UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-KSB







xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
              for
      the year ended December
      31, 2007





oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
              for
      the transition period from _______ to
_______






COMMISSION
FILE NUMBER: 001-14973







CHINA
DIGITAL MEDIA CORPORATION


(Exact
name of small business issuer as specified in its charter)







HAIRMAX INTERNATIONAL,
INC.


(Former
name of registrant)







Nevada
            
            13-3422912(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer identification No.)








2505-06,
25/F, Stelux House


698
Prince Edward Road


E. Kowloon, Hong
Kong


(Address
of principal executive offices)







(011)
852-2390-8600


(Issuer's
telephone number)







Securities
registered under Section 12(b) of the Exchange Act:  None.







Securities
registered under Section 12(g) of the Exchange Act:


Common
Stock, $.001 par value






Table of Contents







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







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







Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o   No
x







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







State
issuer's revenues for its most recent fiscal year: $7,480,453.







As of
March 27, 2008, there were 42,645,653 common shares outstanding and the
aggregate market value of the common shares (based upon the average of the bid
price of $0.15 and the asked price of $0.25 reported by brokers) held by
non-affiliates was approximately $2,279,131.







Transitional
Small Business Disclosure Format (check one):  Yes o   No
x







Number of
shares of common stock outstanding as of March 27, 2008: 42,645,653







Number of
shares of preferred stock outstanding as of March 27, 2008:
1,875,000







- 2
-
 Table of Contents


CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION





The
discussion contained in this 10-KSB under the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") contains forward-looking statements that
involve risks and uncertainties. The issuer's actual results could differ
significantly from those discussed herein. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "the Company believes," "management believes" and similar
language, including those set forth in the discussion under "Description of
Business," including the "Risk Factors" described in that section, and
"Management's Discussion and Analysis or Plan of Operation" as well as those
discussed elsewhere in this Form 10-KSB. We base our forward-looking statements
on information currently available to us, and we assume no obligation to update
them.





As used
in this Form 10-KSB, unless the context requires otherwise, “we” or “us” or the
“Company” means China Digital Media Corporation and its
subsidiaries.






TABLE OF
CONTENTS




PagePART
      IItem
      1.
              Description
      of Business
              4Item
      2.
              Properties
              11Item
      3.
              Legal
      Proceedings
              12Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              12PART
      IIItem
      5.
              Market
      for Registrant’s Common Stock, Related Security Holder Matters, and Small
      Business Issuer Purchases of Equity Securities
              12Item
      6.
              Management’s
      Discussion and Analysis
              13Item
      7.
              Financial
      Statements and Supplementary Data
              19Item
      8.
              Changes
      with and Disagreements With Accountants on Accounting and Financial
      Disclosure
              44Item
      8A.
              Controls
      and Procedures
              44PART
      IIIItem
      9.
              Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act
              45Item
      10.
              Executive
      Compensation
              46Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              47Item
      12.
              Certain
      Relationships and Related Transactions; and Director
      Independence
              48Item
      13.
              Exhibits
              49Item
      14.
              Principal
      Accountant Fees and Services
              49




- 3
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 Table of Contents


PART
I





ITEM
1.                      Description
of Business





Historical Corporate
Development





China
Digital Media Corporation (”CDMC”) was previously known as HairMax
International, Inc. (“Hairmax”), a Nevada corporation. It was incorporated in
Nevada in 1987. Arcotect Digital Technology Limited, a corporation organized
under the laws of Hong Kong, consummated a reverse merger with Hairmax in March,
2005, and Hairmax subsequently changed its name to China Digital Media
Corporation. With the termination of the original businesses of Hairmax, all of
China Digital Media Corporation’s businesses are now located in the People’s
Republic of China (the “PRC” or “China”).  Arcotect Digital Technology
Limited has changed its name to China Digimedia Holdings Limited (“CDHL”), and
is a wholly-owned subsidiary of CDMC.





CDHL was
incorporated in Hong Kong on January 5, 2000 as an investment holding
company.  Its wholly owned subsidiary, Arcotect (Guangzhou) Ltd.
(“AGL”), was incorporated in China as a wholly foreign owned limited liability
company on September 24, 2001.  AGL is engaged in software
development, digital television subscriber and application platform
development.  AGL, through its Nanhai branch established on July 8,
2004, is engaged in the business of converting television signals from analog
into digital signal systems using digital television set-top-boxes (“STB”) and
smart cards.





On June
15, 2005, CDHL entered into a Strategic Alliance Agreement with shareholders of
Guangdong HuaGuang Digimedia Culture Development Limited (“HuaGuang”) whereby
CDHL held a 90% variable interest in HuaGuang.  On January 24, 2007,
CDHL exercised its right to hold 100% interest in HuaGuang.





On August
25, 2005, CDHL acquired a 100% interest in Guangdong M-Rider Media Company
Limited (“M-Rider”), a limited liability company in the PRC.  M-Rider
operates primarily as a Chinese television advertising agency.





On
October 17, 2005, CDHL established a wholly-owned subsidiary in China called
Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”).  This
subsidiary has had no operations since its incorporation.





In
February 2006, HuaGuang undertook two joint ventures with the Guizhou Television
Station. Huaguang held a 51% equity interest in Guizhou Guishi Digimedia
Advertising Company Limited (“Guishi Digimedia”) and a 49% equity interest
in Guizhou Guishi Huaguang Media Company Limited (“Guishi
Huaguang”).  Guishi Digimedia is a television advertising agency and
Guishi Huaguang provides various services to television channels including
program sourcing, schedule planning and the production of television
programming.  On August 19, 2007, HuaGuang sold its shares in Guishi
Digimedia and Guishi Huaguang to Guizhou Tianma Advertising
Company.





On August
23, 2006, CDHL acquired a 20% interest in Arable Media Limited (“Arable”). 
Arable is engaged in the business of developing middleware software and
applications for digital TV STB.





On May
21, 2007, CDHL acquired a 100% interest in Maxcomm Ltd. (“Maxcomm”), its only
asset is the 80% interest in Arable.  After the completion of the
acquisition, CDHL beneficially owns 100% interest in Arable.





On
October 29, 2007, Arable established a wholly-owned subsidiary in China called
Arable (Guangzhou) Limited (“Arable GZ”).  This subsidiary is engaged
in research and development, marketing and promotion of STB Middleware. This
subsidiary did not have operations as of December 31, 2007.





CDMC,
CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Maxcomm, Arable and Arable GZ
are hereinafter referred to as (the “Company”).  Currently, the
Company has approximately 181 employees located primarily in the
PRC.





Current Corporate Structure
and Mission





For the
year ended December 31, 2007, CDMC owned the following
subsidiaries:





(a)
            100%
      of CDHL, an investment holding company incorporated in Hong
      Kong;


(b)
            100%
      of Maxcomm, a limited liability company incorporated in British Virgin
      Island, which holds 80% equity interest in Arable, and a 20% interest in
      Arable, through CDHL, a limited liability company incorporated in Hong
      Kong;


(c)
            100%
      of AGL through CDHL, a limited liability company incorporated in
      China;


(d)
            100%
      variable interest of HuaGuang under CDHL, a limited liability company
      incorporated in China;


(e)
            100%
      beneficial interest of M-Rider through CDHL, a limited liability company
      incorporated in China;


(f)
            100%
      of Digimedia Shenzhen through CDHL, a dormant company incorporated in
      China;


(g)
            100%
      interest in Arable GZ through Arable, a limited liability company
      incorporated in China;





Broadcasting
media and cable television operational support services in the PRC is our
primary source of business, and is currently a growth industry in China. Our
business plan is to strengthen our brand image and to enlarge our presence and
involvement in the Chinese media industry through investment, mergers,
acquisitions and partnership alliances. We continue to believe there will be
rapid growth and potential opportunities in China's media industry, thus we plan
continue to invest our resources into the market across China.




- 4
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Operation
Business





The
Company is primarily involved in the following businesses in China:





1) Cable
television operational support services and digital broadcast technology
development;


2)
Advertising sales; and





Cable Television Operational
Support Services and Digital Broadcast Technology
Development





Arcotect
(Guangzhou) Ltd. (“AGL”), a wholly owned foreign subsidiary of CDMC, duly
established under the laws of the PRC, is legally authorized to carry out the
business activities enumerated in its PRC business license, namely, research,
production and the development of STB for digital television (“DTV”), computer
software, software relating to information platform for DTV, software and
hardware relating to DTV; sales and after sale services of self- manufactured
products; carrying out network projects; and providing related consulting,
technical, repair and maintenance services. AGL is the sole contractor providing
support services for the operation of DTV in Nanhai, located in Guangdong
Province, a city with over 410,000 residential and commercial cable television
subscribers.





On
February 6, 2004, the Company signed a 20-year Co-operative Agreement for Total
Migration into the DTV System for the Nanhai District and subsequently signed a
supplementary agreement on July 8, 2005 (collectively, the “Cooperative
Agreements”) with the Nanhai Network Company, a city-owned cable network
operator located in Guangdong Province. Pursuant to the Co-operative Agreements,
the Company is responsible for migrating all cable television subscribers in
Nanhai from an analog to a digital system (“Migration”) by the end of 2007.
Owing to the technical issue of the local network upgrade by Nanhai Network
Company, the Migration completion date has been re-scheduled to the end of 2008.
The Company entered into two supplementary agreements with the Nanhai Network
Company in May and December 2007, pursuant to the Co-operative Agreements, for
re-scheduling the Migration completion date to the end of 2008.





According
to the Co-operative Agreements, AGL is entitled to share the subscription fees
paid by all cable television subscribers as well as paid by DTV subscribers for
additional services, including pay-TV services, and to receive the subscription
fee for any additional STBs purchased by subscribers.





Under
the Co-operative Agreements, the Company is responsible for supplying all
subscribers with a digital STB on a lease basis to subscribers. If subscribers
require an additional STB, they must purchase the STB from the Company and pay
an additional subscription fee.  The Company is also responsible for
providing operational support services including migration planning, marketing
and sales, software development, customer service and logistics
administration.  The Company’s proprietary operating support system
automates many DTV business processes, such as database management, billings,
work orders and inventory control, and assists in the operation of a 24/7 call
center for technical support and customer care. The city-owned cable company
retains management of the broadcasting system and the fiber-optic network and is
responsible for compliance with national broadcasting policies.





In early
May of 2006, the Company’s office located in Nanhai moved to a much larger
facility with more than 10,000 sq. ft.  The new office building is
also headquarters to the Nanhai TV Bureau and the Nanhai Network
Company.





During
2007, the Company entered into an agreement with the Nanhai Network Company to
obtain a more favorable DTV basic subscription fee income sharing plan in
exchange for setting aside a certain portion of trade receivable balance due
from Nanhai Network Company from the current balance.  Such portion is
to be amortised over 15 years annually and evenly out of the increased fee
income after the expected upward price adjustment for DTV basic subscription fee
implemented in 2008.  The said portion is being treated as long term
asset in the financial statements as of December 31, 2007.





On August
23, 2006, the Company entered into a Subscription Agreement and Cooperation
Agreement (the “Agreement”) with Manta Finance Limited for the subscription of a
20% equity interest in Arable Media Limited, a wholly owned subsidiary of Manta
Finance Limited. On May 21, 2007, Company entered into a Share Purchase And
Transfer Agreement (the “2nd Agreement”) with Lippo Star Investment Limited for
acquiring 80% equity interest in Arable Media Limited via Maxcomm Limited where
the only asset of Maxcomm Limited is the equity interest in Arable Media
Limited. Arable is engaged in the business of developing middleware software and
applications for digital TV STB similar to those deployed by the Company in its
digital roll-out program in the City of Nanhai. The Company believes that Arable
could assist in developing customized applications on the digital STB for DTV
subscribers which could provide new sources of revenue from existing customers
in Nanhai and other cities.





Arable GZ
is engaged in research and development, sales and marketing of STB Middleware in
China.





Migration
to DTV Service


The
Company has migrated approximately 56,000 subscribers in 2007 totaling about
276,000 subscribers to the DTV system as of December 31, 2007, and the Migration
is expected to be completed by 2008.





Basic
Services


Basic
service is available to all cable television subscribers, consisting of 48
channels of programming. This service comprises programming provided by national
television networks, provincial and city television stations, and one channel
provided by AGL.





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Value
Added Packages (VAP)


The
broadcast system that decrypts the signal for the Company’s STB and appropriate
smart cards can carry up to 800 digital channels of pay-TV programs and value
added multimedia services. Currently, the services consist of 144 channels,
including a 49-channel basic package and 95 pay channels bundled into various
value added packages, including 3 high definition channels, movie, life &
leisure, sports, drama and family.





Addition
STB


In the
city of Nanhai, each household has more than two television sets on
average.  DTV subscribers can buy an additional STB from AGL for their
other television sets and pay a subscription fee for the additional
STB.





Value
Added Services (VAS)


During
the second quarter of 2007, the Company launched the first value added service
through the DTV platform: a real time stock information system.  The
subscribers can subscribe to receive the real time stock information for the
Chinese companies which are listed in the Chinese stock market (namely “A”
shares and “B” shares) with charts, analysis and related information on the
television set through the Company’s developed middleware platform.





Other
Revenue Sources


AGL also
generates revenues from installation services, through the sale of additional
STB and reconnection services.





IP
based STB


The
Company deploys an IP (Internet Protocol) based STB which is integrated with new
middleware applications, JAVA Runtime and XML browser, developed by Arable. The
Company believes the advanced STB will enable the Company to provide additional
value added services that can be deployed in the future; such as targeted
advertising, interactive TV programs, online shopping, console games, stock
trading and interactive education services. The Company is currently negotiating
partnerships with various vendors to provide interactive services, transforming
a television set into an interactive multimedia platform.





Customer
and Technical Service


The
operating support system, which is developed by AGL’s software team, manages all
operating processes including technical support to customers, database
management, billing services, inventory control, sales support, and call center
services. AGL’s call center provides 24/7 call answering capability and other
technical support services. The call center handled over 360,000 enquiries in
2007.





Sales,
Marketing and Advertising


AGL has
86 persons in the sales and customer services team.  The Company sells
services through direct customer contact, retail outlets, door-to-door selling,
television advertising and road show promotion.





Technology
Development


From time
to time, AGL works closely with our technology partners to develop new
technologies and additional features in order to improve and enhance our
operations and services. Since 2006, the Company has partnered with Arable to
design middleware for additional functions and applications for the digital
STB.  Arable GZ was established to provide local support on STB
middleware to AGL, and further develop the China market.





Television Channel
Management and Advertising Sales





M-Rider
is a wholly owned subsidiary of the Company and a limited liabilities company
registered in China.  M-Rider is an advertising sales agent
principally engaged in media planning, production, and distribution of
advertisement through television channels and related consulting
services.





During
the year of 2007, M-Rider provided consultation to AGL for advertising and
promotion for its sales of additional STB, VAS, and VAP on DTV business in
Nanhai.





Television Program
Production and Investment





On August
19, 2007, HuaGuang sold all the interests in Guishi Digimedia and Guishi
Huaguang to Guizhou Tianma Advertising Company.  HuaGuang also
disposed of its investment in XiGuan Affairs in December 2007.





The
Company has also made a minority investment in a television series, The Story of
a Small Town.  Owing to the unsatisfactory return from this
investment, its value is impaired under the Financial Statements as of December
31, 2007.





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Strategic
Partnership





The
Company is exploring the possibilities of creating alliances with strategic
partners; particularly those that could help expand its territories. The Company
believes that the opportunities in China’s DTV business are enormous and that it
makes more sense to partner with other companies and investors that can
complement the Company’s core strength as a provider of services to operate DTV
and a developer of customized applications for DTV in China.





Growth
Opportunities





The
Company believes its strengths in China’s media industry, are in the areas of
cable television operational support services and digital broadcasting
technology developments, and television channel management and advertising
sales.





Cable
Television Operations and Digital Broadcasting Technology
Development





Currently,
many cities in China have the infrastructure capable to broadcast DTV programs,
but not many cities today are undertaking a city-wide digital
Migration.  The Company believes that this large potential market for
DTV services presents opportunities in the digitization of cable TV services in
China in the coming years. In addition, the pricing of digital TV services are
likely to be improved and be more acceptable to subscribers in coming years.
Furthermore, the Company believes that declining prices of STBs may help to cut
costs of DTV migration and expand coverage of DTV broadcasting.





The
Company believes that four years of experience has made it's operations and
migration process efficient and effective which has created a substantial
platform for the future growth in cable TV digitalization projects in other
cities with a size similar to Nanhai.  The Company is exploring its
ability to utilize its competitive advantages in seeking other cities,
particularly in Guangdong province, to repeat its Migration model. A number of
cities have expressed interest in working with the Company because of the proven
skills and experiences in operation, marketing and technology, although the
Company has not entered into any definitive or preliminary agreements with any
cities.  The operation of a DTV service business is a business with
long term stable recurring cash flow, but substantial upfront capital investment
has prevented the Company from investing in other cities until additional cash
flow can be generated internally or financed elsewhere.  There is no
assurance that the Company will be successful in entering into new agreements
for future migrations, or that the Company will be able to finance any new
migrations solely from its cash flows from the Nanhai Migration.





The
Company has entered into a Memorandum of Understanding (the ''MOU'') with a city
owned cable network company in the western part of Guangdong province to
implement a digital TV digitalization project during the year.





Pursuant
to the MOU, the Company will invest in digital TV set top boxes to convert all
subscribers in the city from analog into digital TV broadcasting whereas the
cable network company will upgrade its cable network into 2-way capable. Both
parties agree to develop business plans on the digital TV platform, broadband
Internet and other value added services to be deployed into the
market.





Apart
from signing up additional Migration business, the Company will focus on
developing and providing value added services through the STB to DTV
subscribers.  Currently, a number of applications are on trial and
such services are expected to be available in coming months, which the Company
believes will drive its growth organically.





Once the
migration program is fully completed, income from additional STB sales as well
as its subscription fee, VAS subscription fee and advertising income are
expected to be increased.  Accordingly, the profitability of our DTV
business is expected to be improved.





Growth
Strategies





DTV
business





The
Company has established a successful and profitable model for the DTV services
in Nanhai. For the near term, the Company’s strategy is to sign additional
Migration business to drive growth. In the mid or longer term, the Company’s
strategy is to use cash flow generated from existing operations to invest and to
replicate its business model in DTV services and provision of VAS through the
digitalized STB in other cities or provinces in China.





We will
continue to explore opportunities for development of migration projects in other
cities in Guangdong Province.  We may utilize future positive cashflow
generated from the Nanhai DTV to be used for the upfront investment to the new
projects.





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Middleware
and VAS business





In
addition to developing its existing businesses, the Company plans to propose
additional services through the cable network such as Internet connection, IPTV
or IP telephony.  These services, however, involve further upfront
cash investment in related equipment and marketing, negotiation with the
business partners, and head to head competition with China Telecom, a dominant
player in the provision of Internet services in China.  While the
Company’s management team has previous operating experience in the provision of
Internet services elsewhere, the Company will formulate development plans for
these services when, and if, market conditions are favorable.





