UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
   ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                for
      the year endedDecember
      31, 2009
   TRANSITION
      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 registrant 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
  
 Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o     No þ
 
 Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o     No þ
 
 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 þ
    No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes
     No 
 
 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-K or an
amendment to this Form  10-K þ
 
 Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer   o      Accelerated
filer o
 
 Non-accelerated
filer  o
(Do not check if a smaller reporting
company     Smaller reporting company þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   Noþ
 
 As of
March 19, 2010, there were 42,706,363 common shares outstanding and the
aggregate market value of the common shares (based upon the average of the bid
price of $0.123 and the asked price of $0.123 reported by broker) held by
non-affiliates was approximately $229,128.
  Number of
shares of common stock outstanding as of March 19, 2010: 42,706,363
 
 Number of
shares of preferred stock outstanding as of March 19, 2010:
1,875,000
  Incorporation
by Reference: None
 
 CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
 
 The
discussion contained in this 10-K 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-K. 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-K, 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
              
              
              3Item
      1A.
              Risk
      Factors
              
              
              8Item
      1B.
              Unresolved
      Staff Comments
              
              
              10Item
      2.
              Properties
              
              
              10Item
      3.
              Legal
      Proceedings
              
              
              11Item
      4.
              Reserved.
              
              
              11PART
      IIItem
      5.
              Market
      for Registrant’s Common Stock, Related Security Holder
    Matters
              
              
              11Item
      6.
              Selected
      Financial Data
              
              
              11Item
      7.
              Management’s
      Discussion and Analysis
              
              
              11Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              13Item
      8.
              Financial
      Statements and Supplementary Data
              
              
              14Item
      9.
              Changes
      with and Disagreements With Accountants on Accounting and Financial
      Disclosure
              
              
              31Item
      9A.
              Controls
      and Procedures
              
              
              31Item
      9B.
              Other
      Information
              
              
              31PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              
              
              32Item
      11.
              Executive
      CompensationItem
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              
              
              33Item
      13.
              Certain
      Relationships and Related Transactions; and Director
      Independence
              
              
              33Item
      14.
              Principal
      Accountant Fees and Services
              
              
              34PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              
              
              35
  2
  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.
 
 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 200 employees located primarily in the
PRC.
 
 Current
Corporate Structure and Mission
 
 For the
year ended December 31, 2009, 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%
      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.
  3
 
 Operation
Business
 
 The
Company is primarily involved in the following businesses in China:
 
 1) Cable
television operational support services and digital broadcast technology
development; and
 2)
Advertising sales.
 
 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 435,000 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 2009,
and it was completed in December 2009 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 2009.
 
 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 amortized over 15 years annually and evenly out of the increased fee
income after the  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, 2009.
 
 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 fully migrated approximately 150,000 subscribers in 2009 totaling
about 430,000 subscribers to the DTV system as of December 31,
2009,
 
 Basic
Services
 Basic
service is available to all cable television subscribers, consisting of 46
channels of programming. This service comprises programming provided by national
television networks, provincial and city television stations, and one channel
provided by AGL.
 
 4
  
 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 channels,
including a 85-channel basic package and 51 pay channels, bundled into various
value added packages, including 7 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.
 
 High
Definition STB
 With the
increasing demand in High Definition (“HD”) TV broadcasting in Nanhai, with 4
new HD TV channels in Nanhai introduced during 2009, the Company will launch its
new HD STB in the second quarter of the year of 2010 where the subscriber can
purchase such HD STB as their main or 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 the sale of additional STB.
 
 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
2009.
 
 Sales,
Marketing and Advertising
 AGL has
102 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 2009, 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
 
 During
the year of 2009, HuaGuang did not have any business activity.
   5
 
 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 have a city-wide digital Migration
completed.  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, with the introduction of HD TV
broadcasting and flat HD TV gaining higher popularity in China, the HD TV STB
sales will be another potential market.  The Company believes the HD
TV STB middleware developed by the Company will drive the growth of additional
income in the coming years.
 
 The
Company believes that six 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.
 