We
started our STB middleware development a few years ago with the commencement of
our Nanhai business operation. This middleware has proved to be successful and
to work smoothly on our STB. We have noticed that the demand for STB middleware
in China keeps increasing where the supply is limited. We believe we could
provide our middleware technique to other customers across China. We believe
this could become one of our main businesses in near future.





Our
Nanhai cable partner is also working on the upgrade of their cable network to a
two-way system which is also expected to be completed shortly. Such upgrade
would enable us to offer various kinds of VAS to our cable subscribers.
Provision of VAS is expected to become one of our core businesses in the
mid-term.





Government
Regulation





The media
industry in the PRC is subject to government control and censorship. Due to the
PRC’s admission to membership in the World Trade Organization, the Company
believes the government is committed to opening its domestic markets for foreign
investors and that this should favorably impact the media industry. Some
restrictions on the Company’s businesses have already been
relaxed.  For example, as a foreign company, we can now own a 100%
equity interest in a company in the advertising business and up to a 49% equity
interest in a company in the program production business.





Currently
in China, foreign capital is prohibited from establishing and running
broadcasting related stations, network, and content production companies. The
Company, with a business license under the name of AGL, is legally permitted to
develop and produce technical products and provide consulting and technical
services to the licensed cable network companies for the operation of DTV in
China, while sharing compensation from those network companies.





Government
regulations still prohibit the Company from qualifying for holding an equity
interest in certain media business. In order to avoid unnecessary delays, and to
be able to invest in the media sectors such as television advertising and
program production, the Company has invested into media businesses in China
through its subsidiary HuaGuang. Through HuaGuang, the Company obtains the
business benefits of companies engaging in the media business while maintaining
their legal status as Chinese enterprises.





Effects
of Inflation





The
Company’s principal business is related to the media industry in
China.  Revenues and expenses remain relatively constant and are not
affected by the levels of inflation in China or elsewhere. For the foreseeable
future, the Company does not anticipate that inflation will affect the existing
business.





Competition





Cable
Television Operational Support Services and Digital Broadcasting Technology
Development





In China,
television broadcasting has been the vehicle for the government to distribute
information to the public. While government officials intend to control and
monitor the content to be delivered through other broadcasting systems, the
exertion of control on other broadcasting systems may not be as dominant as it
is for television.  In the forseeable future, the Company believes
government officials will continue imposing tight control on distribution of
content through the cable television network.  In order to enhance and
effectively control the distribution of content, the Company believes government
officials will plan to fully convert the current analogue television
broadcasting signal into digital signal, and cable television will remain as the
major form of delivery for television programming in China in the coming years
although there will be competition from satellite, IP television and other
media.





Advertising
Sales





Advertising
time sales are directly related to a channel’s audience population and
viewership.  The China Central Television (“CCTV”), the dominant
broadcaster in China, has a strong influence on broadcasting in the country, and
localized television content can serve the needs of audiences down to the city
levels.  Advertising revenues generated by local television stations
are substantial.  In recent years, country-level cable television
stations have tendered their television channels/air time to advertising
agencies at fixed cost in order to generate guaranteed income. Competition in
different parts of the country is fierce between advertising agencies and
television channels at the provincial and city levels.  In order to
maximize profit, advertising agencies have begun to provide their own content to
increase their channels’ viewership. Because of this trend, some advertising
firms are trying to vertically integrate their business into program sourcing
and production.  It is believed that the television advertising
industry will remain fiercely competitive and media firms will integrate their
scope of business to include program production, sourcing and advertising
sales.





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Risk
Factors





Risks
Related to The Company’s Business and Industry





The
Company has a limited operating history on which to evaluate the Company’s
operations.





The
Company commenced operations in early 2005, and as such, the Company has had a
limited history on which an investor may evaluate the Company’s
operations.  The Company had revenues of $7.9 million (restated),
$14.9 million (restated) and $7.5 million for fiscal years 2005, 2006 and 2007
respectively.  The Company had net income of $3.1 million, net loss
$0.2 million (restated) and net loss $4.1 million (restated) for fiscal years
2005, 2006 and 2007 respectively.  Any investment in the Company
should be considered as a high risk one because the investor will be placing
funds at risk in an unseasoned early stage company with unforeseen costs,
expenses, competition and other problems to which such companies are often
subject.





The
Company’s cable television migration operations require the Company to incur
significant upfront costs to supply customers with set-top-boxes, recovery of
which would be better managed if the Company is able to sell customers
sufficient number of value-added services or additional
set-top-boxes.





The
Company’s agreement with the Nanhai Network Company provides that the Company
migrates all cable TV subscribers in Nanhai from an analog signal to a digital
signal by the end of 2007.  In order for the Company to maintain a
more stable liquidity, the Company must also sell to subscribers’ additional
value-added services or  additional STB, in addition to receiving
portions of subscription fees from the Nanhai Network Company.  If a
sufficient number of subscribers do not purchase additional value-added services
or additional STB from the Company, the Company may not be in a position to
offset the initial cost for providing the STB in a timely manner.





The
Company’s business plan requires substantial capital and there is no assurance
that the Company will be able to raise such capital.





The
Company’s goal is to expand the Company’s operation by entering into new cable
television digitization migration agreements with new cities similar to its
arrangement with Nanhai which requires a significant amount of capital. In
particular, in order to perform cable television migrations in other cities, the
Company is required to provide STB for subscribers if similar terms to the
Nanhai one are provided. A significant amount of additional capital is required
to provide the boxes to subscribers by the Company. The Company does not have
any commitments for funding at this time, and additional funding may not be
available to the Company in the future on favorable terms, if at
all.





A
substantial portion of the Company’s accounts receivable is with the Nanhai
Network Company.





Approximately
99% of the Company’s accounts receivables are with the Nanhai Network Company in
connection with the cable television digitization migration being performed by
the Company. These receivables are paid to the Company based on a schedule with
the Nanhai Network Company. Although the Company has no reason to believe that
these receivables will not be paid in a timely manner, if the Nanhai Network
Company is to delay its payment to the Company or be unable to pay the monies
due to the Company, the Company’s high concentration of credit risk may cause
financial difficulties and may cause the Company to become unable to fulfill the
payment obligations to the Company’s vendors.





The
Company’s revenue recognition in connection with the Company’s cable television
migration project occurs substantially in advance of the Company’s cash receipts
from the migration project.





The
Company recognizes revenues from the Company’s cable television migration
project in Nanhai on a monthly basis.  However, subscribers pay their
subscription fees to the Nanhai Network Company on a quarterly basis, and the
Company receives their portion of the fees after a certain period which could be
as long as six months. As such, there is a considerable delay between the
Company’s recognition of revenues and the cash receipts on such
revenues.





The
Company’s success will depend on public acceptance of cable services in
China.





The
Company’s future results of operations will depend substantially upon the
increased acceptance of pay-TV programs, such as premium channels, and value
added services in China.





The
Company is dependent on three suppliers for the Company’s set-top-boxes and
smart cards.





The
Company’s cable television digitization migration process requires the Company
to supply subscribers with STB and smart cards. Currently, the Company relies on
three suppliers for the Company’s STB and smart cards. If any of these suppliers
is unable to produce STB or smart cards to the Company on a timely basis and in
a cost effective manner, the Company’s ability to complete the cable television
digitization migration plan in Nanhai or in other cities on schedule would be
adversely effected.





If
there is an upward price adjustment during 2008 of DTV basic subscription fee,
there will be no assurance for the government grant to be received in 2008 as
well.





The price
increase in general is approved by the local government.  If there is
a price increase on DTV basic subscription fee, the revenue of the Company will
be increased too. Such increase in revenue will be an additional income to the
existing level of income. Therefore, it will be treated as a substitute of the
government grant by the local authority. If the loss of government grant is
higher than the amount of additional revenue received in 2008, the financial
results to the Company may be adversely affected.





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The
requirements of being a public company may strain the Company’s resources and
distract the Company’s management.





As a
public company, the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may
place a strain on the Company’s systems and resources. The Exchange Act requires
that the Company files annual, quarterly and current reports with respect to the
Company’s business and financial condition. The Sarbanes-Oxley Act requires that
the Company maintains effective disclosure controls and procedures and internal
controls for financial reporting.  The Company is required to document
and test the Company’s internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual
management assessments of the effectiveness of the Company’s internal controls
over financial reporting and a report by the Company’s independent registered
public accountants addressing these assessments. During the course of testing,
the Company may identify deficiencies which the Company may not be able to
remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. In addition, if the Company
fails to achieve and maintain the adequacy of the Company’s internal controls,
as such standards are modified, supplemented or amended from time to time, the
Company may not be able to ensure that the Company can conclude on an ongoing
basis that the Company has effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act.





In order
to maintain and improve the effectiveness of the Company’s disclosure controls
and procedures and internal control over financial reporting, significant
resources and management oversight will be required. This may divert
management's attention from other business concerns, which could have a material
adverse effect on the Company’s business, financial condition, results of
operations and cash flows. In addition, the Company may need to hire additional
accounting and financial staff with appropriate public company experience and
technical accounting knowledge, and the Company cannot assure you that the
Company will be able to do so in a timely fashion.





Technological
advances, the introduction of new products, and new design and manufacturing
techniques could adversely affect the Company’s operations unless the Company is
able to adapt to the resulting change in conditions.





The
Company’s future success and competitive position depends to a significant
extent upon the Company’s proprietary technology, specifically the technology
included in the Company’s set-top-box. The Company will be required to expend
substantial funds for and commit significant resources to conducting research
and development activities, the engagement of additional engineering and other
technical personnel, and the enhancement of design and manufacturing processes
and techniques. There can be no assurance that any new STB will receive or
maintain customer or market acceptance. If the Company is unable to design and
manufacture new STB on a timely and cost-effective basis, such inability could
have a material adverse effect on the Company’s business, financial condition,
results of operations and liquidity.





The
Company’s business operations may be affected by legislative or regulatory
changes in China.





Changes
in laws and regulations governing the content of advertising, business licensing
or otherwise affecting the DTV business, including the content of TV programs
and value added services, in China may also have adverse impact on the Company’s
results of operations, business or prospects.





The
Company has reserved a significant number of shares of its common stock for
issuance upon the exercise of warrants and upon the conversion of
debentures.  The issuance of these shares will have a dilutive effect
on the common stock and may lower the Company’s stock price.





During
the year of 2006, the Company issued warrants to purchase an aggregate of
17,222,205 shares of our common stock and issued convertible debentures which
may be converted into an aggregate of 6,888,882 shares of common stock. The
exercise prices on these warrants range from $0.80 per share to $2.25 per share,
and the conversion price of the debentures is $0.45 per share.  If
issued, the shares underlying the warrants and debentures would increase the
number of shares of common stock currently outstanding and will dilute the
holdings and voting rights of the Company’s then-existing
shareholders.  One of the debenture holders converted an amount of
$135,000 debenture to common stock in December 2007.





The
Company’s Chairman controls a substantial portion of the outstanding common
stock, and as long as he does, he may be able to control the outcome of
stockholder voting.





Mr.
Daniel Ng, the Company’s Founder, Chairman, President and CEO, is the beneficial
owner of approximately 41.0% of the outstanding shares of the Company’s common
stock. As long he owns a significant percentage of common stock, the Company’s
other shareholders may be unable to affect or change the management or the
direction of the Company without his support.  Mr. Ng will be able to
exert significant influence over the outcome of all corporate actions requiring
stockholder approval, including the election of directors, amendments to the
Company’s articles of incorporation and approval of significant corporate
transactions.





The
Company’s stock price is highly volatile, trading in the Company’s stock is
sporadic, and the value of an investment in the Company’s common stock may
fluctuate significantly.





The
market price of the Company’s common stock has fluctuated widely and may
continue to fluctuate.  These fluctuations may be exaggerated since
the trading volume of the Company’s common stock is volatile and
sporadic.  These fluctuations may or may not be based upon any
business or operating results.





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Risks
Related with Doing Business in the People’s Republic of China (the “PRC” or
“China”)





All
of the Company’s assets and operations are located in China and all of the
Company’s revenue is derived from the Company’s operations in China.
Accordingly, the Company’s results of operations and prospects will be subject,
to a significant extent, to the economic, political and legal developments in
China, which have rapidly changed.





The PRC’s
economic, political and social conditions, as well as government policies, could
affect the Company’s business. China has been one of the world’s fastest-growing
economies. However, there is no assurance that such growth will be sustained in
the future. If in the future China’s economy experiences a downturn or grows at
a lower rate than expected, there could be a drop in demand in the Company’s
markets.





If
the PRC imposes restrictions to reduce inflation, future economic growth in the
PRC could be severely curtailed which could lead to a significant decrease in
profitability.





While the
economy of the PRC has experienced rapid growth, this growth has been uneven
among various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in supply of money and rising
inflation. In order to control inflation in the past, the PRC has imposed
controls on bank credits, limits on loans for fixed assets and restrictions on
state bank lending. If similar restrictions are imposed in the future, it may
lead to a slowdown of economic growth and diminish the interest and demand for
the Company’s services and products, leading to a decline in
profitability.





Because
Chinese law governs all of the Company’s material agreements, the Company may
not be able to enforce the Company’s rights within the PRC or elsewhere, which
could result in a significant loss of business, business opportunities or
capital.





Chinese
law governs all of the Company’s material agreements, many of which are with
Chinese governmental agencies. The Company cannot assure you that the Company
will be able to enforce any of the Company’s material agreements. The Chinese
legal system is similar to a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. Although legislation in China over the past 25 years has
significantly improved the protection afforded to various forms of foreign
investment and contractual arrangements in China, these laws, regulations and
legal requirements are relatively new and their interpretation and enforcement
involve uncertainties, which could limit the legal protection available to the
Company. The inability to enforce or obtain a remedy under any of the Company’s
agreements could result in a significant loss of business, business
opportunities or capital and could have a material adverse impact on the
Company’s operations.





Fluctuations
in the value of the Chinese currency, the Renminbi, relative to foreign
currencies could affect the Company’s operating results.





The
Company prepares its financial statements in United States dollars, but payroll
and other costs of non-United States operations will be payable in foreign
currencies, primarily Renminbi. To the extent future revenue is denominated in
non-United States currencies, the Company would be subject to increased risks
relating to foreign currency exchange rate fluctuations that could have material
adverse effect on the Company’s business, financial condition and operating
results. The value of Renminbi against the United States dollar and other
currencies may fluctuate and is affected by, among other things, changes in
monetary policy, political and economic conditions of the Mainland Government.
As the Company’s operations are in China, any significant revaluation of the
Renminbi may materially and adversely affect the Company’s cash flows, revenues
and financial condition. For example, to the extent that the Company needs to
convert United States dollars into Renminbi for the Company’s operations,
appreciation of this currency against the United States dollar could have a
material adverse effect on the Company’s business financial condition and
results of operations for the exchange loss incurred. Conversely, if the Company
decides to convert Renminbi into United States dollars for other business
purposes whereas the United States dollar appreciates against this currency,
less United States dollar would be converted which also results in a foreign
exchange risk. The Chinese government recently announced that it is pegging the
exchange rate of the Renminbi against a number of currencies, rather than just
the United States dollar. Fluctuations in the Renminbi exchange rate could
adversely affect the Company’s business.





ITEM
2. Properties





The
Company leased offices for its following subsidiaries: (1)AGL, with about 1,188
square meters for operation and paid total rent of $49,051 for year 2007 under
lease term expiring on January 2014, and with 184 square meters and paid rent of
$6,330 for year 2007 under lease term expired on June 2007; (2) AGL Nanhai, with
1,045 square meters for operation and paid total rent of $33,049 for year 2007
under lease term expiring on March 2009; (3) M-Rider,  with 613 square
meters and paid total rent of $7,271 for year 2007 under lease term expired on
December 2007 and with 18 square meters and paid total rent of $937 under lease
term expiring on January 2014;(4) HuaGuang, with 45 square meters and paid total
rent of $2,132 for year 2007 under lease term expiring Jan 2014;
and  (5) Arable GZ, with 52 square meters and paid total rent of
$1,371 for year 2007 under lease term expiring on July 2011.  The
Company also leased seven staff quarters with total area of 770 square meters
and paid total rent of $14,722 for year 2007 under various lease terms expiring
through March to September 2008.







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ITEM
3. Legal Proceedings





On May
24, 2005, a Complaint was filed against us, among others, in the United States
District Court for the Southern District of New York, in a matter captioned as
“Ziegler, Ziegler & Associates LLP and Scott Ziegler, Plaintiffs, v. China
Digital Media Corporation and John Does 1-10, Defendants.” In the Complaint, the
Plaintiffs allege, among other things, that we and John Does 1-10 used Plaintiff
Scott Zeigler’s e-mail address and Plaintiff Ziegler, Ziegler & Associates,
LLP’s internet domain name to distribute promotional information about us over
the internet. The Plaintiffs seek a several types of relief, including damages
in an amount not less than $1,250,000. Pre-trial discovery has commenced in the
matter.  The file number of the civil action is 05 CV
4960.





The
Company contested the allegations of the Plaintiffs and has retained counsel
admitted to practice in the U.S. District Court for the Southern District of New
York to vigorously defend the action. The Company did not hire a stock promoter
or a spammer to distribute promotional e-mails, and the emails themselves recite
that they were paid for by a shareholder of our Company, and not by the Company
or an affiliate.  We believe that the shareholder referred to in the
emails was promoting its own interest and we had nothing to do with such
activity. We believe we have no liability in this matter.





On
January 18, 2006, counsel for the plaintiff threatened to file a complaint in
the County Court in and for Miami-Dade County, Florida against the Company in an
action for damages that does not exceed $15,000, exclusive of court costs,
attorney’s fees and interest.  The plaintiff alleged that the Company
was a guarantor of a lease entered into by its Hairmax of Florida, Inc.
subsidiary, which abandoned the lease and failed to pay the full rental due
under the lease.





The
Company has made a settlement offer to the plaintiff of an amount equal to
$9,000, and is awaiting the plaintiff’s response.  As part of any
settlement, the Company will insist upon the execution and delivery of a binding
release of all claims in favor of the Company. The Company has accrued $9,000 as
at December 31, 2007.





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





None.





PART
II





ITEM
5. Market for the Registrant’s Common Stock, Related Security Holder Matters,
and Small Business Issuer Purchases of Equity Securities





(a) The
principal market in which our common stock is traded is the Over-the-Counter
Bulletin Board, under the symbol “CDGT”. The table below presents the high and
low bid price for our common stock each quarter during the past two years and
reflects inter-dealer prices, without retail markup, markdown, or commission,
and may not represent actual transactions. We obtained the following information
from QuoteMedia.com, an on-line source that provides historical pricing
information.





Quarter
Ended                       LowHigh





03/31/06                                   1.45      1.50


06/30/06                                   0.94      0.99


09/30/06                                   0.60      0.65


12/31/06                                   0.60      0.62


03/31/07                                   0.48      0.481


06/30/07                                   0.42      0.49


09/30/07                                   0.22      0.24


12/31/07                                   0.24      0.26





The above
stock prices have been retroactively adjusted in the above table to reflect a
100 for 1 reverse split in 2005.