 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. The Company’s strategy is to use cash flow generated from existing
operations to provide VAS through the digitalized STB in Nanhai.  With
the expected rapid growth in population of Nanhai area in the coming years, we
expect the VAS subscription fee to become one of the major income and profit
contributors.
 
 We will
continue to explore opportunities for development of migration projects in other
cities in Guangdong Province.  The Company will look for different
sources of financing for covering the upfront investment to the new
projects.
 
 6
 
 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.   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.
   7
 
 Item
1A.                      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 $14.9 million (restated),
$7.5 million, $7.3 million and $$9.5 million for fiscal years 2006, 2007, 2008,
and 2009 respectively.  The Company  had net loss of $0.2
million (restated), $4.1 million (restated), $13,4 million and net gain $4.2
million for fiscal years 2006, 2007, 2008 and 2009 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 could fail to remain a going concern. The Company needs to raise
substantial additional capital to fund its operations, and does not have any
commitments for that capital.
 
 The
Company’s independent registered public accounting firm issued their report for
the fiscal year ended December 31, 2009, which included an explanatory paragraph
for the Company’s uncertainty to continue as a going concern. If the Company
became unable to continue as a going concern, it would have to liquidate its
assets and it may likely receive significantly less than the values at which
they are carried on its consolidated financial statements. The inclusion of a
going concern explanatory paragraph in the Company’s independent registered
public accounting firm’s audit opinion for the year ended December 31, 2009 may
materially and adversely affect the Company’s stock price and its ability to
raise new capital.
 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 2009.  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 account receivables is with the Nanhai
Network Company.
 
 Approximately
99% of the Company’s account 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. 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 provide STB in Nanhai or in
other cities will be adversely effected.
 
 8
 
 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, commencing with the year ending December 31, 2010,
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 and middleware. 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 and middleware 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
entered into an extension agreement with this debenture holder on December 8,
2008 where the conversion price of the debentures is reduced to $0.25 per share
where the Company also partially redeemed the debenture for $100,750 on December
31, 2009 from this debenture holder as one of the conditions of the extension
agreement.  The Company also entered into an extension agreement with
another two debenture holders on March 24, 2009 and December 1, 2009 separately
where the conversion price of the debentures is reduced to $0.25 per
share.
 
 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.
 
 9
 
 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
1B.  Unresolved Staff Comments
 
 None.
 
 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 $69,804 for year 2009 under
lease term expiring on January 2014; (2) AGL Nanhai, with 1,045 square meters
for operation and paid total rent of $36,028 for year 2009 under lease term
expiring on September 2012; (3) M-Rider,  with 18 square meters and
paid total rent of $1,332 for year 2009 under lease term expiring on January
2014; (4) HuaGuang, with 45 square meters and paid total rent of $3,414 for year
2009 under lease term expiring Jan 2014; and  (5) Arable GZ, with 52
square meters and paid total rent of $599 for year 2009.  The Company
also leased nine staff quarters with total area of 970 square meters and paid
total rent of $72,352 for year 2009 under various lease terms expiring through
July 2010 to December 2011.
  10
 
 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. We are currently awaiting a decision from the Court on our
motion to dismiss the case. The file number of the civil action is 05 CV 4960.
The Company did not hire a stock promoter or a spammer to distribute the
alleged e-mails, and the alleged emails themselves recite that they were
not paid for by the Company or an affiliate. The Company contests 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.
  ITEM
4. Reserved
 
 
 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                       Low      High
 
 03/31/08                                   0.18      0.18
 06/30/08                                   0.07      0.09
 09/30/08                                   0.12      0.12
 12/31/08                                   0.045    0.045
 03/31/09                                   0.02      0.02
 06/30/09                                   0.025    0.02
 09/30/09                                   0.04      0.04
 12/31/09                                   0.045    0.06
 
 The above
stock prices reflect a 100 for 1 reverse split in 2005.
 
 (b) The
approximate number of holders of record of the Company's Common Stock was 111 in
certificate form and over 1,732 shareholders deposit their shares with the
clearing house according to the NOBO list provided by Broadridge Financial
Solutions, Inc as of March 10, 2010.
 
 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.
 
 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, 2009, the Company did not issue any
shares.
 
 Purchase
of Equity Securities by the Issuer and Affiliated Purchasers
 
 None.
 
 ITEM
6.  Selected Financial Data
 
 Not
applicable.
 
 ITEM
7.  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
2009, the Company reported revenue of $9,525,141 (2008: $7,290,344), an increase
of 31% as compared with last year, and a net income of $2,210,139 (2008
loss: $13,375,575).
 
 The
Company has completed the DTV migration program in Nanhai. The Company will
focus its resources toward developing VAS and DTV middleware to facilitate the
future growth of the subscription income.
 
 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 2009 and 2008 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.
  All
significant inter-company transactions and balances have been eliminated in
consolidation.
 
 11
 
 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”.
 
 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, 2009 and 2008, the Company
did not receive any government grant.  The government grant for 2008
and 2009 may not be received in the future owing to the upward price adjustment
of DTV subscription fee income in mid-2008, which is considered as a
replacement of the government grant.
 
 Advertising
sales
 
 The
Company acts as an advertising agent for certain television channels by selling
advertising air time spaces 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.
 
 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.
 
 Financial
review of the Company for the year 2009:
 
 Selected
      financial data
              
              Year
      Ended December 312009
              
              
              2008Net
      sales
              
              $
              9,525,141
              
              
              $
              7,290,344Net income
      (loss)
              
              
              2,210,139
              
              
              
              (13,375,575
              )Net
      income (loss) per share –basic (two classes method)
              
              
              0.05
              
              
              
              (0.30
              )Net
      income (loss) per share -fully diluted (two classes
method)
              
              
              0.04
              
              
              
              (0.30
              )Weighted
      average shares outstanding – basic
              
              
              42,706,363
              
              
              
              42,595,450Weighted
      average shares outstanding - fully diluted
              
              
              63,005,030
              
              
              
              42,595,450Total
      assets
              
              
              25,711
      ,723
              
              
              
              17,535,847Working
      Capital (Deficit)
              
              
              (9,905,650
              )
              
              
              (7,805,558
              )Stockholders'
      equity
              
              
              6,360,096
              
              
              
              4,372,380
 
 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, 2009 were $9,525,141 as compared to
$7,290,344 for the fiscal year ended December 31, 2008, an increase of
$2,234,797 or 31%.   The increase in sales was due to the
increase in the revenue from the DTV basic subscription fee income as a result
of the upward adjustment of the basic subscription fee from Nanhai DTV
subscribers effective from June 1, 2008.  The expediting DTV migration
progress during the year has also highly contributed to the growth in the
subscription fee income as a result of the increase in number of DTV
subscribers.  In addition, the increase in the sales of additional STB
because of the migration activity is another major reason for such increase in
income.
 
 The total
number of DTV subscribers increased by 132,627 to 431,626 by the end of 2009
from end of 2008.  Sale of additional STB in 2009 was increased by
17,854 to 30,770, an increase of 72% from last year.  The number of
additional STB subscribers increased from 48,991 to 74,182 representing 17% of
total DTV subscribers in Nanhai.  The number of value added package
subscriptions decreased by 4,155 to 7,262 in 2009.
 
 Gross
Margin
 
 Due to
the increase in depreciation charge of STB for the year, gross profit margin
decreased from 30% in 2008 to 28% in 2009. Gross profit amount increased by
$536,969 from last year due to increased basic subscription fee revenues during
2009.
 