(b)
Holders. The approximate number of holders of record of the Company's Common
Stock was 108 in certificate form and over 2,120 shareholders deposit their
shares with the clearing house according to the NOBO list provided by Broadridge
Financial Solutions, Inc as of December 31, 2007.





Dividends





The
Company has not declared any cash dividends on common stock since
inception and does not anticipate paying such dividends in the foreseeable
future. The Company plans to retain any future earnings for use in
the business. Any decisions as to future payment of dividends will depend
on our earnings and financial position and such other factors, as the Board of
Directors deems relevant.





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Dividend
Policy





All
shares of common stock are entitled to participate proportionally in dividends
if our Board of Directors declares them out of the funds legally available.
These dividends may be paid in cash, property or additional shares of common
stock. The Company has not paid any dividends since inception and presently
anticipates that all earnings, if any, will be retained for development of our
business. Any future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, future earnings, operating
and financial condition, capital requirements, and other factors.





Unregistered
Sales of Equity Securities





During
the quarter ended December 31, 2007, the Company issued 550,000 restricted
shares to consultants as payment for their services.  The shares were
issued at a price of $0.45 per share, and we believed the issuance to be exempt
pursuant to Regulation S under the Securities Act of 1933, as
amended.





On
November 17, 2007, the Company issued 10,000,000 shares of restricted common
stock with a fair value of $3,760,000 for the acquisition of Maxcomm Limited,
which sole asset is an 80% equity interest in Arable Media Limited. The Company
relied on an exemption from registration pursuant to Section 4(2) under the
Securities Act in connection with the issuance of the shares.





ITEM
6.                      Management’s
Discussion and Analysis





This
discussion and analysis should be read in conjunction with the Company’s
Consolidated Financial Statements and related notes thereto included in Part II,
Item 7 of this Report. All amounts are expressed in U.S. dollars.  Please
also refer to our forward-looking statement.





Overview





During
the year ended December 31, 2007, the Company acquired another 80% of Arable,
and now beneficially owns 100% of Arable, to strengthen the Company’s
capabilities in developing customized applications for DTV
subscribers.





During
2007, the Company reported a revenue of $7,480,453 (2006 restated: $14,872,682),
a decrease of 49.7% as compared with last year, and a net loss of $4,094,935
(2006 restated loss: $158,751).





The
Company’s business plan is to complete the DTV migration program in Nanhai. The
Company will continue to focus its resources toward replicating its successful
migration model to other cities of China, while seeking opportunities to
alliance with strong strategic partners.





Critical
Accounting Policies





The
following discussion and analysis is based upon the Company’s consolidated
financial statements, which have been prepared in conformity with accounting
principles generally accepted in the United States of America. The Company’s
significant accounting policies are more fully described in the Notes to the
Consolidated Financial Statements. However, certain accounting policies and
estimates are particularly important to the understanding of the Company’s
financial position and results of operations and require the application of
significant judgment by the Company’s management or can be materially affected
by changes from period to period in economic factors or conditions that are
outside of the control of management. As a result they are subject to an
inherent degree of uncertainty. In applying these policies, the Company’s
management uses their judgment to determine the appropriate assumptions to be
used in the determination of certain estimates. Those estimates are based on the
Company’s historical operations, its future business plans and projected
financial results, the terms of existing contracts, the Company’s observance of
trends in the industry, information provided by customers and information
available from other outside sources, as appropriate. The following discusses
the Company’s significant accounting policies and estimates.





Principles of
consolidation





The
      accompanying 2007 consolidated financial statements include the financial
      statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its
      Nanhai Branch, Maxcomm, Arable, Arable GZ, M-Rider and Digimedia Shenzhen,
      and its 100% variable interest entity in
  HuaGuang.





The
accompanying 2006 consolidated financial statements include the financial
statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai
Branch, M-Rider and Digimedia Shenzhen, its 90% variable interest entity in
HuaGuang and 51% owned subsidiary of HuaGuang in Guishi Digimedia. The Company
accounts for its 49% investment held by HuaGuang in Guishi Huaguang and its 20%
investment held by CDHL in Arable using the equity method. The minority
interests represent the minority shareholders’ 10% and 54.1% proportionate share
of the results of HuaGuang and Guishi Digimedia respectively.





All
significant inter-company transactions and balances have been eliminated in
consolidation.





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Consolidation of variable
interest entity





In
accordance with Interpretation No. 46R, Consolidation of Variable Interest
Entities(“FIN 46R”), variable interest entities (VIEs) are
generally entities that lack sufficient equity to finance their activities
without additional financial support from other parties or whose equity holders
lack adequate decision making ability. All VIEs with which the Company is
involved must be evaluated to determine the primary beneficiary of the risks and
rewards of the VIE. The primary beneficiary is required to consolidate the VIE
for financial reporting purposes. In connection with the adoption of FIN 46R,
the Company concluded that HuaGuang is a VIE and that the Company is the primary
beneficiary. Under FIN 46R transition rules, the financial statements of
HuaGuang are then consolidated into the Company’s consolidated financial
statements.





Property and
equipment





Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred. Depreciation is
provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives.  The estimated useful lives are as
follows: (a) STB and smart cards - 5 years; (b) Motor vehicles - 10 years; and
(c) Furniture, fixtures and equipment - 5 and 8 years.





Depreciation of
STB





As
required by SAB11:B, depreciation and amortization for property and equipment
directly attributed to the generation of revenue was classified under “Cost of
Sales”. Accordingly, depreciation of STB and smart cards of the Company in 2007
for the amount of $3,023,468 was included in “Cost of Sales”. To conform with
the current account presentation, the depreciation of STB in 2006 of $2,450,739
previously classified as “Selling, General and Administrative expenses” is now
included in “Cost of Sales”.





Revenue
recognition





Digitalization
of television signals





The
Company entered into an agreement with Nanhai Network Company (“Network
Company”) to assist its subscribers on the conversion of television signal from
analog into digital by providing STBs and smart cards to the subscribers in
Nanhai City on a lease basis. The Company is entitled to receive a portion of
fees, for subscribers’ television subscription and pay-TV services, payable by
Network Company, under the subscription agreement. Revenue is recognized on a
straight line basis in accordance with the terms of the subscription agreement.
The Company also charges installation fees and sells STBs and smart cards to new
subscribers. Revenue arising from these services is recognized when the
subscriber is invoiced for the STB and smart card upon the completion of
installation works.  In addition, the Company is entitled to be
reimbursed for its operating expenses from Network Company in accordance to the
subscription agreement. Revenue arising from costs reimbursement is recognized
when the amounts are duly agreed upon between the Company and Network
Company.





Government
grant





The local
government of Nanhai City also approved a grant of Rmb10,000,000 each year for
five years commencing in 2004 to finance the purchase of STBs and smart cards
for sale and lease to subscribers. The grant is recognized as revenue on a
straight line basis.  As of December 31, 2007 and 2006, the Company
received $1,317,992 and $1,276,976 of government grant
respectively.  There is a possibility the government grant in 2008 may
not be received owing to an expected upward price adjustment of  DTV
subscription fee, which would reduce the government grant.





Advertising
sales





The
Company acts as an advertising agent for certain television channels by selling
advertising air time spaces and television program backdrops to
customers.  The Company's advertising services revenue is derived from
billings that are earned when the advertisements are placed and revenue is
recognized as the media placements appear. Deferred revenues are recognized as a
liability when billings are received in advance of the date before revenues are
earned.





Software
development





The
Company provides various information technology professional services to its
customers based on a negotiated fixed-price time and materials contract. The
Company recognizes services-based revenue from all of its contracts when the
services have been performed, the customers have approved the completion of the
services and invoices have been issued and collectibility is reasonably
assured.





Television
series





The
Company invested in the production of two television series. Revenue from
investments in television series is recognized upon receipt from the production
company.





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Supplier
rebate





Rebate or
refund received by the Company from its supplier, either in cash or trade
discount, will be considered as an adjustment of the prices of the supplier’s
products purchased by the Company. Therefore, it will be characterized as (a) a
reduction of cost of sales for subsequent selling of the products by the
Company; or (b) a reduction of Property and Equipment for products booked as
fixed assets of the Company and subject to depreciation in line with the
depreciable life of the relevant products; or (c) a reduction of Inventories for
products maintained in stock.





Restatement
of financials for the year ended December 31, 2006





For the
year ended December 31, 2006, the Company had recorded in its Statements of
Operations interest expenses of $2,072,721, which included $15,003 in 4%
debenture interest expense and $2,048,889 in interest on beneficial convertible
feature of the convertible note for the year 2006.





The
Company issued a total of $3.1 million in eighteen months 4% interest bearing
convertible debentures in November and December 2006.  In accordance
with SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” and
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, the
convertible feature of such debenture gives rise to a debenture interest cost in
additional to the annual interest expense payable and a discount to the face
value of these debt instruments. In the financial statements for the year ended
December 31, 2006, The Company did not (1) account for such interest costs
amounting to $2,295,741; (2) account for the discount amounting to $3,100,000;
(3) did not amortize the discount of $3,100,000 over the term of the instruments
which amounted to $246,852; and (4) did not classify these liabilities as
long-term liabilities.





During
the preparation of the Form 10-KSB for fiscal 2007, the Company became aware of
such accounting requirements and classifications.  The Company has had
discussions with its independent accountants and has agreed to apply the
accounting treatment in recording the interest costs and discount out of the
convertible feature of the debenture and reclassify the debentures as long-term
liabilities.





Accordingly,
the convertible debenture interest costs have been booked and shown as interest
expenses.  The discount to the face value of the debentures were
recognized and amortized over the term of the debentures. The unamortized
portion of the discount was netted off against the convertible debentures and
classified under long term liabilities. The Company’s net income in the fiscal
year of 2006 was reduced by $2,295,741 and the debentures were classified as
long-term liabilities.  There was no impact to the Company’s
previously reported revenue, cash and cash equivalents. The accounting
effect was also discussed in the Company’s Form 8-K filed on March 27,
2008.




The
financial statements for the year ended December 31, 2006 have been restated to
record the debenture interest costs and discount out of the convertible feature
of the debentures issued in November and December of 2006 and to reclassify the
debentures as long-term liabilities. The accounting treatment and
reclassification resulting in this restatement is in accordance with SFAS No.
107 and 133.





As the
convertible debentures were issued in November and December 2006, no restatement
of the financial statements is required prior to that period. However, the
restatement will affect the financial statements for the year ended December 31,
2006, and for the fiscal quarters ended March 31, 2007, June 30, 2007, and
September 30, 2007. Accordingly, such financial statements should no longer be
relied upon.





Net
income impacts on each prior period are shown below:





Fiscal
      Quarter ended
            
            Decrease
      in Net Income
            
            
            Cumulative
      effect of the change of retained earningsDecember
      31, 2006
            
            
            2,295,741
            
            
            
            (2,295,741)March
      31, 2007
            
            
            516,666
            
            
            
            (2,812,407)June
      30, 2007
            
            
            516,666
            
            
            
            (3,329,073)September
      30, 2007
            
            
            516,667
            
            
            
            (3,845,740)





The
restated financial statements of the Company for the year ended December 31,
2006 are shown in the notes to the Company’s Consolidated Financial Statements
included in Part II, Item 7 of this Report.





- 15
-
 Table of Contents




Financial
review of the Company for the year 2007:





Selected
      financial dataYear
      Ended December 312007
            
            
            2006(Restated)Net
      sales
            
            $
            7,480,453
            
            
            $
            14,872,682Net
      income
            
            
            (4,094,935
            )
            
            
            (158,751
            )Net
      income per share –basic (two classes method)
            
            
            (0.11
            )
            
            
            (0.00
            )Net
      income per share -fully diluted (two classes method)
            
            
            (0.11
            )
            
            
            (0.00
            )Weighted
      average shares outstanding – basic
            
            
            37,725,894
            
            
            
            31,312,535Weighted
      average shares outstanding - fully diluted
            
            
            37,725,894
            
            
            
            31,312,535Total
      assets
            
            
            29,057,363
            
            
            
            25,090,389(8,114,014
            )
            
            
            1,515,234Working
      Capital (Deficit)Stockholders'
      equity
            
            
            16,811,326
            
            
            
            15,382,496





No
dividends have been declared or paid for any of the periods
presented





CONSOLIDATED RESULTS OF
OPERATIONS





Statements
of Operations Items:





Sales





Sales for
the fiscal year ended December 31, 2007 were $7,480,453 as compared to
$14,872,682 for the fiscal year ended December 31, 2006, a decrease of
$7,392,229 or 50%.   The decrease in sales was due to: (1) the
reduction in TV advertising sales after the Company decided to discontinue its
agreement to act as the sole advertising agent of a TV channel in Guangzhou
during 2007 as such operations had shown during 2006 not to be profitable; and
(2) reduction in STB installation fee income as a result of a change in the
Government’s policy which provided for the suspension of charging service fees
to DTV subscribers on STB installation enforced by the local
Government.





The total
number of DTV subscribers increased by 24,921 to 245,352 by the end of
2007.  Sale of additional STB in 2007 was increased by 10,576 to
45,051, an increase of 31% as compared with last year, representing
approximately 18% of total DTV subscribers in Nanhai.  The number of
value added package subscriptions increased by 14,130 to 33,741 in 2007,
representing approximately 14% of total DTV subscribers in
Nanhai.  The digitalization project will continue in 2008 and the
Company expects that revenue from DTV business will grow as a result of the
completion of migration process in 2008.





Gross
Margin





Due to
the impairment loss on investment in television series, gross profit margin
decreased from 38% in 2006 to 36% in 2007, and the gross profit amount
decreased by $2,931,416 from last year.





Expenses





Selling,
general, administrative and depreciation and amortization expenses for the
fiscal year ended December 31, 2007 increased by $1,952,821 or 68% to
$4,825,106, in comparison with the last fiscal year ended December 31,
2006.  The increase was mainly due to the increase in business
activities to support increased TV subscription revenue, R&D expenditure for
STB middleware $763,231 (2006: Nil), and provision for doubtful debt on
advertising customers $1,306,959 (2006: $200,652) for those who had financial
difficulty in repaying their debts in short term, which are offset by the
decrease in advertising related expenses owing to detraction of advertising
sales activities.





- 16
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Income
Taxes





Income
taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), “Accounting for Income Taxes.”
A deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting and net operating loss-carry
forwards.





Income
(Loss) from Discontinued Operation





Income
(Loss) from discontinued operation in the statement of operation represents the
shareholders’ share of an operating result in Guishi Digimedia, a 51%
subsidiary, and Guishi Huaguang, a 49% affiliate, being disposed of during the
period.  For the year ended December 31, 2007, we recognized the
income from the discontinued operation of $327,083.





Net
Income





The
Company had net loss of $4,094,935 (2006 loss: $158,751) or $0.12 loss per
common share for the year ended December 31, 2007, an increase of net loss
$3,936,184 as compared with last year. The increase in net loss was due to drop
in gross profit $2,931,416, and the increase in doubtful debt provision, R&D
expenses and the amortization of convertible debt discount.





Balance
Sheet Items:





Current
Assets





Current
Assets of the Company decreased by $7.4 million to $3.5 million as at December
31, 2007. As the Company utilized most of its cash on DTV migration, it has
maintained a low level of cash balance of $0.3 million as at December 31, 2007,
a decrease of $0.1 million from December 31, 2006. Accounts Receivable decreased
by $8 million in 2007, of which $7.8 million attributable to the Accounts
Receivable from Nanhai Network Company is classified as long term according to
an agreement for the $7.8 million balance to be repayable over 15 years by this
company.





Intangible
Assets





Intangible
assets increased by $3.9 million during 2007, which is the goodwill generated
from the acquisition of Maxcomm.





Property
and Equipment, Net





The net
increase in property and equipment of the Company of $1.1 million in 2007 mainly
represented purchase of STB for migration in 2007.





Current
Liabilities





Current
Liabilities of the Company have increased by $2.2 million to $11.6 million as at
December 31, 2007. The increase was mainly attributable to the accounting
treatment for reinstating the debenture costs out of the convertible
feature.





Impact of
Inflation





The
Company believes that inflation has had a negligible effect on operations over
the past two years.





Trends,
Events, and Uncertainties





The
Company believes that the demand for its DTV services is stable as cable
television service in Nanhai is monopolized by the local television
bureau.  The increase of the number of DTV subscribers depends on the
digitalization schedule.  The increase of subscribers is dependent on
our migration plan and the rate of increase of residents in Nanhai.





On the
technology side, the Company is not certain about the impact of technological
changes on its business as such development in IPTV, satellite and terrestrial
broadcasting.  However, assuming the Company has sufficient cash
resources, the Company intends to continue to put more resources in research and
development in order to catch up with the technological development especially
with a focus on DTV related businesses.





In
advertising sales, the Company plans to enter into more exclusive television
channel arrangements in order to increase its sales volume and try to boost its
advertising rate.  The Company expects that revenue will increase as
the 2008 Olympic Games hosted by the PRC in Beijing approach.  The
Company, however, has a concern that the cost to obtain exclusive television
channel arrangements will escalate since the PRC is opening its advertising
market to foreign investors.





The
Company believes television program production will generate stable revenue for
the Company. The Company believes that the government policy of the PRC to
control the production and publication of media content, especially movie and
television drama, is the most important factor. However, due to the demand for
television programs and the digitalization of television as the primary task for
SARFT, the Company anticipates that more investors will be allowed to enter the
market and competition will be increased.





- 17
-
 Table of Contents






Liquidity
and Capital Resources





On
December 31, 2007, the Company had cash of $334,410 and a working capital
deficit of $8,114,014.  This compares with cash of $402,591 and a
working capital surplus of $1,515,234 at December 31, 2006.





Operating
activities had a net surplus of cash in the amount of $1,398,695 during the
year, reflecting an excess of revenues over operating expenditures.





Net cash
used in investing activities for the fiscal year ended December 31, 2007 was
$3,241,369 as compared with net cash used in investing activities of $6,711,667
for the fiscal year ended December 31, 2006. The decrease in net cash used in
investing activities was due to the drop in purchases of STBs for migration
purpose, and fund provided by the disposal of investment in subsidiaries during
the year.





Net cash
provided by financing activities for the fiscal year ended December 31, 2007 was
$1,234,427. The majority of net cash provided by financing activities was raised
through a major shareholder and proceeds from stock issue in private
placement.





We
continued to receive cash from Nanhai Network Company according to the project
schedule and DTV migration plan. The Company's investment in STBs and smart
cards remained the substantial accounts payable at the year end of 2007. For
further business expansion and acquisition, the Company is considering various
financing methods for funding, although there is no assurance that the Company
will be able to raise additional funding on favorable terms, if at
all.





On a
long-term basis, liquidity is dependent on continuation and expansion of
operations, receipt of revenues, additional infusions of capital and debt
financing. Our current capital and revenues are not sufficient to fund further
acquisition and business expansion.  The Company is planning to raise
capital through debt financing and equity raising from banks, potential
investors and partners. However, if the Company is unable to raise additional
capital, its growth potential is more likely to be affected.