 Expenses
 
 Selling,
general, administrative and depreciation and amortization expenses for the
fiscal year ended December 31, 2009 increased by $710,192 or 32% to $2,909,446,
in comparison with the last fiscal year ended December 31, 2008.  The
increase is mainly due to the increase in selling expenses as a result of
increased sales activities for the additional STB sales and the larger payroll
to cope with the migration process.    The provision for
doubtful debts decreased to nil whereas the amount for the year ended December
31, 2008 is $7.8 million.  The Company entered into an agreement with
Network Company at the end of 2007 for amortizing a major portion of the
receivable amount of $7,781,997 due from Nanhai Network Company over 15 years
against its share of increased portion of DTV subscription fee out of the upward
adjustment effective during the mid of year 2008.  Owing to the latest
global financial turmoil which has a drastic adverse impact on the economy of
China, the Company considered that it may result in a drop in DTV subscription
fee and a drop in the income of the Nanhai Network Company.  This in
turn increased the uncertainty of the recoverability of such long term
receivable.  The Company considered that a full doubtful debt
provision which amounted to $7,847,084 was necessary as of the year end of
2008.  As the global financial and economic environment has improved
and become stable, no further provision is considered necessary for the
year.
  No
further impairment of goodwill incurred for the year ended December 31, 2009,
this amount has decreased to nil from the amount of $4 million incurred last
year due to the impairment of goodwill generated from the acquisition of Maxcomm
during 2008.
  Reclassifications
have been made to the comparative figures for the year ended December 31, 2008
showing the amortization of convertible debt discount under other expenses where
it was shown under operating expenses in the last report.  Also,
impairment of goodwill has been separately shown under operating expenses where
the comparative figure of this item for the year ended 2008 was included in
other expenses in the last report.
 
 Other
income was increased by $0.5 million to $689,533 from last year.  The
increase is mainly due to the increased settlement of account receivable – long
term portion from Network Company which was fully reserved.   The
monthly settlement started in June 2008 where there were twelve monthly
settlements in 2009.
 
 12
 
 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.  There was a reversal of income tax provision of $2.3
million in the year of 2009 as a result of the tax holiday enjoyed by AGL for
years of 2008 and 2009.  During the year, AGL was qualified for the
Software Enterprise Certification in China where AGL is entitled to the two-year
income tax exemption and following three-year income tax reduction upon the
confirmation from the local tax bureau.
 
 Net
Income
  The
Company had net income of $2,210,139 (2008 loss: $13,375,575) or $0.05 gain
per common share for the year ended December 31, 2009, an increase of net income
$14,595,833 as compared with last year. The increase in net income was mainly
due to the reversal of income tax provision of $2.3 million, the decrease in
doubtful debt provision of $7.8 million, and the decrease in impairment of
goodwill of $4 million from last year.
 
 Balance
Sheet Items:
 
 Current
Assets
 
 Current
Assets of the Company decreased by $4.3 million to $7.3 million as at December
31, 2009. As the Company had obtained a bank credit facility of $2.2 million
from a commercial bank in China, the Company had maintained a cash balance of
$1.6 million as of December 31, 2009, an increase of $1.2 million from December
31, 2008. The cash deposit placed in fixed deposit account under Restricted Cash
balance for securing the credit facility was $2.0 million as of December 31,
2009.  Accounts Receivable increased by $0.4 million to $1.4 million
in 2009 as a result of higher DTV subscription fee income receivable every month
compared to that in the year 2008 as the number of digital TV subscribers
increased.  Deferred tax asset was increased by $1.0 million to $1.1
million as of December 31, 2009 as a result of the value added tax credit
allowed for deduction but not utilized from the STB purchased for migration
purpose during the year 2009 in accordance with the new value added tax law in
China effective at the beginning of 2009.
 
 Property
and Equipment, Net
 
 The net
increase in property and equipment of the Company of $3.9 million in 2009 mainly
represented purchase of STB for migration purpose in 2009 where these migrated
STB are classified as fixed asset.
 
 Current
Liabilities
 
 Current
Liabilities of the Company have increased by $6.4 million to $17.2 million as at
December 31, 2009. The increase was mainly attributable to the classification of
convertible debenture classified as long term liability last year, the bills
payable as a result of the credit facility obtained during the year, and the
increase in account payable to the STB supplier as a result of larger quantity
of STB purchased during the year for completing the migration
process.
 
 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, 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.
 