The
Company issued a total of $3.1 million in convertible debentures in November and
December 2006, which debentures will mature in May 2008.  Due to the
Company’s current financial situation with most of the Company’s cash being
utilized to make the upfront investment for the Migration, the Company may not
have enough cash to repay the debentures.  The Company intends to
negotiate with the debenture holders to refinance or otherwise satisfy the
debentures.  However, as of the date of this report, the Company does
not have any agreements or understandings in place with the debenture holders,
and there is no assurance that the Company will be able to refinance or
otherwise satisfy the debentures prior to May 2008.





- 18
-
 Table of Contents


ITEM
7. Financial Statements





CHINA
DIGITAL MEDIA CORPORATION


AND
SUBSIDIARIES





CONTENTS


PageReport
      of Independent Registered Public Accounting Firm
              20Consolidated
      Balance Sheets as of December 31, 2007 and 2006
              21Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2007 and 2006
              22Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2007
      and 2006
              23Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2006
              24Notes
      to the Consolidated Financial Statements as of December 31, 2007 and
      2006
              25 - 43






- 19
-
 Table of Contents








Jimmy
      C.H. Cheung & Co
              Certified Public Accountants
              (A
      member of Kreston International) Registered
      with the Public Company Accounting Oversight Board


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors of:




China
Digital Media Corporation






We have
audited the accompanying consolidated balance sheets of China Digital Media
Corporation and subsidiaries as of December 31, 2007 and 2006 (restated) and the
related consolidated statements of operations and comprehensive income,
stockholders’ equity and cash flows for the years ended December 31, 2007 and
2006 (restated). These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits of the financial
statements provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Digital Media Corporation and
subsidiaries as of December 31, 2007 and 2006 (restated) and the results of its
operations and its cash flows for the years ended December 31, 2007 and 2006
(restated), in conformity with accounting principles generally accepted in the
United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 24
to the consolidated financial statements, the Company had a net loss of
$4,094,935, an accumulated deficit of $970,704 and a working capital deficiency
of $8,114,014.  These factors raise substantial doubt about its
ability to continue as a going concern.  Management’s plans concerning
this matter are also described in Note 24.  The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.




As
discussed in Note 2, the Company restated its consolidated financial statements
for the year ended December 31, 2006.









JIMMY
C.H. CHEUNG & CO




Certified
Public Accountants








Hong
Kong





Date:
 February 26, 2008







1607
Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong


Tel:  (852)
25295500   Fax:  (852) 28651067


Email: jimmycheung@jimmycheungco.com


Website:  http://www.jimmycheungco.com  - 20
-
 Table of Contents


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,2007
            
            
            2006(Restated)CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            334,410
            
            
            $
            402,591Accounts
      receivable, net of allowances
            
            
            1,851,193
            
            
            
            9,827,678Inventories,
      net
            
            
            781,561
            
            
            
            475,481Other
      receivables and prepaid expenses
            
            
            500,229
            
            
            
            187,818Value
      added taxes recoverable
            
            
            45,530
            
            
            
            63,210Total
      Current Assets
            
            
            3,512,923
            
            
            
            10,956,778ACCOUNTS
      RECEIVABLE, long term portion
            
            
            7,781,997
            
            
            
            -INTANGIBLE
      ASSETS
            
            
            4,320,924
            
            
            
            392,521INVESTMENTS
      IN TELEVISION SERIES, NET
            
            
            -
            
            
            
            616,277INVESTMENTS
      IN AFFILIATES
            
            
            -
            
            
            
            528,581PROPERTY
      AND EQUIPMENT, NET
            
            
            13,193,066
            
            
            
            12,129,494DEFERRED
      TAX ASSET
            
            
            123,982
            
            
            
            -OTHER
      ASSETS
            
            
            124,471
            
            
            
            466,738TOTAL
      ASSETS
            
            $
            29,057,363
            
            
            $
            25,090,389LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESConvertible
      debentures, net of discount
            
            $
            2,212,631
            
            
            $
            -Accounts
      payable
            
            
            5,109,728
            
            
            
            5,968,778Other
      payables and accrued liabilities
            
            
            707,932
            
            
            
            753,292Due
      to a stockholder
            
            
            384,581
            
            
            
            -Due
      to a director
            
            
            241,239
            
            
            
            84,656Due
      to related companies
            
            
            730,831
            
            
            
            380,486Business
      and other taxes payable
            
            
            157,646
            
            
            
            299,532Income
      tax payable
            
            
            2,082,349
            
            
            
            1,954,800Total
      Current Liabilities
            
            
            11,626,937
            
            
            
            9,441,544LONG
      TERM LIABILITIESAccounts
      payable
            
            
            619,100
            
            
            
            -Convertible
      debentures, net of discount
            
            
            -
            
            
            
            246,852619,100
            
            
            
            246,852TOTAL
      LIABILITIES
            
            
            12,246,037
            
            
            
            9,688,396MINORITY
      INTERESTS
            
            
            -
            
            
            
            19,497STOCKHOLDERS'
      EQUITYSeries
      A convertible preferred stock ($0.001 par value, 40,000,000 sharesauthorized,
                1,875,000
      shares issued and outstanding as of December 31, 2007 and
      2006)
            
            
            1,875
            
            
            
            1,875Common
      stock ($0.001 par value, 500,000,000 shares authorized,
                42,117,057
      and 31,602,365 shares issued and outstanding as of December 31, 2007 and
      2006 respectively)
            
            
            42,117
            
            
            
            31,602Additional
      paid-in capital
            
            
            14,836,639
            
            
            
            10,812,806Deferred
      stock compensation
            
            
            (21,200
            )
            
            
            (84,800
            )Retained
      earningsUnappropriated
            
            
            (970,704
            )
            
            
            3,688,643Appropriated
            
            
            1,521,997
            
            
            
            957,585Accumulated
      other comprehensive gain (loss)
            
            
            1,400,602
            
            
            
            (25,215
            )Total
      Stockholders' Equity
            
            
            16,811,326
            
            
            
            15,382,496TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            29,057,363
            
            
            $
            25,090,389






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


- 21
-
 Table of Contents




CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS





For
      the Year Ended December 31,2007
            
            
            2006(Restated)NET
      SALESRevenue
      from digitalization of television signals
            
            $
            5,714,471
            
            
            $
            7,214,110Revenue
      from television advertising
            
            
            384,423
            
            
            
            6,061,743Revenue
      from software development
            
            
            63,567
            
            
            
            51,688Revenue
      from investments in television series
            
            
            -
            
            
            
            268,165Government
      grant received
            
            
            1,317,992
            
            
            
            1,276,9767,480,453
            
            
            
            14,872,682COST
      OF SALESCost
      of Sales - digitalization of television signals
            
            
            (560,086
            )
            
            
            (1,009,846
            )Depreciation
      - digitalization of television signals
            
            
            (3,023,468
            )
            
            
            (2,450,739
            )Cost
      of Sales - television advertising
            
            
            (428,234
            )
            
            
            (5,619,792
            )Cost
      of Sales - investment in television series
            
            
            (790,515
            )
            
            
            (182,738
            )(4,802,302
            )
            
            
            (9,263,115
            )GROSS
      PROFIT
            
            
            2,678,151
            
            
            
            5,609,567OPERATING
      EXPENSESSelling,
      general and administrative expenses
            
            
            (4,725,186
            )
            
            
            (2,770,387
            )Depreciation
      and amortization
            
            
            (99,920
            )
            
            
            (101,898
            )Total
      Operating Expenses
            
            
            (4,825,106
            )
            
            
            (2,872,285
            )(LOSS)
      INCOME FROM OPERATION
            
            
            (2,146,955
            )
            
            
            2,737,282OTHER
      INCOME (EXPENSES)Interest
      income
            
            
            2,629
            
            
            
            2,882Other
      income
            
            
            142,370
            
            
            
            45,670Amortization
      of convertible debt discount
            
            
            (2,100,779
            )
            
            
            (246,852
            )Interest
      expenses
            
            
            (125,049
            )
            
            
            (2,072,721
            )Interest
      paid to related companies and directors
            
            
            (17,400
            )
            
            
            (17,257
            )Loss
      on disposal of investment in television series
            
            
            (261,187
            )
            
            
            -Other
      expenses
            
            
            (35,009
            )
            
            
            (34,292
            )Total
      Other Expenses, net
            
            
            (2,394,425
            )
            
            
            (2,322,570
            )NET
      (LOSS) INCOME BEFORE TAX
            
            
            (4,541,380
            )
            
            
            414,712Income
      tax benefit (expense)
            
            
            119,362
            
            
            
            (468,980
            )NET
      LOSS FROM CONTINUING OPERATIONS
            
            
            (4,422,018
            )
            
            
            (54,268
            )DISCONTINUED
      OPERATIONSEquity
      loss of affiliates
            
            
            (14,391
            )
            
            
            (1,886
            )Net
      loss from subsidiary
            
            
            -
            
            
            
            (102,597
            )Gain
      on disposal of subsidiary
            
            
            255,415
            
            
            
            -Gain
      on disposal of affiliate
            
            
            86,059
            
            
            
            -INCOME
      FROM DISCONTINUED OPERATIONS
            
            
            327,083
            
            
            
            (104,483
            )NET
      LOSS
            
            $
            (4,094,935
            )
            
            $
            (158,751
            )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
            
            
            1,425,817
            
            
            
            13,491COMPREHENSIVE
      LOSS
            
            $
            (2,669,118
            )
            
            $
            (145,260
            )Net
      loss per share-basic - two classes method-
      From continuing operations
            
            $
            (0.12
            )
            
            $
            (0.00
            )-
      From discontinued operations
            
            
            0.01
            
            
            
            (0.00
            )Net
      (loss) income per share-diluted-
      From continuing operations
            
            $
            (0.12
            )
            
            $
            (0.00
            )-
      From discontinued operations
            
            
            0.01
            
            
            
            (0.00
            )Weighted
      average number of shares outstanding during the period -
    basic
            
            
            37,725,894
            
            
            
            31,312,535Weighted
      average number of shares outstanding during the period-
      diluted
            
            
            37,725,894
            
            
            
            31,312,535





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


- 22
-
 Table of Contents


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


Restated
              
              
              
              
              
              Restated(Note
      2)
              
              
              
              
              
              (Note
      2)Series
      A Convertible
              
              Preferred
      Stock
              
              
              Series
      B Convertible
              
              
              Preferred
      Stock
              
              
              Common
              
              Stock
              
              
              Additional
              
              
              Deferred
              
              
              Unappropriated
              
              
              Appropriated
              
              
              Accumulated
      other
              
              
              
              
              
              Comprehensivepaid-in
              
              
              stock
              
              
              retained
              
              
              retained
              
              
              comprehensive
              
              
              
              
              
              (Loss)Shares
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              Amount
              
              
              capital
              
              
              compensation
              
              
              earnings
              
              
              earnings
              
              
              loss
              
              
              Total
              
              
              IncomeBalance
      at December 31, 2005
              
              
              1,875,000
              
              $
              1,875
              
              
              
              -
              
              
              $
              -
              
              
              
              31,039,676
              
              $
              31,040
              
              
              $
              4,907,679
              
              
              $
              (50,433
              )
              
              $
              3,848,637
              
              
              $
              956,342
              
              
              $
              (38,706
              )
              
              $
              9,656,434Stock
      issued for placement
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              310,000
              
              
              310
              
              
              
              387,190
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              387,500Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,381
              
              
              2
              
              
              
              2,998
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,000Stock
      issued for oustanding participation costs in the production of a televsion
      series
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              335,308
              
              
              335
              
              
              
              565,665
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              566,000Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              40,000
              
              
              40
              
              
              
              46,360
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              46,400Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              30,000
              
              
              30
              
              
              
              29,970
              
              
              
              (26,667
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,333Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              30,000
              
              
              30
              
              
              
              20,370
              
              
              
              (18,133
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,267Repurchase
      of stock
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (310,000
              
              
              (310
              )
              
              
              (387,190
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (387,500
              )Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              60,000
              
              
              60
              
              
              
              44,940
              
              
              
              (40,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,000Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,000
              
              
              15
              
              
              
              10,485
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,500Stock
      issued for services
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50,000
              
              
              50
              
              
              
              35,450
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              35,500Amortization
      on stock compensation
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              50,433
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50,433Adjustment
      for convertible debenture interest
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              5,148,889
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,148,889Net
      income for the year
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (158,751
              )
              
              
              -
              
              
              
              -
              
              
              
              (158,751
              )Foreign
      currency translation gain
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,491
              
              
              
              13,491Transferred
      to statutory surplus reserve
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,243
              )
              
              
              1,243
              
              
              
              -
              
              
              
              -Comprehensive
      income
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (145,260
              )Balance
      at December 31, 2006 restated
              
              
              1,875,000
              
              
              1,875
              
              
              
              -
              
              
              
              -
              
              
              
              31,602,365
              
              
              31,602
              
              
              
              10,812,806
              
              
              
              (84,800
              )
              
              
              3,688,643
              
              
              $
              957,585
              
              
              $
              (25,215
              )
              
              $
              15,382,496Stock
      issued for acquisition
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,000,000
              
              
              10,000
              
              
              
              3,750,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,760,000Stock
      issued for private placement
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              550,000
              
              
              550
              
              
              
              249,450
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              250,000Cancellation
      of stocks
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (335,308
              
              
              (335
              )
              
              
              (110,317
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (110,652
              )Stock
      issued for converted debenture
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              300,000
              
              
              300
              
              
              
              134,700
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              135,000Amortization
      on stock compensation
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              63,600
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              63,600Transferred
      to statutory surplus reserve
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (564,412
              )
              
              
              564,412
              
              
              
              -
              
              
              
              -Net
      loss for the year
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,094,935
              )
              
              
              
              
              
              
              -
              
              
              
              (4,094,935
              )Foreign
      currency translation gain
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,425,817
              
              
              
              1,425,817Comprehensive
      loss
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,669,118
              )Balance
      at December 31, 2007
              
              
              1,875,000
              
              $
              1,875
              
              
              
              -
              
              
              $
              -
              
              
              
              42,117,057
              
              $
              42,117
              
              
              $
              14,836,639
              
              
              $
              (21,200
              )
              
              $
              (970,704
              )
              
              $
              1,521,997
              
              
              $
              1,400,602
              
              
              $
              16,811,326


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


- 23
-
 Table of Contents


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  For
      the Year Ended December 31,2007
                
                
                2006(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (4,094,935
                )
                
                $
                (158,751
                )Adjusted
      to reconcile net loss to cash provided by operating
      activities:Equity
      loss of affiliate
                
                
                14,391
                
                
                
                1,886Amortization
      - cost of sales
                
                
                -
                
                
                
                154,838Depreciation-cost
      of sales
                
                
                3,023,468
                
                
                
                2,450,739Depreciation
      and amortization
                
                
                99,920
                
                
                
                132,274Provision
      for doubtful debts, net
                
                
                1,215,704
                
                
                
                392,198Gain
      on disposal of subsidiary
                
                
                (255,415
                )
                
                
                -Gain
      on disposal of affiliate
                
                
                (86,059
                )
                
                
                -Loss
      on disposal of investment in television series
                
                
                261,187
                
                
                
                -Impairment
      loss of investment in television series
                
                
                223,421
                
                
                
                -Amortization
      of convertible debt discount
                
                
                2,100,779
                
                
                
                246,852Convertible
      debenture interest
                
                
                -
                
                
                
                2,048,889Stock
      issued for services
                
                
                -
                
                
                
                106,000Amortization
      on stock compensation
                
                
                63,600
                
                
                
                50,433Minority
      interests
                
                
                -
                
                
                
                (131,074
                )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                
                
                (1,060,143
                )
                
                
                (5,775,789
                )Other
      receivables and prepaid expenses
                
                
                624,396
                
                
                
                562,773Inventories
                
                
                (306,080
                )
                
                
                (80,491
                )Deferred
      tax asset
                
                
                (123,982
                )Other
      assets
                
                
                935,023
                
                
                
                (466,738
                )Increase
      (decrease) in:Accounts
      payable
                
                
                (162,510
                )
                
                
                1,742,439Other
      payables and accrued liabilities
                
                
                (1,077,413
                )
                
                
                462,636Business
      and other taxes payable
                
                
                (141,886
                )
                
                
                299,532Value
      added taxes payable
                
                
                17,680
                
                
                
                (79,540
                )Income
      tax payable
                
                
                127,549
                
                
                
                536,797Net
      cash provided by operating activities
                
                
                1,398,695
                
                
                
                2,495,903CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      cash inflow from business combination (Note 4)
                
                
                61
                
                
                
                -Disposal
      of affiliates
                
                
                265,924
                
                
                
                -Investment
      in affiliate
                
                
                360,684
                
                
                
                (530,467
                )Disposal
      of subsidiary (Note 5)
                
                
                87,333
                
                
                
                -Purchase
      of property and equipment
                
                
                (3,955,371
                )
                
                
                (6,181,200
                )Net
      cash used in investing activities
                
                
                (3,241,369
                )
                
                
                (6,711,667
                )CASH
      FLOWS FROM FINANCING ACTIVITIESDue
      to related companies
                
                
                350,345
                
                
                
                162,092Proceeds
      from stock issuance in private placement
                
                
                250,000
                
                
                
                -Proceeds
      from convertible debentures
                
                
                -
                
                
                
                3,100,000Minority
      interests
                
                
                92,918
                
                
                
                122,514Due
      to a stockholder
                
                
                384,581
                
                
                
                -Due
      to a director
                
                
                156,583
                
                
                
                84,656Net
      cash provided by financing activities
                
                
                1,234,427
                
                
                
                3,469,262EFFECT
      OF EXCHANGE RATE ON CASH
                
                
                540,066
                
                
                
                24,181NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (68,181
                )
                
                
                (722,321
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                
                
                402,591
                
                
                
                1,124,912CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                
                $
                334,410
                
                
                $
                402,591SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
                
                $
                -
                
                
                $
                26,133Cash
      paid for income tax
                
                $
                -
                
                
                $
                -


SUPPLEMENTAL
NON-CASH INFORMATION:





During
the year, the Company issued 10,000,000 shares of its restricted common stock
with a fair value of $3,760,000 to a third party to acquire 100% equity interest
in Maxcomm.





During
      the year, the Company issued 300,000 shares of common stock to a debenture
      holder for $135,000 of convertible
debentures.





On
December 24, 2007, the Company received and cancelled 335,308 shares with a fair
value of $110,652 as consideration for the transfer of an investment in a
television series back to the producer.





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


- 24
-
 Table of Contents


CHINA
DIGITAL MEDIA CORPORATION


AND
SUBSIDIARIES


NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS








1.SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ORGANIZATION





(A)
            Organization




China
Digital Media Corporation (“CDMC”) (previously HairMax International, Inc.) was
incorporated in the State of Nevada on August 13, 1987.





China
      Digimedia Holdings Limited (“CDHL”) (previously Arcotect Digital
      Technology Limited) was incorporated in Hong Kong on January 5, 2000 as an
      investment holding company.  Through its wholly owned
      subsidiary, Arcotect (Guangzhou) Ltd. (“ AGL”) incorporated in the
      People’s Republic of China (“PRC”) as a wholly owned foreign limited
      liability company on September 24, 2001, CDHL is engaged in software
      development, digital television subscription and application platform
      development (“software development”).  Through its Nanhai Branch
      (“AGL Nanhai Branch”) established in July 8, 2004, AGL is also engaged in
      the business of converting television signals from analogue into digital
      format (“digitalization of television signals”), using digital television
      set-top-box (STB) and smart cards.