 Liquidity
and Capital Resources
 
 On
December 31, 2009, the Company had cash and restricted cash of $3,600,583 and a
working capital deficit of $9,905,650.  This compares with cash of
$436,062 and a working capital deficit of $7,805,558 at December 31,
2008.
 
 Operating
activities had a net surplus of cash in the amount of $8,412,747 during the
year, reflecting an excess of revenues over operating expenditures.
 
 Net cash
used in investing activities for the fiscal year ended December 31, 2009 was
$8,607,785 as compared with net cash used in investing activities of $4,114,665
for the fiscal year ended December 31, 2008. The increase in net cash used in
investing activities was due to the increase in purchases of STBs for migration
purpose.
 
 Net cash
provided by financing activities for the fiscal year ended December 31, 2009 was
$3,565,850. The majority of net cash  provided by financing activities
was from the bills drawn out of the bank credit facility to pay our STB
supplier.
 
 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 2009. 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 2007, which debentures already matured 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 does have
enough cash to repay the debentures.  The Company had negotiated with
certain of the debenture holders to refinance or otherwise satisfy the
debentures.  As of the date of this report, the Company had entered into an
extension agreement with three major debenture holders holding $2,564,250 in
principal amount of debenture to extend the maturity date to June and December
2010.
 
 ITEM
7A. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
applicable.
 
 13
 
 
 ITEM
8. Financial Statements
 
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 
 CONTENTS
 
 
 PageReport
      of Independent Registered Public Accounting Firm
              
              
              15Consolidated
      Balance Sheets as of December 31, 2009 and 2008
              
              
              16Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2009 and 2008
              
              
              17Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2009
      and 2008
              
              
              18Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
              
              
              19Notes
      to the Consolidated Financial Statements as of December 31, 2009 and
      2008
              
              
              20-30
 
 14
 
 BONGIOVANNI & ASSOCIATES,
CPA's
 19720
Jetton Road, 3rd
Floor
 Cornelius,
NC 28031
  
 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, 2009 and 2008 and the related
consolidated statements of operations and comprehensive income, stockholders’
equity and cash flows for the years ended December 31, 2009 and 2008. 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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits 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, 2009 and 2008 and the results of its operations
and its cash flows for the years ended December 31, 2009 and 2008, 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 21 to
the consolidated financial statements, the Company had an accumulated deficit of
$12,136,140 and a working capital deficiency of $9,905,650 at December 31,
2009. 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 21. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
 
 
 /s/
BONGIOVANNI & ASSOCIATES, CPA's
 BONGIOVANNI
& ASSOCIATES, CPA's
 
 Certified
Public Accountants
 
 
 Cornelius,
N.C.
 
 Date:
 March 11, 2010
 
 15
 
 CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSASSETSDecember
      31, 2009
                
                
                December
      31, 2008(Audited)
                
                
                (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                
                $
                1,639,971
                
                
                $
                436,062Restricted
      cash
                
                
                1,960,612
                
                
                
                -Accounts
      receivable, net of allowances
                
                
                1,449,800
                
                
                
                1,078,228Inventories,
      net
                
                
                658,734
                
                
                
                1,247,781Other
      receivables and prepaid expenses
                
                
                308,519
                
                
                
                194,386Due
      from a related company
                
                
                238,016
                
                
                
                -Deferred
      tax asset
                
                
                1,064,552
                
                
                
                52,820Total
      Current Assets
                
                
                7,320,204
                
                
                
                3,009,277INTANGIBLE
      ASSETS, NET of impairment of $3,996,595
                
                
                324,330
                
                
                
                324,329PROPERTY
      AND EQUIPMENT, NET
                
                
                18,067,189
                
                
                
                14,202,241TOTAL
      ASSETS
                
                $
                25,711,723
                
                
                $
                17,535,847LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESConvertible
      debentures, net of discount
                
                $
                2,864,250
                
                
                $
                950,000Bank
      loans
                
                
                4,149,135
                
                
                
                -Accounts
      payable
                
                
                7,505,024
                
                
                
                5,178,216Other
      payables and accrued liabilities
                
                
                1,413,979
                
                
                
                923,980Due
      to directors
                
                
                180,157
                
                
                
                285,642Due
      to a stockholder
                
                
                9,270
                
                
                
                396,331Due
      to related companies
                
                
                464,566
                
                
                
                454,555Business
      and other tax payable
                
                
                19,015
                
                
                
                23,099Income
      tax payable
                
                
                620,458
                
                
                
                2,603,012Total
      Current Liabilities
                
                
                17,225,854
                
                
                
                10,814,835LONG
      TERM LIABILITIESConvertible
      debentures, net of discount
                
                
                -
                
                
                
                2,015,000Accounts
      payable
                
                
                2,125,773
                
                
                
                333,632Total
      Long Term Liabilities
                
                
                2,125,773
                
                
                
                2,348,632COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -MINORITY
      INTERESTS
                
                
                -
                
                
                
                -STOCKHOLDERS'
      EQUITYSeries
      A convertible preferred stock ($0.001 par value, 40,000,000
      sharesauthorized,1,875,000
      shares issued and outstanding as ofDecember
      31, 2009 and December 31, 2008)
                
                
                1,875
                
                
                
                1,875Common
      stock ($0.001 par value, 500,000,000 shares authorized,42,706,363
      shares issued and outstanding as of December 31, 2009and
      December 31, 2008)
                
                
                42,706
                
                
                
                42,706Additional
      paid-in capital
                
                
                14,984,021
                
                
                
                14,984,021Retained
      earningsUnappropriated
                
                
                (12,136,140
                )
                
                
                (14,346,279
                )Appropriated
                
                
                1,521,997
                
                
                
                1,521,997Accumulated
      other comprehensive income
                
                
                1,945,637
                
                
                
                2,168,060Total
      Stockholders' Equity
                
                
                6,360,096
                
                
                
                4,372,380TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                25,711,723
                
                
                $
                17,535,847
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 16
  CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE
      INCOME (AUDITED)FOR
      THE TWELVE MONTHS ENDED DECEMBER 31, 2009 AND 20082009
                
                
                2008NET
      SALESRevenue
      from digitalization of television signals
                
                $
                9,123,942
                
                
                $
                6,855,420Revenue
      from television advertising
                
                
                334,379
                
                
                
                392,296Revenue
      from software development
                
                
                66,820
                
                
                
                42,6289,525,141
                
                
                
                7,290,344COST
      OF SALESCost
      of Sales - digitalization of television signals
                
                
                (1,850,206
                )
                
                
                (891,836
                )Depreciation
      - digitalization of television signals
                
                (4,645,955
                )
                
                
                (3,952,496
                )Cost
      of Sales - television advertising
                
                
                (317,418
                )
                
                
                (271,419
                )(6,813,579
                )
                
                
                (5,115,751
                )GROSS
      PROFIT
                
                
                2,711,562
                
                
                
                2,174,593OPERATING
      EXPENSESSelling,
      general and administrative expenses
                
                
                (2,909,446
                )
                
                
                (2,199,254
                )Provision
      for doubtful debts
                
                
                -
                
                
                
                (7,847,084
                )Impairment
      of goodwill
                
                
                -
                
                
                
                (3,996,946
                )Depreciation
      and amortization
                
                
                (80,749
                )
                
                
                (82,959
                )Total
      Operating Expenses
                
                
                (2,990,195
                )
                
                
                (14,126,243
                )LOSS
      FROM OPERATIONS
                
                
                (278,633
                )
                
                
                (11,951,650
                )OTHER
      INCOME (EXPENSES)Amortization
      of convertible debt discount
                
                
                -
                
                
                
                (752,369
                )Interest
      income
                
                
                2,423
                
                
                
                2,808Other
      income
                
                
                689,533
                
                
                
                207,863Interest
      expense
                
                
                (366,336
                )
                
                
                (279,000
                )Interest
      paid to related companies and directors
                
                
                (22,792
                )
                
                
                (30,091
                )Other
      expenses
                
                
                (17,819
                )
                