On
December 28, 2004, CDMC entered into a Plan of Exchange (“the Agreement”) with
CDHL pursuant to which:





(i)
            the
      stockholders of CDHL purchased 2,850,000 shares of the Company’s Series A
      Convertible Preferred Stock from the majority stockholders of the Company
      in return for the payment of $400,000 in
cash.





(ii)
            the
      stockholders of CDHL has agreed to transfer all of CDHL’s common stock to
      the Company for the issue of 20,000,000 shares of restricted common stock
      of the Company.




The
Agreement was consummated on March 31, 2005 whereupon 1,500,000 shares of
restricted common stock were issued by the Company to the stockholders of CDHL
in lieu of the 20,000,000 shares of restricted common stock contemplated by the
Agreement.  The reduction was consented by the stockholders of CDHL in
light of the significant increase in the price of the shares of common stock of
the Company since the execution of the Agreement.




Additionally,
it was subsequently discovered that 875,000 shares of the Company’s Series A
Convertible Preferred Stock were previously converted before the execution of
the Agreement.  The stockholders of CDHL accepted the remaining
1,975,000 shares of the Company’s Series A Convertible Preferred Stock and
1,750,000 shares of common stock converted from the 875,000 shares of the
Company’s Series A Convertible Preferred Stock in lieu of the 2,875,000 shares
of the Company’s Series A Convertible Preferred Stock in return for the payment
of $400,000 in cash.




On
completion of the Agreement in March 2005, the merger of CDMC and CDHL was
treated for accounting purposes as a capital transaction and recapitalization by
CDHL (“the accounting acquirer”) and re-organization by CDMC (“the accounting
acquiree”). The financial statements have been prepared as if the reorganization
had occurred retroactively.




Accordingly,
the financial statements include the following:





(1)
            The
      balance sheet consists of the net assets of the acquirer at historical
      cost and the net  assets of the acquiree at historical
      cost.





(2)
            The
      statement of operations includes the operations of the acquirer for the
      periods presented and the operations of the acquiree from the date of the
      merger.




The
Company changed its name to China Digital Media Corporation in March
2005.




On June
15, 2005, CDHL entered into a Strategic Alliance Agreement with shareholders of
Guangdong HuaGuang Digimedia Culture Development Limited (“HuaGuang”) whereby
CDHL will hold a 90% variable interest in HuaGuang for the issue of 83,042
shares of CDMC. On January 24, 2007, CDHL exercised its right to hold 100%
interest in HuaGuang.




On August
25, 2005, CDHL acquired a 100% interest in Guangdong M-Rider Media Company
Limited (“M-Rider”), a limited liability company in the PRC, from the
shareholders of M-Rider for US$132,927 in cash and 29,158 shares of
CDMC.




On
October 17, 2005, CDHL established a wholly-owned subsidiary, Digimedia Services
(Shenzhen) Limited (“Digimedia Shenzhen”) in the PRC with a registered capital
of $100,000.  The subsidiary has no operations since its
incorporation.




- 25
-
 Table of Contents


CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS






On May 8,
2006, HuaGuang set up two joint ventures, namely Guizhou Guishi Digimedia
Advertising Company Limited (“Guishi Digimedia”) in which HuaGuang owns 51%
interest, and Guizhou Guishi Huaguang Media Company Limited (“Guishi HuaGuang”)
in which HuaGuang owns 49% interest, both located in China. Guishi Digimedia was
formed to provide advertising agency services whereas Guishi HuaGuang was formed
to provide television programming services, both for a period of 20
years.  On August 19, 2007, HuaGuang sold its shares in Guishi
Digimedia and Guishi Huaguang to Guizhou Tianma Advertising
Company.




On August
23, 2006, CDHL acquired a 20% interest in Arable Media Limited
(“Arable”).  Arable is engaged in the business of developing
middleware software and applications for digital television STB




On May
21, 2007, CDHL acquired a 100% interest in Maxcomm Limited (“Maxcomm”), its only
asset is the 80% interest in Arable.  After the completion of the
acquisition, CDHL beneficially owns 100% interest in Arable.




On
October 29, 2007, Arable established a wholly-owned subsidiary in the PRC,
Arable (Guangzhou) Limited (“Arable GZ”).  Arable GZ is engaged in
research and development, marketing and promotion of STB middleware software.
Arable GZ does not have operations up to December 31, 2007.




CDMC,
CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Maxxcomm, Arable and Arable GZ
are hereinafter referred to as (“the Company”).





(B)
            Use
      of estimates





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





(C)
            Principles
      of consolidation




The
accompanying 2007 consolidated financial statements include the financial
statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai
Branch, Maxcomm, Arable, Arable GZ, M-Rider and Digimedia Shenzhen, and its 100%
variable interest entity in HuaGuang.




The
accompanying 2006 consolidated financial statements include the financial
statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai
Branch, M-Rider and Digimedia Shenzhen, its 90% variable interest entity in
HuaGuang and 51% owned subsidiary of HuaGuang in Guishi Digimedia. The Company
accounts for its 49% investment held by HuaGuang in Guishi Huaguang and its 20%
investment held by CDHL in Arable using the equity method. The minority
interests represent the minority shareholders’ 10% and 54.1% proportionate share
of the results of HuaGuang and Guishi Digimedia respectively.




All
significant inter-company transactions and balances have been eliminated in
consolidation.





(D)
            Consolidation
      of variable interest entity




In
accordance with Interpretation No. 46R, Consolidation of Variable Interest
Entities (“FIN 46R”), variable interest entities (VIEs) are generally
entities that lack sufficient equity to finance their activities without
additional financial support from other parties or whose equity holders lack
adequate decision making ability. All VIEs with which the Company is involved
must be evaluated to determine the primary beneficiary of the risks and rewards
of the VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.




In
connection with the adoption of FIN 46R, the Company concluded that
HuaGuang is a VIE and that the company is the primary beneficiary. Under
FIN 46R transition rules, the financial statements of HuaGuang are then
consolidated into the Company’s consolidated financial statements.





(E)
            Cash
      and cash equivalents





For
purpose of the statements of cash flows, cash and cash equivalents include cash
on hand and demand deposits with a bank with a maturity of less than three
months.





(F)
            Accounts
      receivable




The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and recorded based on managements’ assessment of the credit history
with the customer and current relationships with them.




As of
December 31, 2007 and 2006, the Company considers all its accounts receivable to
be collectible after provision for doubtful accounts made in the financial
statements.


- 26
-
 Table of Contents
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS







(G)
            Inventories




Inventories
are stated at lower of cost or market value, cost being determined on a first in
first out method.  The Company provided inventory allowances based on
excess and obsolete inventories determined principally by customer demand.
Inventory consists of finished goods purchased directly from
manufacturers.





(H)
            Property
      and equipment  Property
and equipment are stated at cost, less accumulated
depreciation.  Expenditures for additions, major renewals and
betterments are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred.




Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives.  The estimated useful lives are as
follows:





Set
      Top Box (“STB”) and smart cards
            5
      Years


Motor
      vehicles
            10
      Years


Furniture,
      fixtures and equipment
            5
      and 8 Years




Depreciation
of STB




As
required by SAB11:B, depreciation and amortization for property and equipment
directly attributed to the generation of revenue was classified under “Cost of
Sales”. Accordingly, depreciation of STB and smart cards of the Company in 2007
for the amount of $3,023,468 was included in “Cost of Sales”. To conform with
the current account presentation, the depreciation of STB in 2006 of $2,450,739
previously classified as “Selling, General and Administrative expenses” is now
included in “Cost of Sales”.





(I)
            Investments
      in television series




Investments
in television series represent the unamortized costs of acquired television
series production and participation costs. The investments are stated at the
lower of cost less accumulated amortization or fair values. The investments are
amortized, using the individual television series forecast method, in the
proportion that current revenue bears to management’s estimate of ultimate
revenue expected to be recognized from the exploitation and exhibition of the
television series. The ultimate revenue which includes estimates over a period
not to exceed 10 years following the date of initial release are prepared on a
title-by-title basis and reviewed periodically based on current market
conditions. Estimate of future revenue involve measurement uncertainty and it is
therefore possible that reduction in the carrying value of investments in
television series may be required as a consequence of changes in management’s
future revenue estimates.





(J)
            Long-lived
      assets




The
Company accounts for long-lived assets under the Statements of Financial
Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other
Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
Assets” (“SFAS No. 142 and 144”).  In accordance with SFAS No. 142 and
144, long-lived assets held and used by the Company are reviewed for impairment
annually in the fourth quarter or more frequently if events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
when undiscounted future cash flows will not be sufficient to recover an asset’s
carrying amount, the asset is written down to its fair value. The management
reviewed for impairment on the investment in television series and an impairment
of $223,421 was recognized as cost of sales for the year ended December 31,
2007.  The Company believes that no impairment of other long-lived
assets including property and equipment and goodwill exist at December 31,
2007.





(K)
            Valuation
      of financial instruments (other than derivative financial
      instruments)




Statement
of Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," requires certain disclosures regarding the fair
value of financial instruments. Fair value of financial instruments is made at a
specific point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective in nature,
involving uncertainties and matters of significant judgment, they cannot be
determined with precision. Changes in assumptions can significantly affect
estimated fair values.




The
carrying value of cash and cash equivalents, accounts receivable (trade and
others), accounts payable (trade and related party) and accrued liabilities
approximate their fair value because of the short-term nature of these
instruments. The Company places its cash and cash equivalents with what it
believes to be high credit quality financial institutions. The Company controls
credit risk related to accounts receivable through credit approvals, credit
limit and monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit risk,
establishes an allowance, if required, for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowance is limited.


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 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


The
Company’s major operation is in the PRC, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility of foreign
exchange rates between the United States dollars (“US$”) and the Chinese
Renminbi (“RMB”). Nevertheless, the Company does not believe that its foreign
currency exchange rate fluctuation risk is significant, especially if the PRC
government allows only gradual currency fluctuation so as to maintain the
relative stability of RMB.




(L)             
Convertible Instruments




The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature.  Generally, embedded conversion features where the
ability to physical or net-share settle the conversion option is not within the
control of the Company are bifurcated and accounted for as a derivative
financial instrument.  (See Derivative Financial Instruments
below).  Bifurcation of the embedded derivative instrument requires
allocation of the proceeds first to the fair value of the embedded derivative
instrument with the residual allocated to the debt instrument.  The
resulting discount to the face value of the debt instrument is amortized through
periodic charges to the amortization of debt discount using the Effective
Interest Method.







(M)
            Derivative
      financial instruments




The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as  warrants or options to acquire common stock and
the embedded conversion features of debt that are indexed to the Company’s
common stock, are classified as liabilities when either (a) the holder possesses
rights to net – cash settlement or (b) physical or net share settlement is not
within the control of the Company. In such instances, net – cash settlement is
assumed for financial accounting and reporting, even when the terms of the
underlying contracts do not provide for net – cash settlement. Such financial
instruments are initially recorded at fair value and subsequently adjusted to
fair value at the close of each reporting period. These derivative financial
instruments are indexed to an aggregate of 6,888,888 shares of the Company’s
common stock as of December 31, 2007 and are carried at fair value of
$3,100,000.


Upon
conversion or exercise of a derivative instrument, the instrument is marked to
fair value at the conversion date and then that fair value is reclassified to
equity.





(N)
            Revenue
      recognition




Digitalization
of television signals




The
Company entered into an agreement with Nanhai Network Company (“Network
Company”) to assist its subscribers on the conversion of television signal from
analog into digital by providing STB and smart cards to the subscribers in
Nanhai City on a lease basis. The Company is entitled to receive a portion of
fees, for subscribers’ television subscription and pay-TV services, payable by
Network Company, under the subscription agreement. Revenue is recognized on a
straight line basis in accordance with the terms of the subscription agreement.
The Company also charges installation fees and sells STB and smart cards to new
subscribers. Revenue arising from these services is recognized when the
subscriber is invoiced for the STB and smart cards upon the completion of
installation works.




In
addition, the Company is entitled to be reimbursed for its operating expenses
from Network Company in accordance to the subscription agreement. Revenue
arising from costs reimbursement is recognized when the amounts are duly agreed
upon between the Company and Network Company.




Government
grant




The local
government of Nanhai City also approved a grant of Rmb10,000,000 each year for
five years from  2004 to finance the conversion of television signal
from analog into digital. The grant is recognized as revenue on a straight line
basis.




As of
December 31, 2007 and 2006, the Company received $1,317,992 and $1,276,976 of
government grant respectively.




Advertising
sales




The
Company acts as an advertising agent for certain television channels by selling
advertising air time spaces and television program backdrops to customers. The
Company's advertising services revenue is derived from billings that are earned
when the advertisements are placed and revenue is recognized as the media
placements appear. Deferred revenues are recognized as a liability when billings
are received in advance of the date before revenues are earned.




Software
development




The
Company provides various information technology professional services to its
customers based on a negotiated fixed-price time and materials contract. The
Company recognizes services-based revenue from all of its contracts when the
services have been performed, the customers have approved the completion of the
services and invoices have been issued and collectibility is reasonably
assured.


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DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


Television
series


The
Company invested in the production of two television series. Revenue from
investments in television series is recognized upon receipt from the production
company.




Supplier
rebate




Rebate or
refund received by the Company from its supplier, either in cash or trade
discount, will be considered as an adjustment of the prices of the supplier’s
products purchased by the Company. Therefore, it will be characterized as (a) a
reduction of cost of sales for subsequent selling of the products by the
Company; or (b) a reduction of property and equipment for products booked as
fixed assets of the Company and subject to deprecation in line with the
depreciable life of the relevant products; or (c) a reduction of inventories for
products maintained in stocks.





(O)
            Research
      and Development




Research
and development costs related to both present and future products are expenses
as incurred. Total expenditures on research and development charged to general
and administrative expenses for the years ended December 31, 2007 and 2006 were
$763,231 and $0 , respectively.





(P)
            Income
      taxes




The
Company accounts for income taxes under the Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“Statement
109”).  Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
included the enactment date.





(Q)
            Foreign
      currency transactions




CDMC,
Arable and CDHL maintain their accounting records in their functional currencies
of US$ and Hong Kong Dollars (“HK$”) respectively, whereas AGL, M-Rider,
HuaGuang, and
Shenzhen DigiMedia maintain their accounting records in their functional
currency of RMB.




Foreign
currency transactions during the year are translated to the functional currency
at the approximate rates of exchange on the dates of
transactions.  Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated at the approximate rates of
exchange at that date.  Non-monetary assets and liabilities are
translated at the rates of exchange prevailing at the time the asset or
liability was acquired.  Exchange gains or losses are recorded in the
statement of operations.




The
financial statements of the subsidiaries (whose functional currency is HK$ or
RMB) are translated into US$ using the closing rate method.  The
balance sheet items are translated into US$ using the exchange rates at the
respective balance sheet dates.  The capital and various reserves are
translated at historical exchange rates prevailing at the time of the
transactions while income and expenses items are translated at the average
exchange rate for the year.  All exchange differences are recorded
within equity. Translation gain for the years ended December 31, 2007 and 2006
were $1,425,817 and$13,491respectively.





(R)
            Comprehensive
      income (loss)




The
foreign currency translation gain or loss resulting from translation of the
financial statements expressed in HK$ and RMB to US$ is reported as other
comprehensive income in the statements of operations and stockholders’ equity.
Other comprehensive income for the years ended December 31, 2007 and 2006 were
$1,425,817 and$13,491
respectively.




(S)
            Income
      per share




Basic
income per share is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding during the
year.  Diluted income per share is computed similar to basic income
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
in nature.




(T)
            Segments




The
Company operates in five reportable segments, digitalization of television
signals, software development, television advertising, investments in television
series and other.


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DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS





(U)
            Reclassifications




Certain
2006 balances have been reclassified to conform to the 2007
presentation.





(V)
            Recent
      accounting pronouncement




In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value and establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP). More precisely, this
statement sets forth a standard definition of fair value as it applies to assets
or liabilities, the principal market (or most advantageous market) for
determining fair value (price), the market participants, inputs and the
application of the derived fair value to those assets and liabilities. The
effective date of this pronouncement is for all full fiscal and interim periods
beginning after November 15, 2007. The Company is currently evaluating the
impact this new Standard, but believes that it will not have a material impact
on the Company’s financial position.





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities—including an amendment of FASB
      Statement No. 115 (“FAS 159”). FAS 159 permits companies to choose to
      measure many financial instruments and certain other items at fair value
      that are not currently required to be measured at fair value. The
      objective of FAS 159 is to provide opportunities to mitigate volatility in
      reported earnings caused by measuring related assets and liabilities
      differently without having to apply hedge accounting provisions. FAS 159
      also establishes presentation and disclosure requirements designed to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities. SFAS 159 will be
      effective in the first quarter of fiscal 2009. The Company is evaluating
      the impact that this statement will have on its consolidated financial
      statements.




In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed.  The Company adopted FSP EITF 07-3 and expensed the
research and development as incurred.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.




In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations, was
issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations.SFAS
141R retains the fundamental requirements in SFAS 141 that the acquisition
method of accounting (which SFAS 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This replaces SFAS 141’s cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values (or other amounts determined in accordance with
SFAS 141R). SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity may not apply it
before that date. The adoption of adopting SFAS No. 141R will have an impact on
its accounting for business combination once adopted, but the effect is
dependent upon acquisition at that time.




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DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


2.   RESTATEMENT OF FINANCIAL
STATEMENTS




The
Company issued a total of $3.1 million in eighteen months 4% interest bearing
convertible debentures in November and December 2006.  In accordance
with SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” and
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, the
convertible feature of such debenture gives rise to a debenture interest cost in
additional to the annual interest expense payable and a discount to the face
value of these debt instruments. In the financial statements for the year ended
December 31, 2006, The Company did not (1) account for such interest costs
amounting to $2,295,741; (2) account for the discount amounting to $3,100,000;
(3) did not amortize the discount of $3,100,000 over the term of the instruments
which amounted to $246,852; and (4) did not classify these liabilities as
long-term liabilities.




During
the preparation of the Form 10-KSB for fiscal 2007, the Company became aware of
such accounting requirements and classifications.  The Company has had
discussions with its independent accountants and has agreed to apply the
accounting treatment in recording the interest costs and discount out of the
convertible feature of the debenture and reclassify the debentures as long-term
liabilities.




Accordingly,
the convertible debenture interest costs have been booked and shown as interest
expenses.  The discount to the face value of the debentures were
recognized and amortized over the term of the debentures. The unamortized
portion of the discount was netted off against the convertible debentures and
classified under long term liabilities.  The Company’s net income in
the fiscal year of 2006 was reduced by $2,295,741 and the debentures were
classified as long-term liabilities.  There was no impact to the
Company’s previously reported revenue, cash and cash equivalents.
The accounting effect  was also discussed in the Company’s Form 8-K
filed on March 27, 2008.