                
                (52,095
                )Total
      Other Income (Expenses) , net
                
                
                285,009
                
                
                
                (902,884
                )NET
      INCOME (LOSS) BEFORE TAX
                
                
                6,376
                
                
                
                (12,854,534
                )Income
      tax income (expense)
                
                
                2,203,763
                
                
                
                (521,041
                )NET
      INCOME (LOSS)
                
                
                2,210,139
                
                
                
                (13,375,575
                )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation (loss) income
                
                
                (222,423
                )
                
                
                767,458COMPREHENSIVE
      INCOME (LOSS)
                
                $
                1,987,716
                
                
                $
                (12,608,117
                )Net
      income (loss) per share - basic - two classes method
                
                $
                0.05
                
                
                $
                (0.30
                )Net
      income (loss) per share - diluted
                
                $
                0.04
                
                
                $
                (0.30
                )Weighted
      average number of shares outstanding during the period -
    basic
                
                
                42,706,363
                
                
                
                42,595,450Weighted
      average number of shares outstanding during the period -
      diluted
                
                
                63,005,030
                
                
                
                42,595,450
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 17
  
 CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYFOR
      THE YEAR ENDED DECEMBER 31, 2009 AND 2008Restated
                  
                  
                  
                  
                  
                  Restated(Note
      2)
                  
                  
                  
                  
                  
                  (Note
      2)Series
      A Convertible
                  
                  
                  
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  Deferred
                  
                  
                  Unappropriated
                  
                  
                  Appropriated
                  
                  
                  Accumulated
      otherPreferred
      Stock
                  
                  
                  Common
      Stock
                  
                  
                  paid-in
                  
                  
                  stock
                  
                  
                  retained
                  
                  
                  retained
                  
                  
                  comprehensive
                  
                  
                  
                  
                  
                  ComprehensiveShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  capital
                  
                  
                  compensation
                  
                  
                  earnings
                  
                  
                  earnings
                  
                  
                  loss
                  
                  
                  Total
                  
                  
                  (Loss)
      IncomeBalance
      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
                  
                  
                  
                  16,811,326Amortisation
      on stock compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,200
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,200Transferred
      to statutory surplus reserve
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      issued for converted debenture interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  589,306
                  
                  
                  
                  589
                  
                  
                  
                  147,382
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  147,971Net
      loss for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (13,375,575
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (13,375,575
                  )Foreign
      currency translation gain
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  767,458
                  
                  
                  
                  767,458Comprehensive
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,608,117
                  )Balance
      at December 31, 2008
                  
                  
                  1,875,000
                  
                  
                  $
                  1,875
                  
                  
                  
                  42,706,363
                  
                  
                  $
                  42,706
                  
                  
                  $
                  14,984,021
                  
                  
                  $
                  0
                  
                  
                  $
                  (14,346,279
                  )
                  
                  $
                  1,521,997
                  
                  
                  $
                  2,168,060
                  
                  
                  $
                  4,372,380Amortisation
      on stock compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Transferred
      to statutory surplus reserve
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      issued for converted debenture interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net income
      for the period
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,210,139
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,210,139Foreign
      currency translation gain
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (222,423
                  )
                  
                  
                  (222,423
                  )Comprehensive
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,987,716Balance
      at December 31, 2009
                  
                  
                  1,875,000
                  
                  
                  $
                  1,875
                  
                  
                  
                  42,706,363
                  
                  
                  $
                  42,706
                  
                  
                  $
                  14,984,021
                  
                  
                  $
                  0
                  
                  
                  $
                  (12,136,140
                  )
                  
                  $
                  1,521,997
                  
                  
                  $
                  1,945,637
                  
                  
                  $
                  6,360,096The
      accompanying notes are an integral part of these consolidated financial
      statements
 
 18
  CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE YEAR ENDED DECEMBER 31, 2009 and 2008(AUDITED)2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESTotal
      net income (loss)
                
                $
                2,210,139
                
                
                $
                (13,375,575
                )Adjusted
      to reconcile net income (loss) to cash provided by operating
      activities:Depreciation-cost
      of sales
                