The
financial statements for the year ended December 31, 2006 have been restated to
record the debenture interest costs and discount out of the convertible feature
of the debentures issued in November and December of 2006 and to reclassify the
debentures as long-term liabilities.  The accounting treatment and
reclassification resulting in this restatement is in accordance with SFAS No.
107 and 133.




The
restated financial statements for the year ended December 31, 2006 are shown as
follows:





December
      31,2006
            
            
            2006Restated
            
            
            PreviouslyReportedCURRENT
      ASSETS
            
            
            10,956,778
            
            
            
            10,956,778PROPERTY
      AND EQUIPMENT, NET
            
            
            392,521
            
            
            
            392,521INTANGIBLE
      ASSETS
            
            
            616,277
            
            
            
            616,277INVESTMENTS
      IN TELEVISION SERIES, NET
            
            
            528,581
            
            
            
            528,581INVESTMENTS
      IN AFFILIATES
            
            
            12,129,494
            
            
            
            12,129,494OTHER
      ASSETS
            
            
            466,738
            
            
            
            466,738TOTAL
      ASSETS
            
            $
            25,090,389
            
            
            $
            25,090,389CURRENT
      LIABILITIES
            
            
            9,441,544
            
            
            
            12,541,544LONG
      TERM LIABILITY
            
            
            246,852
            
            
            
            -TOTAL
      LIABILITIES
            
            
            9,688,396
            
            
            
            12,541,544MINORITY
      INTERESTS
            
            
            19,497
            
            
            
            19,497STOCKHOLDERS'
      EQUITYSeries
      A convertible preferred stock
            
            
            1,875
            
            
            
            1,875Series
      B convertible preferred stock
            
            
            -
            
            
            
            -Common
      stock
            
            
            31,602
            
            
            
            31,602Additional
      paid-in capital
            
            
            10,812,806
            
            
            
            5,663,917Deferred
      stock compensation
            
            
            (84,800
            )
            
            
            (84,800
            )Retained
      earningsUnappropriated
            
            
            3,688,643
            
            
            
            5,984,383Appropriated
            
            
            957,585
            
            
            
            957,586Accumulated
      other comprehensive gain (loss)
            
            
            (25,215
            )
            
            
            (25,215
            )Total
      Stockholders' Equity
            
            
            15,382,496
            
            
            
            12,529,348TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            25,090,389
            
            
            $
            25,090,389




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 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS




December
      31,2006
              
              
              2006Restated
              
              
              Previously
                reportedNet
      Sales
              
              $
              15,523,026
              
              
              $
              15,523,026Cost
      of Sales
              
              
              (9,458,477
              )
              
              
              (9,458,477
              )Group
      Profit
              
              
              (6,064,549
              )
              
              
              (6,064,549
              )Operating
      Expenses
              
              
              (3,560,175
              )
              
              
              (3,560,175
              )Income
      from Operations
              
              
              2,504,374
              
              
              
              29,478Other
      Expenses, net
              
              
              (2,325,219
              )
              
              
              (2,325,219
              )Income
      before Taxes and Minority Interests
              
              
              179,155
              
              
              
              2,474,896Income
      Tax Expenses
              
              
              (468,980
              )
              
              
              (468,980
              )Minority
      Interest
              
              
              131,074
              
              
              
              131,074Net
      (Loss) Income
              
              
              (158,751
              )
              
              
              2,136,990Other
      Comprehensive Income
              
              
              13,491
              
              
              
              13,491Comprehensive
      (Loss) Income
              
              $
              (145,260
              )
              
              $
              2,150,481Net
      (loss) income per share – basic – two classes method-
      From continuing operations
              
              $
              (0.00
              )
              
              $
              (0.00
              )-
      From discontinued operations
              
              $
              (0.00
              )
              
              $
              (0.00
              )Net
      (loss) income per share – diluted-
      From continuing operations
              
              $
              (0.00
              )
              
              $
              0.00-
      From discontinued operations
              
              $
              (0.00
              )
              
              $
              (0.00
              )Weighted
      average number of shares outstanding during the year -
    basic
              
              
              31,312,535
              
              
              
              31,312,535Weighted
      average number of shares outstanding during the year -
    diluted
              
              
              31,312,535
              
              
              
              31,312,535


3.
            INTANGIBLE
      ASSETS





Intangible
assets at of December 31, 2007 and 2006 consisted of the following:




2007
              
              
              2006Goodwill
      recognized upon acquisitions of subsidiaries
              
              $
              4,320,924
              
              
              $
              392,521Impairment
      loss
              
              
              --
              
              
              
              --$
              4,320,924
              
              
              $
              392,521


In
      accordance with SFAS No. 142 “Goodwill and other intangible assets,”
      goodwill is not amortized but is tested for impairment. The Company
      performed an assessment on goodwill arising from the M-Rider and
      Maxcomm acquisitions and concluded there was no impairment as to the
      carrying value of the goodwill in this reporting
  period.




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DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS






4.
            BUSINESS
      COMBINATION




On May
21, 2007, CDHL entered into a Stock Purchase and Transfer Agreement (the
“Purchase Agreement”) with a third party to purchase 100% of Maxcomm Limited, a
corporation incorporated in the British Virgin Islands, which sole asset is an
80% equity interest in Arable Media Limited (“Arable”) in exchange for
10,000,000 shares of restricted common stock of the Company, having a
fair value of $3.76 million, based on the 10 days' volume weighted average
price. After the acquisition, the Company’s interest in Arable was increased
from 20% to 100%. Arable is a software developer specialized in middleware
products and applications for digital TV set-top box and broadcasting
technologies. The acquisition was accounted for under the purchase method of
accounting in accordance with step acquisition rules in Statement of
Financial Accounting Statements No. 141, “Business
Combinations”. Accordingly, the operating results of Maxcomm have been
included in the consolidated statements of operation and comprehensive loss
after the effective date of the acquisition of May 21, 2007.




The
preliminary allocation of the net liabilities taken over is as
follows:





Cash
      and cash equivalent
            
            $
            61Other
      receivables and prepaid expenses
            
            
            323,452Total
      current assets
            
            
            323,513Property
      and equipment
            
            
            701Capitalized
      software development cost
            
            
            592,756Total
      assets
            
            
            916,970Accounts
      payable and accruals liabilities
            
            
            (1,106,823
            )Net
      liabilities acquired
            
            
            (189,853
            )Minority
      interest
            
            
            (2,559
            )Share
      of pre-acquisition losses prior to becoming a subsidiary
            
            
            27,361$
            (165,051
            )Consideration
      for acquisition
            
            
            3,760,000Goodwill
            
            $
            3,925,051





Analysis
      of the net inflow of cash and cash equivalents in respect of the business
      combination is as follows:





Cash
      and cash equivalents acquired
            
            $
            61Net
      cash inflow
            
            $
            61





The
      following table reflects the unaudited pro forma combined results of
      operations for the year ended December 31, 2007, assuming the
      acquisition had occurred at the beginning of
  2007.





Revenue
            
            $
            7,480,453Net
      loss
            
            $
            (4,211,390
            )Net
      loss per share  -  basic and diluted
            
            $
            0.00




5.
            DISCONTINUED
      OPERATIONS




On August
17, 2007, the Company disposed its 51% owned subsidiary, Guishi
Digimedia.  The operation of Guishi Digimedia has been reclassified as
discontinued operations in the accompanying consolidated statement of operations
for the year ended December 31, 2006 and is summarized as follows:




Net
      Sales
              
              $
              650,344Cost
      of Sales
              
              
              (195,362
              )Gross
      Profit
              
              
              454,982Selling
      and Administrative Expenses
              
              
              (656,916
              )Other
      Income
              
              
              763Income
      Tax
              
              
              0Net
      Loss
              
              
              (201,171
              )Share
      of Loss
              
              $
              (102,597
              )
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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


6.
            BUSINESS
      DISPOSAL





On August
17, 2007, HuaGuang entered into an Agreement to Transfer the Equity in Guishi
Digimedia  and Guishi Huaguang (the “Transfer of Equity Agreement”)
with a third party to sell its 51% equity interest in Guishi Digimedia and 49%
equity interest in Guishi Huaguang to the third party for a total consideration
of US$ 450,442.  The consideration will be payable in three installments:
(i) 40% of the purchase price was payable within seven business days of
execution of the agreement, (ii) 30% of the purchase price is payable within
five business days of the completion of the equity transfer, and (iii) 30% of
the purchase price is payable by November 30, 2007. If the equity transfer is
not completed for reasons not attributable to either party, either party may
terminate the agreement and the transaction will be reversed in its entirety. On
the completion of the sale, the Company recorded a gain on the disposal of
Guishi Digimedia and Guishi Huaguang of $255,415 and $86,059
respectively.




The
following table summarizes the assets and liabilities of Guishi Digimedia as of
August 17, 2007 foregone:





Fixed
      Assets
            
            $
            628,560Cash
      and bank balance
            
            
            97,186Accounts
      receivable
            
            
            38,927Other
      receivables
            
            
            85,898Prepaid
      expenses
            
            
            216,080Due
      to stockholders
            
            
            (779,101
            )Accounts
      payable
            
            
            (77,440
            )Other
      payables
            
            
            (128,361
            )Accrued
      liabilities
            
            
            (35,607
            )Deposit
      received
            
            
            (48,922
            )Minority
      interest
            
            
            (68,116
            )(70,896
            )Gain
      on disposal of interest in subsidiary
            
            
            255,415Consideration
            
            $
            184,519Satisfied
      by:Cash
      consideration received
            
            $
            184,519Net
      cash inflow arising on disposalCash
      consideration received
            
            $
            184,519Cash
      and bank balance disposed of
            
            
            (97,186
            )$
            87,333




7.
            INVESTMENTS
      IN AFFILIATES




The
Company’s effective interest of 49% in Guishi Huaguang is accounted for using
the equity method of accounting and is stated at cost plus equity in
undistributed earnings or losses since acquisition. The Company’s share of the
net loss for the year ended December, 2007 was $14,391. The Company disposed its
49% equity interest in Guishi Huaguang on August 17, 2007.




A summary
of the unaudited condensed financial statements of the affiliate as of August
17, 2007 is as follows:





Current
      assets
            
            $
            520,779Non-current
      assets
            
            
            225,746Total
      assets
            
            $
            746,525Current
      liabilities
            
            $
            379,454Stockholders’
      equity
            
            
            367,071Total
      Liabilities and Stockholders’ Equity
            
            $
            746,525Revenues
            
            $
            -Gross
      Profit
            
            $
            -Net
      loss
            
            $
            29,669




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DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


The
Company’s share of the loss of this year up to August 17, 2007 is as
follows:





Company
      share at 49%
            
            $
            14,391Equity
      in loss of affiliate
            
            $
            14,391




8.
            ACCOUNTS
      RECEIVABLE, NET




Accounts
receivable at December 31, 2007 and 2006 consisted of the
following:




2007
              
              
              2006Accounts
      receivable
              
              $
              11,241,092
              
              
              $
              10,219,876Less:
      Amount recoverable beyond 12 months
                classified as non-current assets
              
              
              (7,781,997
              )
              
              
              --Accounts
      receivable, current portion
              
              
              3,459,095
              
              
              
              10,219,876Less:
      allowance for doubtful accounts
              
              
              (1,607,902
              )
              
              
              (392,198
              )Accounts
      receivable, net
              
              $
              1,851,193
              
              
              $
              9,827,678


During
2007, the Company entered into an agreement with the Network Company to obtain a
more favorable digital TV basic subscription fee income sharing plan in exchange
for setting aside a certain portion of trade receivable balance due from the
Network Company from the current balance.  Such portion is to be
repayable by the Network Company over 15 years annually and evenly, and is
now classified as non-current assets in the consolidated financial
statements as of December 31, 2007.





The
amounts receivable over the future periods are as follows:


2009
              
              $
              518,7802010
              
              
              518,7802011
              
              
              518,7802012
              
              
              518,7802013
              
              
              518,780Thereafter
              
              
              5,188,097$
              7,781,997


As of
December 31, 2007 and 2006, the Company considered all accounts receivable
collectable after $1,166,938 and $392,198 were provided for doubtful accounts
for the years ended December 31, 2007 and 2006, respectively.




9.
            INVENTORIES,
      NET





Inventories
at December 31, 2007 and 2006 consisted of the following:




2007
              
              
              2006Finished
      goods
              
              $
              781,561
              
              
              $
              475,481Less:
      provision of obsolescence
              
              
              --
              
              
              
              --Inventories,
      net
              
              $
              781,561
              
              
              $
              475,481


For both
of the years ended December 31, 2007 and 2006, the Company has not recorded a
provision for obsolete inventories.


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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS








10.
            OTHER
      RECEIVABLES AND PREPAID EXPENSES




Other
receivables and prepaid expenses at December 31, 2007 and 2006 consisted of the
following:




2007
            
            
            2006Deposit
      paid for the sole advertising agency
            
            $
            134,350
            
            
            $
            -Proceeds
      from the disposal of subsidiary and affiliate
            
            
            138,946
            
            
            
            -Advances
      to staff
            
            
            45,528
            
            
            
            83,659Prepayments
            
            
            145,148
            
            
            
            85,252Trade
      deposits
            
            
            -
            
            
            
            10,156Utility
      deposits
            
            
            36,257
            
            
            
            8,751$
            500,229
            
            
            $
            187,818







11.
            INVESTMENTS
      IN TELEVISION SERIES, NET




The
following is a summary of investments in television series related to the
Company’s participations in the production of two television series through
HuaGuang, a 100% held VIE:




2007
              
              
              2006Television
      participation costs
              
              $
              223,421
              
              
              $
              885,711Less:
      impairment loss
              
              
              223,421
              
              
              
              --Less:
      accumulated amortization
              
              
              --
              
              
              
              269,434Television
      participation costs, net
              
              $
              --
              
              
              $
              616,277


a)
            During
      the year ended December 31, 2005, HuaGuang, a VIE, entered into two
      investment contracts to participate in the production of two television
      series. The Company’s participation is 20% and 34% of the total production
      costs. These investments, for which the Company does not have significant
      influence, are accounted for under the cost method of
      accounting.





b)
            During
      the year ended December 31, 2007, the Company disposed of its 34% interest
      in a television series to the original producer who returned 335,308
      shares of common stock previously issued to the producer as consideration.
      This disposal resulted in a loss of
$261,187.





c)
            Amortization
      expense for the years ended December 31, 2007 and 2006 was $0 and $60,822
      respectively.  Impairment loss of $223,421 and $0 was also
      recorded for the years ended December 31, 2007 and 2006
      respectively.





11.   PROPERTY
AND EQUIPMENT, NET




The
following is a summary of property and equipment at December 31:




2007
              
              
              2006STB
      and smart cards leased to subscribers
              
              $
              20,257,843
              
              
              $
              15,744,782Motor
      vehicles
              
              
              111,353
              
              
              
              103,868Furniture
      and office equipment
              
              
              736,102
              
              
              
              498,28521,105,298
              
              
              
              16,346,935Less:
      accumulated depreciation
              
              
              7,912,232
              
              
              
              4,217,441Property
      and equipment, net
              
              $
              13,193,066
              
              
              $
              12,129,494


Depreciation
expense for the years ended December 31, 2007 and 2006 were $3,123,388 and
$2,583,013 respectively.


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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


12.  OTHER ASSETS




Other
assets represent deferred finance costs relate to commission, legal and
financial advisory fees directly attributable to the issuance of the convertible
debenture by the Company. Deferred finance costs are amortized over the life of
the debenture of 18 months from November 2006. In 2007, costs amortized as
expenses were $373,501 and costs of $21,200 were classified as deferred stock
compensation.





13.
            CONVERTIBLE
      DEBENTURES





On
November 17, 2006, the Company completed a private equity financing with four
accredited investors for $3,000,000, $1,000,000 of which was rolled over from
the investor of the sale completed on July 7, 2006.  The investor’s
previously purchased securities were returned to the Company in partial exchange
for the units issued on this private equity financing.  Upon the
closing of this private equity financing, the investor waived all rights
associated with the previously purchased securities and waived all interest
payments accrued on the previously purchased securities. Furthermore, on
December 13, 2006, the Company has completed another private equity financing
with an accredited investor for $100,000.




As a
result of the above, during 2006, the Company has issued the following
convertible debentures;




u
            On
      November 17, 2006 to a financial institution for $
    2,150,000


u
            On
      November 17, 2006 to a financial institution for $
  200,000


u
            On
      November 17, 2006 to a financial institution for $
  500,000


u
            On
      November 17, 2006 to an individual investor for $
  150,000


u
            On
      December 13, 2006 to an individual investor for
  $100,000





The above
convertible debentures were issued pursuant to the private equity financing as
described above where the Company sold a total 31 units of securities. Each unit
consists of (i) an eighteen-month 4% interest bearing convertible debenture in
the principal amount of $100,000, convertible at $0.45 per share, (ii) a
six-year Class A warrant to purchase 222,222 shares of the Company’s common
stock, par value $0.001 per share at an exercise price of $0.80 per share, a
(iii) six-year Class B warrant to purchase 222,222 shares of the Company’s
common stock at an exercise price of $1.20 per share, and (iv) a six-year Class
C warrant to purchase 111,111 shares of the Company’s common stock at an
exercise price of $2.25 per share. The securities issuable upon conversion of
the debenture and exercise of the warrants are eligible for certain registration
rights.  In December 2007, debenture amounted to $135,000 was
converted to common stock by one of the debenture holders.




The
following is a summary of convertible debentures as of December 31, 2007 and
2006:




2007
                
                
                2006Restated$2,150,000
      Convertible Debentures, net of $135,000 and $0 as of December 31, 2007 and
      2006 respectively conversions and unamortized discount of $376,350 and
      $1,978,796 as of December 31, 2007 and 2006 respectively at 4% interest
      per annum due May 2008
                
                $
                1,503,650
                
                
                $
                171,204$500,000 Convertible
      Debentures, net of unamortized discount of $126,852 and $460,185 as of
      December 31, 2007 and 2006 respectively at 4% interest per annum due
      May 2008
                
                
                373,148
                
                
                
                39,815$200,000 Convertible
      Debentures, net of unamortized discount of $50,741 and $184,074 as of
      December 31, 2007 and 2006 respectively at 4% interest per annum due
      May 2008
                
                
                149,259
                
                
                
                15,926$150,000 Convertible
      Debentures, net of unamortized discount of $38,056 and $138,056 as of
      December 31, 2007 and 2006 respectively at 4% interest per annum due
      May 2008
                
                
                111,944
                
                
                
                11,944$100,000 Convertible
      Debentures, net of unamortized discount of $25,370 and $92,037 as of
      December 31, 2007 and 2006 respectively at 4% interest per annum due
      June 2008
                
                
                74,630
                
                
                
                7,9632,212,631
                
                
                
                246,852Less:
      current maturities
                
                
                (2,212,631
                )
                
                
                --Long
      term portion
                
                $
                --
                
                
                $
                246,852
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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS





14.
            ACCOUNTS
      PAYABLE




Accounts
payable at December 31, 2007 and 2006 consists of the following.




2007
              
              
              2006Accounts
      payable
              
              $
              5,728,828
              
              
              $
              5,968,778Less:
      current portion
              
              
              5,109,728
              
              
              
              5,968,778Long
      term liabilities payable from January to November 2009
              
              $
              619,100
              
              
              $
              --
  During
2007, the Company entered into an agreement with one of its major suppliers to
extended the payment of its purchases over 24 equal monthly installments. The
amounts owed to this supplier payable beyond one year as of December 31,
2007 are classified as long-term liabilities.





15.
            OTHER
      PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities at December 31, 2007 and 2006 consist of the
following:




2007
            
            
            2006Other
      payables
            
            $
            320,469
            
            
            $
            229,116Deposits
      received from customers
            
            
            89,030
            
            
            
            239,466Accrued
      liabilities
            
            
            298,433
            
            
            
            284,710$
            707,932
            
            
            $
            753,292




16.
            INCOME
      TAX




a)
            CDMC
      was incorporated in the United States and has incurred net operating loss
      for income tax purposes for 2007 and
2006.




CDHL,
Maxcomm, and Arable are incorporated in Hong Kong and are subject to Hong Kong
profits tax. No provision for Hong Kong profits tax has been made since all of
these entities incurred a loss during 2007 and 2006.




AGL,
M-Rider, HuaGuang, Guishi Digimedia, Guishi HuaGuang, Shenzhen DigiMedia and
Arable GZ were incorporated in the PRC and are subject to PRC income tax which
is computed according to the relevant laws and regulations in the PRC. The
applicable tax rate has been 33%. No tax benefit is expected from the tax
credits in the future. The income tax expenses for 2007 and 2006 are summarized
as follows:




PRC
      Income Tax
              
              2007
              
              
              2006Current
              
              $
              --
              
              
              $
              --Deferred
              
              
              (119,362
              )
              
              
              468,980$
              (119,362
              )
              
              $
              468,980


Deferred
tax liabilities result from temporary differences for revenues earned but not
yet taxable under PRC tax regulations.




b)
            The
      Company’s deferred tax asset at December 31, 2007 and 2006 consists of net
      operating losses carry forwards calculated using statutory effective tax
      rates. Due to its history of losses, the Company believes that sufficient
      objective, positive evidence currently exists to conclude that
      recoverability of its net deferred tax assets is unlikely rather than not.
      Consequently, the Company has provided a valuation allowance covering 100%
      of its net deferred tax assets with the exception of those of
      AGL.




As of
December 31, 2007, CDMC had loss carried forward of approximately $5,299,793 for
U.S. income tax purposes available for offset against future taxable U.S. income
expiring in 2027.




As of
December 31, 2007, CDHL has Hong Kong tax loss carry forwards of approximately
$1,243,220. Currently, the Hong Kong tax losses can be carried forward
indefinitely.




As of
December 31, 2007, all the PRC companies have tax loss carry forwards of
approximately $1,095,200 of 375,703 which are expected to be utilized in near
future.  A deferred tax asset $123,982 is recognized.




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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS




c)
            The
      reconciliation of income taxes computed at the statutory income tax rates
      to total income taxes for the years ended December 31, 2007 and 2006 is as
      follows:




2007
              
              
              2006CDMCIncome
      tax computed at the federal statutory rate
              
              
              34
              %
              
              
              34
              %State
      income taxes, net of federal tax benefit
              
              
              5
              %
              
              
              5
              %Valuation
      allowance
              
              
              39
              %
              
              
              39
              %CDHLIncome
      tax computed at applicable tax rate
              
              
              17.5
              %
              
              
              17.5
              %Valuation
      allowance
              
              
              (17.5
              %)
              
              
              (17.5
              %)AGLIncome
      tax computed at applicable tax rate
              
              
              33
              %
              
              
              33
              %Valuation
      allowance
              
              
              0
              %
              
              
              0
              %M-RiderIncome
      tax computed at applicable tax rate
              
              
              33
              %
              
              
              33
              %Valuation
      allowance
              
              
              (33
              %)
              
              
              (33
              %)HuaGuangIncome
      tax computed at applicable tax rate
              
              
              33
              %
              
              
              33
              %Valuation
      allowance
              
              
              (33
              %)
              
              
              (33
              %)


17.
            NET
      LOSS PER SHARE





Loss per
share on a diluted basis were $0.04 and $0.05 for the fiscal years ended
December 31, 2007 and 2006 respectively.  As of December 31, 2007, the
Company has outstanding:





-  42,117,057
shares of common stock;


-  1,875,000
shares of preferred stock;


-  6,588,882
shares of common stock to be issued upon conversion of convertible debenture
(“CD”);












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CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS






In
accordance with paragraph 40 and 41 of SFAS 128 and EITF 03-6, basic and diluted
earnings per share on a two class method for the fiscal year ended December 31,
2007 and 2006 were calculated as follows:




2007
            
            
            2006RestatedNet
      Loss
            
            $
            (4,094,935
            )
            
            $
            (158,751
            )Basic
      – 2 classes methodIncome
      available to common shareholders
            
            $
            (4,094,935
            )
            
            $
            (158,751
            )Weighted-average
      common stock outstanding
            
            
            37,725,894
            
            
            
            31,312,535Basic
      earnings per share – Common Stock-
      From continued operations
            
            $
            (0.12
            )
            
            $
            (0.00
            )-
      From discontinued operations
            
            $
            0.01
            
            
            $
            (0.00
            )DilutedLoss
      available to common stockholders
            
            $
            (4,094,935
            )
            
            $
            (158,751
            )Weighted-average
      common stock outstanding
            
            
            37,725,894
            
            
            
            31,312,535Diluted
      weighted-average common stock outstanding
            
            
            37,725,894
            
            
            
            31,312,535Diluted
      earnings per share-
      From continued operations
            
            
            (0.12
            )
            
            
            (0.00
            )-
      From discontinued operations
            
            
            0.01
            
            
            
            0.00


Warrants
to purchase 6,588,882 shares of common stock at $0.80 per share, 6,888,882
shares of common stock at $1.20 per share and 3,294,441 shares of common stock
at $2.25 per share were outstanding as of December 31, 2007 but were not
included in the computation of diluted earnings per share because the warrants’
exercise price was greater than the market price of the common shares. The
warrants, which expire on November, 2012, were still outstanding on December 31,
2007.




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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


18.
            SEGMENTS





The
Company operates in five reportable segments; digitalization of television
signals, software development, television advertising, investments in television
series and other. The accounting policies of the segments are the same as
described in the summary of significant accounting policies.  The
Company evaluates segment performance based on income from
operations.  All inter-company transactions between segments have been
eliminated.  As a result, the components of operating income for one
segment may not be comparable to another segment.  The following is a
summary of the Company’s segment information for the years ended December 31,
2007 and 2006:




Digitalization
              
              
              
              
              
              
              
              
              Investmentsof
      Television
              
              
              Television
              
              
              Software
              
              
              in
      televisionSignals
              
              
              Advertising
              
              
              Development
              
              
              series
              
              
              Total2007Revenues
              
              $
              7,032,463
              
              
              $
              384,423
              
              
              $
              63,567
              
              
              $
              -
              
              
              $
              7,480,453Gross
      profit (loss)
              
              
              3,448,910
              
              
              
              (43,811
              )
              
              
              63,567
              
              
              
              (790,515
              )
              
              
              2,678,151Net
      income (loss)
              
              
              2,077,103
              
              
              
              (641,986
              )
              
              
              (1,047,808
              )
              
              
              (1,805,462
              )
              
              
              (1,418,153
              )Total
      assets
              
              
              23,771,154
              
              
              
              682,482
              
              
              
              4,452,575
              
              
              
              151,152
              
              
              
              29,057,363Capital
      expenditure
              
              
              3,838,186
              
              
              
              (572,670
              )
              
              
              39,873
              
              
              
              22,123
              
              
              
              3,327,512Depreciation
      and amortization
              
              $
              3,066,146
              
              
              $
              10,154
              
              
              $
              8,801
              
              
              $
              38,287
              
              
              $
              3,123,3882006
      (Restated)Revenues
              
              $
              8,491,087
              
              
              $
              6,712,087
              
              
              $
              51,687
              
              
              $
              268,165
              
              
              $
              15,523,026Gross
      profit
              
              
              5,030,502
              
              
              
              896,933
              
              
              
              51,687
              
              
              
              85,427
              
              
              
              6,064,549Net
      income (loss)
              
              
              2,937,200
              
              
              
              (271,961
              )
              
              
              (147,337
              )
              
              
              92,535
              
              
              
              2,610,436Total
      assets
              
              
              19,747,225
              
              
              
              4,059,702
              
              
              
              69,450
              
              
              
              1,214,012
              
              
              
              25,090,389Capital
      expenditure
              
              
              5,447,530
              
              
              
              626,045
              
              
              
              3,488
              
              
              
              104,137
              
              
              
              6,181,200Depreciation
      and amortization
              
              $
              2,487,219
              
              
              $
              46,051
              
              
              $
              12,669
              
              
              $
              191,911
              
              
              $
              2,737,851




A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.




2007
              
              
              2006Total
      net loss (gain)  for reportable segments
              
              $
              1,418,153
              
              
              $
              (2,610,436
              )Unallocated
      amounts relating to corporate operationsInterest expenses
              
              
              125,049
              
              
              
              2,072,721Amortization of convertible debt discount
              
              
              2,100,779
              
              
              
              246,852Interest paid to related companies and directors
              
              
              17,400
              
              
              
              17,257Gain on disposal of subsidiary
              
              
              (255,415
              )
              
              
              -Gain on disposal of affiliate
              
              
              (86,059
              )
              
              
              -Loss from discontinued operations
              
              
              (14,391
              )
              
              
              (104,483
              )Administration expenses
              
              
              542,989
              
              
              
              471,590Professional fees
              
              
              240,346
              
              
              
              65,250Others
              
              
              6,084
              
              
              
              -$
              4,094,935
              
              
              $
              158,751


19.
            STOCKHOLDERS’
      EQUITY




(A)  Stock
issuances




(1)
            Stock issued for
      acquisition




During
the year, the Company issued 10,000,000 shares of its restricted common stock
with a fair value of $3,760,000 to a third party to acquire 100% equity interest
in Maxcomm.





(2)
            Stock issued for
      converted debenture




During
the year, the Company issued 300,000 shares of common stock to a debenture
holder who converted $135,000 of the debenture.





(3)
            Stock issued for
      private placement




During
the year, the Company issued 550,000 shares of its restricted common stock to a
third party with a fair value of $250,000 for private placement.





(4)
            Stock issued for
      investment




On March
30, 2006, the Company issued 335,308 shares of restricted common stock with a
fair value of $110,652 for the investment costs in the production of a
television series.




On
December 24, 2007, the Company received and cancelled 335,308 shares with a fair
value of $110,652 as consideration for transfer of an investment in a television
series back to the producer.


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 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS






(B)  Appropriated
retained earnings




The
Company’s PRC subsidiaries are required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on the after-tax net income determined in
accordance with the laws and regulations of the PRC.  Prior to January
1, 2006 the appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the laws and
regulations of the PRC until the reserve is equal to 50% of the entities’
registered capital.  Appropriations to the statutory public welfare
fund are at 5% to 10% of the after tax net income determined by the Board of
Directors.  Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 percent of net income after tax
per annum, such contributions not to exceed 50 percent of the respective
companies’ registered capital.




The
statutory reserve funds are restricted for use to set off against prior period
losses, expansion of production and operation or for the increase in the
registered capital of the Company. The statutory public welfare fund is
restricted for use in capital expenditures for the collective welfare of
employees. These reserves are not transferable to the Company in the form of
cash dividends, loans or advances. These reserves are therefore not available
for distribution except in liquidation.




During
2007 and 2006, the Company appropriated $564,412 and $1,243 respectively to the
reserves funds based on its net income in accordance with the laws and
regulations of the PRC.




(C)  Contributed
capital




During
2007 and 2006, CDHL contributed restricted capital of $0 and $779,207
respectively to AGL.




20.
            RELATED
      PARTY TRANSACTIONS





As of
December 31, 2007 and 2006, the Company owed to two directors $241,239 and
$84,656 respectively for short-term advances. Interest is charged at 6% per
annum on the amount owed.




As of
December 31, 2007 and 2006, the Company owed to related companies $730,831 and
$380,486 respectively for short-term unsecured advances made. Interest is
charged at 6% per annum on the amount owed.




As of
December 31, 2007 and 2006, the Company owed to a stockholder $384,581 and $0
respectively for short-term unsecured advances made. Interest is charged at 6%
per annum on the amount owed.




21.
            COMMITMENTS





(A)
            Employee
      benefits




The full
time employees of the Company in China are entitled to employee benefits
including medical care, welfare subsidies, unemployment insurance and pension
benefits through a Chinese government mandated multi-employer defined
contribution plan. The Company is required to accrue for those benefits based on
certain percentages of the employees’ salaries and make contributions to the
plans out of the amounts accrued for medical and pension benefits. The total
provision and contributions made for such employee benefits was $93,011 and
$70,574 for the years ended December 31, 2007 and 2006, respectively. The
Chinese government is responsible for the medical benefits and the pension
liability to be paid to these employees.





The
      Company also operates a Mandatory Provident Fund plan (“the plan”) which
      is available to all employees in Hong Kong.  Both the Company
      and the employees are required to contribute 5% (subject to an aggregate
      amount of $256) per month of the employees’ relevant
      income.  Contributions from the Company are 100% vested in the
      employees as soon as they are paid to the plan.  Contributions
      to the plan are expensed as they become payable in accordance with the
      rules of the plan and amounted to $6,588 and $4,563 for the years ended
      December 31, 2007 and 2006 respectively. The assets of the plan are held
      separately from those of the Company and are managed by independent
      professional fund managers.





(B)
            Operating
      leases commitments




The
Company leases office spaces from third parties under four operating leases; one
lease expires on March 31, 2009 and three leases expire Jan 8, 2014 for total
monthly rentals of $9,635. The Company also leases spaces for staff quarters
from third parties under six operating leases which expire from March 22, 2008
to July, 2008 with total monthly rentals of $883.  Accordingly, for
the years ended December 31, 2007 and 2006, the Company recognized rental
expense for office spaces in the amount of $129,407 and $90,731,
respectively




As of
December 31, 2007, the Company has outstanding commitments with respect to the
above non-cancelable operating leases, which are due as follows:




2008
              
              $
              129,4072009
              
              
              98,4212010
              
              
              94,3972011
              
              
              99,117Thereafter
              
              
              328,090$
              749,433
  - 42
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 Table of Contents
 CHINA
DIGITAL MEDIA CORPORATION AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


22.
            CONTINGENCIES




The
Company accounts for loss contingencies in accordance with SFAS 5 “Accounting
for Loss Contingencies”, and other related guidance.  Set forth below
is a description of certain loss contingencies as of December 31, 2005 and
management’s opinion as to the likelihood of loss in respect of each loss
contingency.




On May
24, 2005, Ziegler, Ziegler & Associates LLP and Scott Ziegler filed a
Complaint against the Company in the United States District Court for the
Southern District of New York for using their internet domain name to distribute
the Company’s promotional information over the internet.  The
Plaintiffs seek several types of damages in an amount not less than
$1,250,000.  The Company’s counsel was instructed to vigorously defend
the action as the emails in question were distributed by a party not hired nor
associated with the Company.  Accordingly, no provision for this
contingency has been made as of December 31, 2007.




23.
            CONCENTRATIONS
      AND RISKS





During
2007 and 2006, 100% of the Company’s assets were located in China and 100% of
the Company’s revenues were derived from customers in China.




The
Company relied on two suppliers and purchases from those suppliers for the year
ended December 31, 2007 and 2006 are as follows:




For
      the year ended
              
              Supplier
      A
              
              
              Supplier
      BDecember
      31, 2007
              
              
              72
              %
              
              
              15
              %December
      31, 2006
              
              
              89
              %
              
              
              0
              %


At
December 31, 2007 and 2006, accounts payable to those two suppliers totaled
$5,001,855 and $5,316,582 respectively.




24.
            GOING
      CONCERN




As
reflected in the accompanying consolidated financial statements, the Company has
an accumulated deficit of $970,704 at December 31, 2007 that includes a net loss
of $4,094,935 for the year ended December 31, 2007.  The Company’s
total current liabilities exceed its total current assets by
$8,114,014.  These factors raise substantial doubt about its ability
to continue as a going concern.  In view of the matters described
above, recoverability of a major portion of the recorded asset amounts shown in
the accompanying consolidated balance sheet is dependent upon continued
operations of the company, which in turn is dependent upon the Company’s ability
to raise additional capital, obtain financing and succeed in its future
operations.  The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.




Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern.  The Company is actively
pursuing additional funding and potential merger or acquisition candidates and
strategic partners, which would enhance stockholders’
investment.  Management believes that the above actions will allow the
Company to continue operations through the next fiscal year.





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ITEM
8. Changes with and Disagreements With Accountants on Accounting And Financial
Disclosure





None.





ITEM
8A. Controls and Procedures





Evaluation of Controls. As of
the end of the period covered by this annual report on Form 10-KSB, the Company
evaluated the effectiveness of the design and operation of (i) our disclosure
controls and procedures ("Disclosure Controls"), and (ii) our internal control
over financial reporting ("Internal Controls"). This evaluation ("Evaluation")
was performed by our President and Chief Executive Officer and Chief Financial
Officer ("CFO"), Ng Chi Shing ("CEO & CFO"). In this section, the Company
presents the conclusions of our CEO & CFO based on and as of the date of the
Evaluation, (i) with respect to the effectiveness of our Disclosure Controls,
and (ii) with respect to any change in our Internal Control that occurred during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect our Internal Control.





CEO & CFO
Certifications.  Attached to this annual report, as Exhibits
31.1 and 31.2, are certain certifications of the CEO and CFO, which are required
in accordance with the Exchange Act and the Commission's rules implementing such
section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This section of the
annual report contains the information concerning the Evaluation referred to in
the Rule 13a-14(a)/15d–14(a) Certifications. This information should be read in
conjunction with the Rule 13a-14(a)/15d–14(a) Certifications for a more complete
understanding of the topic presented.





Disclosure Controls and Internal
Control. Disclosure Controls are procedures designed with the objective
of ensuring that information required to be disclosed in our reports filed with
the Commission under the Exchange Act, such as this annual report, is recorded,
processed, summarized and reported within the time period specified in the
Commission's rules and forms. Disclosure Controls are also designed with the
objective of ensuring that material information relating to us is made known to
the CEO & CFO by others, particularly during the period in which the
applicable report is being prepared.  Internal Control, on the other
hand, are procedures which are designed with the objective of providing
reasonable assurance that (i) our transactions are properly authorized, (ii) the
Company's assets are safeguarded against unauthorized or improper use, and (iii)
our transactions are properly recorded and reported, all to permit the
preparation of complete and accurate financial statements in conformity with
accounting principals generally accepted in the United States.





Limitations on the Effectiveness of
Controls. Our management does not expect that our Disclosure Controls or
our Internal Control will prevent all error and all fraud. A control system, no
matter how well developed and operated, can provide only reasonable, but not
absolute assurance that the objectives of the control system are
met.  Further, the design of the control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances so of fraud, if any, within the Company 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. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of a system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated objectives under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, or because the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.





Conclusions.  Based
upon the Evaluation, our disclosure controls and procedures are designed to
provide reasonable assurance of achieving our objectives. Our CEO & CFO have
concluded that our disclosure controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to the
Company is made known to management, including the CEO and CFO. Additionally,
there has been no change in our Internal Controls that occurred during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
affect, our Internal Controls.





Management’s
Annual Report on Internal Control Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, in accordance with Rules 13a-15(f)
and 15d-15(f) of the Exchange Act. Under the supervision and with the
participation of the Company’s management, including the Certifying Officers, we
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.





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





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Based on
its assessment using these criteria, the Company’s management concluded that the
Company maintained effective internal control over financial reporting as of
December 31, 2007.





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





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PART
III




ITEM
9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act





Identification
of Directors





The
following information, as of December 31, 2007 is furnished with respect to each
Director and Executive Officer:


Name of Director
              
              Age
              
              Date of Service
              
              Position with CompanyNg
      Chi Shing
              
              43
              
              2004
              
              President,
      Chief Executive Officer, DirectorChen
      Lu
              
              38
              
              2005
              
              DirectorChen
      Juan
              
              31
              
              2005
              
              Director


All
Directors serve for one-year terms.





All
officers serve at the pleasure of the Board.





There are
no arrangements or understandings pursuant to which any of them were elected as
officers.





Mr. Ng Chi Shing is our
President and Chief Executive Officer and Director and Chief Financial
Officer.  Mr. Ng is founder and CEO of Arcotect Digital Technology
Limited.  Arcotect Digital Technology Limited was founded to
capitalize on the numerous opportunities in China arising from the digitization
of cable television services and the reform of state owned cable television
enterprises.  Mr. Ng has extensive experience in Cable TV operations,
Internet and information technology industry.  Over his 16 years
experience in the industry, he has been Chairman, CEO and director of public
companies in Hong Kong, such companies including DCP Holdings Ltd., Hong Kong
Cable TV Ltd, the first cable TV operator in Hong Kong, Hong Kong Star Internet
Ltd., the first Internet Service Provider in Hong Kong.  Mr. Ng is
also the Chairman of Hong Kong Information Technology Federation and the founder
member of Hong Kong Internet Service Providers Association.  Besides,
Mr. Ng was elected as Hong Kong’s “Ten Outstanding Young Digi Persons” by Hong
Kong Productivity Council and Hong Kong Junior Chamber in 2000.





Mr. Chen Lu is a Director of
the Company.  Mr. Chen has over 17 years experience in banking,
telecom and broadcasting industry in China.  Mr. Chen was the founder
and general manager of Guangzhou Vispac Telecom Co Ltd. and Guangzhou DaiLin
Communication Co. Ltd.





Ms. Chen Juan is a Director of
the Company.  She is currently a teacher of computer related courses
in Guangdong Dance College since 1999.





There
have been no events under any bankruptcy act, any criminal proceedings and any
judgments or injunctions material to the evaluation of the ability and integrity
of any director or executive officer during the past 5 years.





Audit
Committee Financial Expert





The
Company does not have a separately designated standing audit committee. The
entire Board of Directors acts as an audit committee for the purpose of
overseeing the accounting and financial reporting processes, and our audits of
the financial statements. The Commission has adopted regulations relating to
audit committee composition and functions, including disclosure requirements
relating to the presence of an "audit committee financial expert" serving on its
audit committee. In connection with these new requirements, our Board of
Directors examined the Commission's definition of "audit committee financial
expert" and concluded that the Company does not currently have a person that
qualifies as such an expert. Presently, there are only three directors serving
on our Board, and the Company is not in a position at this time to attract,
retain and compensate additional directors in order to acquire a director who
qualifies as an "audit committee financial expert". While neither of our current
directors meets the qualifications of an "audit committee financial expert",
each of our directors, by virtue of his past employment experience, has
considerable knowledge of financial statements, finance, and accounting, and has
significant employment experience involving financial oversight
responsibilities. Accordingly, the Company believes that our current directors
capably fulfill the duties and responsibilities of an audit committee in the
absence of such an expert.





Code
of Conduct





The
Company has adopted a code of conduct that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions.  Such code of
ethics will be provided to any person without charge, upon request, by sending
such request to us at our principal office. The Company publishes the code in
the Company’s website at www.chinadigimedia.com.





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Section
16(a) Beneficial Ownership Reporting Compliance





Under
Section 16(a) of the Exchange Act, all executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of a
company that files reports pursuant to Section 12 of the Exchange Act, are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes in
that ownership with the Commission. Specific due dates for these reports have
been established, and the Company is required to report, in this Form 10-KSB,
any failure to comply therewith during the fiscal year ended December 2007. The
Company believes that all of these filing requirements are satisfied by our
executive officers, directors and by the beneficial owners of more than 10% of
our common stock. In making this statement, the Company has relied solely on
copies of any reporting forms received by it, and upon any written
representations received from reporting persons that no Form 5 (Annual Statement
of Changes in Beneficial Ownership) was required to be filed under applicable
rules of the Commission.





Changes
in Nomination Procedures





There
have been no material changes to the procedures by which security holders may
recommend nominees for the Company’s Board since the Company’s filing in which
we discussed such procedures.





ITEM
10. Executive Compensation





During
the fiscal years ended December 31, 2006 and 2007, we did not have any employees
that earned greater than $100,000 in salary and bonus.  The following
table sets forth information regarding the annual compensation for our Chief
Executive Officer.





Summary
Compensation Table





Name
      and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            All
      Other Compensation
              ($)
            
            Total
              ($)Ng
      Chi Shing (a.k.a. Daniel Ng)
              Chairman
      of the Board, Chief Executive Officer and President
            
            2007
            
            
            38,473
            (1)
            
            
            
            
            
            38,4732006
            
            
            38,473
            (1)
            
            
            
            
            
            38,473





(1)           Includes
$38,461 (based on a conversion rate of Hong Kong dollars to U.S. dollars of 7.8
to 1) payable to Mr. Ng pursuant to his agreement with our subsidiary China
Digimedia Holdings Limited, and $14.40 payable by the Company.





Stock
Option Grants





No
options, warrants, or stock appreciation rights were issued during fiscal year
2007 to any employees.





Discussion
of Employment Agreements and Termination or Change of Control
Arrangements





Effective
January 1, 2006, Mr. Daniel Ng and our subsidiary, China Digimedia Holdings
Limited (or CDHL), entered into an employment agreement pursuant to which Mr. Ng
agreed to serve as Chief Executive Director of CDHL.  The employment
agreement provides for a base salary of HK $25,000 per month (or approximately
US $3,205) and a discretionary year-end bonus.  The employment
agreement may be terminated by CDHL on three months’ written notice, provided
that CDHL reserves the right to terminate the agreement at any time without
prior notice with cause.  The employment agreement also provides that
during the term of the employment and for one year thereafter, the Mr. Ng shall
not compete in any other business or services similar to that of
CDHL.





Effective
January 1, 2006, we entered into an employment agreement with Mr. Ng pursuant to
which Mr. Ng agreed to serve as our Chief Executive Officer for an initial term
ending December 31, 2008, which may be renewed for additional one-year
periods.  The agreement provides for an annual salary of $12 in 2006,
$14.40 in 2007, and $17.28 in 2008, provided that if our revenues increase by
50% or more in 2006 as compared to 2005.  Commencing in 2007, Mr. Ng’s
salary shall increase to the “Market Rate,” which is defined as the comparable
rate of pay for a CEO employed by a company in a similar industry with similar
capacity, as determined and approved by our Board of Directors. As of the date
of this report, this determination has not been made.  Commencing in
2007, Mr. Ng is entitled to receive an annual bonus as determined by the Board
of Directors. Upon termination of the agreement by us for a reason other than
for “cause” (as defined in the agreement) or upon the death or disability of Mr.
Ng, Mr. Ng is entitled to a severance payment of his then salary and bonus for
the remaining term of the employment agreement. Upon termination of the
agreement upon the disability of Mr. Ng, Mr. Ng is entitled to 75% of his then
base salary and bonus for a period of one year.  Upon termination of
the agreement by us for “cause,” Mr. Ng is entitled to all amounts due to him
for any portion of the payroll period worked but for which payment had not yet
been made up to the date of termination. The employment agreement provides that
during the term of the employment and for three months thereafter, the Mr. Ng
shall not compete in any other business or services similar to that of our
business or services.





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Director
Compensation





Directors
who are also employees do not receive compensation for their services as
directors.





Director
Compensation Table – 2007





Name
            
            Fees
      Earned or Paid in Cash
              ($)
            
            
            Total
              ($)Chen
      Lu
            
            
            26,600
            
            
            
            26,600Chen
      Juan
            
            
            -
            
            
            
            -





(1)           Mr.
Ng’s total compensation is reflected in the Summary Compensation
Table.





ITEM
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





Security
Ownership of Certain Beneficial Owners





All
persons known by the Company to own beneficially more than 5% of any class of
the Company's outstanding stock on December 31, 2007, are listed
below:




Title
      of Class
              
              Name
      and Address
              
              #
      Shares
              
              Nature
      of
                Ownership
              
              Current
      % OwnedCommon
      Stock, $.001 Par Value
              
              Ng
      Chi Shing
                Ste
      B 27/Fk Wah Ctr 191 Java Road, North Point,
                Hong
      Kong
              
              17,398,440
      (A)
              
              Direct
              
              41.0%Common
      Stock, $.001 Par Value
              
              Chen
      Lu
                2505-06
      25/F Stelux House
                698
      Prince Edward Road E.
                Hong
      Kong
              
              5,851,560
              
              Direct
              
              13.8%Common
      Stock, $.001 Par Value
              
              Billy,
      Tam Wai Keung
                2505-06
      25/F Stelux House
                698
      Prince Edward Road E.
                Hong
      Kong
              
              8,000,000
      (B)
              
              Direct
              
              18.8%Common
      Stock, $.001 Par Value
              
              Vision
      Opportunity Master Fund, Ltd.
                20
      West 55th Street
                5th
      Floor
                New
      York, Ny 10019
              
              4,202,784
      (C)
              
              Direct
              
              9.9%
      (C)Preferred
      Stock, $.001 Par Value
                (D)
              
              Ng
      Chi Shing
                Ste
      B 27/Fk Wah Ctr 191 Java Road, North Point,
                Hong
      Kong
              
              1,403,100
      (A)
              
              Direct
              
              74.8%Preferred
      Stock, $.001 Par Value
                (D)
              
              Chen
      Lu
                2505-06
      25/F Stelux House
                698
      Prince Edward Road E.
                Hong
      Kong
              
              471,900
      (A)
              
              Direct
              
              25.2%


(A)           On
March 21, 2007, Modern Delta transferred 23,250,000 shares of common stock and
1,875,000 shares of Series A Convertible Preferred Stock of the Company owned by
Modern Delta Limited to Daniel Ng and Chen Lu.  After completion of
the restructuring, Daniel Ng owned 17,398,440 shares of common stock and
1,403,100 shares of Series A Convertible Preferred Stock of the Company, and
Chen Lu owned 5,851,560 shares of common stock and 471,900 shares of Series A
Convertible Preferred Stock of the Company




(B)           
CDHL acquired 100% shares in Maxcomm from Lippo Star Investment Limited (“Lippo
Star”) at a consideration of $3,760,000 on May 21, 2007.   The
consideration was fully settled by issuing 10,000,000 shares of CDGT common
stock to Lippo Star, of which 8,000,000 shares was issued to Mr. Tam as a
shareholder of Lippo Star.




(C)           Vision
held 300,000 shares and is eligible to purchase an aggregate of 16,422,211
shares of our common stock pursuant to the exercise of warrants and the
conversion of debentures. However, pursuant to the terms of the transaction
documents relating to the purchase of the foregoing securities, Vision may not
acquire shares of common stock upon exercise of any such warrants or conversion
of the debenture to the extent that, upon exercise or conversion, respectively,
the number of shares of common stock beneficially owned by Vision and its
affiliates would exceed 9.9% of the issued and outstanding shares of our common
stock.  The amount listed assumes the conversion or exercise of the
debenture or warrants, as applicable, in an amount up to 9.9% of our outstanding
common stock after such conversion or exercise.  Adam Benowitz, in his
capacity as managing member of Vision, has ultimate dispositive power over the
shares held by the Vision. Mr. Benowitz disclaims beneficial ownership of the
shares disclosed herein.




(D)           Each
share of preferred stock is convertible into five shares of common
stock.





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Security
Ownership of Management





The
following table sets forth the number of shares owned beneficially on December
31, 2007, by each Director and by all Officers and Directors as a group. No
shares listed below have been pledged by the holder of such shares.




Title
      of Class
              
              Name
      and Address
              
              #
      Shares
              
              Nature
      of Ownership
              
              Current
      % OwnedCommon
      Stock,
                $.001
      Par Value
              
              Ng
      Chi Shing
                2505-06,
      25F, 698 Prince Edward Road E., Hong Kong
              
              17,398,440
              
              Direct
      (y)
              
              41.0%Common
      Stock,
                $.001
      Par Value
              
              Chen
      Lu
                2505-06,
      25F, 698 Prince Edward Road E., Hong Kong
              
              5,851,560
              
              Direct
      (y)
              
              13.8%Common
      Stock,
                $.001
      Par Value
              
              Chen
      Juan
                2505-06,
      25F, 698 Prince Edward Road E., Hong Kong
              
              None
              
              Direct
              
              -0-%Common
      Stock,
                $.001
      Par Value
              
              All
      Officers and Directors as a Group
              
              23,250,000
              
              Direct
              
              54.8%Preferred
      Stock,
                $.001
      Par Value(z)
              
              Ng
      Chi Shing
                2505-06,
      25F, 698 Prince Edward Road E., Hong Kong
              
              1,403,100
              
              Direct
      (y)
              
              74.8%Preferred
      Stock,
                $.001
      Par Value(z)
              
              Chen
      Lu
                2505-06,
      25F, 698 Prince Edward Road E., Hong Kong
              
              471,900
              
              Direct
      (y)
              
              25.2%


(y)           On
March 21, 2007, Modern Delta transferred 23,250,000 shares of common stock and
1,875,000 shares of Series A Convertible Preferred Stock of the Company owned by
Modern Delta Limited to Daniel Ng and Chen Lu.  After completion of
the restructuring, Daniel Ng directly owned 17,398,440 shares of common stock
and 1,403,100 shares of Series A Convertible Preferred Stock of the Company, and
Chen Lu  directly owned 5,851,560 shares of common stock and 471,900
shares of Series A Convertible Preferred Stock of the Company




(z)           Each
share of preferred stock is convertible into five shares of common stock, and
votes together with the common stock on all matters on an “as converted”
basis.





Securities
Authorized for Issuance Under Equity Compensation Plans





As of
December 31, 2007, the Company’s equity compensation plan information was as
follows.





Equity
Compensation Plan Information




Plan
      Category
              
              Number
      of Securities
                to
      be issued upon exercise of outstanding options
                (a)
              
              Weighted-average
                exercise
      price of outstanding options
                (b)
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                (c)Equity
      compensation plans approved by security holders
              
              --
              
              --
              
              --Equity
      compensation plans not approved by security holders
              
              1,211,104
              
              1.27
              
              N/ATotal
              
              1,211,104
              
              1.27
              
              N/A


ITEM
12. Certain Relationships and Related Transactions; and Director
Independence





The
Company has 1,875,000 shares of Series “A” preferred stock outstanding at
December 31, 2007. These shares are owned by our majority
shareholders.





Director
Independence.





Since we
trade our securities on the OTC Bulletin Board, our Board of Directors is not
subject to any independence requirements. Assuming we were subject to the Nasdaq
Stock Market independence requirements, our Board considered transactions and
relationships between each director or any member of his or her immediate family
and our company, subsidiaries and affiliates. The purpose of this review was to
determine which of our directors were independent, and whether any such
relationships or transactions existed that were inconsistent with a
determination that the director is independent.  As a result of this
review, the Board affirmatively determined that during 2007 Ms. Chen was
independent of us under the standards of the independent director requirements
of the Nasdaq Stock Market.  Messrs. Ng and Chen are not independent
directors under the standards of the independent director requirements of the
Nasdaq Stock Market.





Our Board
of Directors does not have an audit committee, compensation committee, or
nominating committee, and as such the actions normally taken by these committees
is taken by the Board as a whole.





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ITEM
13. Exhibits





Exhibits





31.1. Rule 13a-14(a)/15d-14(a)
Certifications of Chief Executive Officer


31.2. Rule 13a-14(a)/15d-14(a)
Certifications of Chief Financial Officer


32.1.
Section 1350 Certifications of Chief Executive Officer





Item
14.              Principal
Accountant Fees and Services





Fees
Billed For Audit and Non-Audit Services





The
following table represents the aggregate fees billed for professional audit
services rendered to the independent auditor, Jimmy C.H. Cheung and Co.,
Certified Public Accountants (“Jimmy”), for our audit of the annual financial
statements for the years ended December 31, 2007 and 2006.  Audit fees
and other fees of auditors are listed as follows:





Year Ended December 31
            
            2007
            
            
            2006Audit
      Fees (1)
            
            $
            54,600
            
            
            $
            53,100Audit-Related
      Fees (2)
            
            
            --
            
            
            
            --Tax
      Fees (3)
            
            
            --
            
            
            
            --All
      Other Fees (4)
            
            
            --
            
            
            
            --Total
      Accounting Fees and Services
            
            $
            54,600
            
            
            $
            53,100





(1)
            Audit
      Fees.  These are fees for professional services for our
      audit of the annual financial statements, and for the review of the
      financial statements included in our filings on Form 10-QSB, and for
      services that are normally provided in connection with statutory and
      regulatory filings or engagements.


(2)
            Audit-Related
      Fees.  These are fees for the assurance and related
      services reasonably related to the performance of the audit or the review
      of our financial statements.


(3)
            Tax
      Fees.  These are fees for professional services with
      respect to tax compliance, tax advice, and tax
  planning.


(4)
            All Other
      Fees.  These are fees for permissible work that does not
      fall within any of the other fee categories, i.e., Audit Fees,
      Audit-Related Fees, or Tax Fees.





Pre-Approval
Policies and Procedures





The
Company’s Board of Directors acts as its audit committee and on an annual basis
reviews audit and non-audit services performed by the independent auditors. All
audit and non-audit services are pre-approved by the Board of Directors, which
considers, among other things, the possible effect of the performance of such
services on the auditors' independence.







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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 MEDIA CORPORATION


(Registrant)








Date:  April
14, 2008








/s/ Ng Chi
Shing


Ng Chi
Shing


President,
CEO and Director








/s/ Chen
Lu


Chen
Lu


Director








/s/ Chen
Juan


Chen
Juan


Director








/s/ Ng Chi
Shing


Ng Chi
Shing


Chief
Financial Officer









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