                
                4,645,955
                
                
                
                3,952,496Depreciation
      and amortization
                
                
                80,749
                
                
                
                82,959Provision
      for doubtful debts
                
                
                -
                
                
                
                7,847,084Amortization
      of convertible debt discount
                
                
                -
                
                
                
                752,369Impairment
      loss of goodwill
                
                
                -
                
                
                
                3,996,946Amortization
      on stock compensation
                
                
                -
                
                
                
                21,200Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                
                
                (371,572
                )
                
                
                707,878Other
      receivables and prepaid expenses
                
                
                (1,125,865
                )
                
                
                253,023Due
      from a related company
                
                
                (238,016
                )
                
                
                -Inventories
                
                
                589,047
                
                
                
                (466,220
                )Deferred
      tax asset
                
                
                -
                
                
                
                123,982Other
      assets
                
                
                -
                
                
                
                124,471Increase
      (decrease) in:Accounts
      payable
                
                
                4,118,949
                
                
                
                (216,980
                )Other
      payables and accrued liabilities
                
                
                489,999
                
                
                
                364,019Business
      tax payable
                
                
                (4,084
                )
                
                
                (134,547
                )Value
      added taxes payable
                
                
                -
                
                
                
                45,530Income
      tax payable
                
                
                (1,982,554
                )
                
                
                520,663Net
      cash provided by operating activities
                
                
                8,412,747
                
                
                
                4,599,298CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                
                
                (8,607,785
                )
                
                
                (4,114,665
                )Net
      cash used in investing activities
                
                
                (8,607,785
                )
                
                
                (4,114,665
                )CASH
      FLOWS FROM FINANCING ACTIVITIESDue
      to related companies
                
                
                10,011
                
                
                
                (276,276
                )Convertible
      debentures redeemed
                
                
                (100,750
                )
                
                
                -Bank
      loans drawn down
                
                
                4,149,135
                
                
                
                -Due
      to a stockholder
                
                
                (387,061
                )
                
                
                11,750Due
      to directors
                
                
                (105,485
                )
                
                
                44,403Net
      cash provided by/(used in) financing activities
                
                
                3,565,850
                
                
                
                (220,123
                )EFFECT
      OF EXCHANGE RATE ON CASH
                
                
                (206,291
                )
                
                
                (162,858
                )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                3,164,521
                
                
                
                101,652CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                436,062
                
                
                
                334,410CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                3,600,583
                
                
                $
                436,062SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
                
                $
                464,476
                
                
                $
                30,253Cash
      paid for income tax
                
                $
                -
                
                
                $
                -
 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
      ACTIVITIES:On
      March 4, 2008, the Company issued 528,596 shares of common stock in lieu
      of cash for debenture interest payable to a debenture
    holder.On
      May 8, 2008, the Company issued 60,710 shares of common stock in lieu of
      cash for debenture interest payable to the debenture
    holders.
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 19
  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 Hair Max 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.
 
 20
 
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 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 2009 and 2008 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 its 100% variable
interest entity in HuaGuang.
 
 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 except for Restricted Cash which represents the security deposits with a
maturity of six months for the bank loans.
 
 (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, 2009 and 2008, the Company considers all its accounts receivable to
be collectible after provision for doubtful accounts made in the financial
statements.
 
 21
 
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  (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 2008
for the amount of $4,645,955 was 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 goodwill for acquisition of Maxcomm of $3,996,595
was recognized for the year ended December 31, 2008 and 2009.  The
Company believes that no impairment of other long-lived assets including
property and equipment exist at December 31, 2009.
 
 (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.
 
 22
 
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 
 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, 2009 and are carried at fair value of
$2,864,250.
 
 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, 2009 and 2008, the Company did not receive any of 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.
 
 23
 
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 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, 2009 and 2008 were
$505,456 and $18,469, 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 Arable GZ 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 loss and gain for the years ended December 31, 2009
and 2008 were $222,887 and $767,458 respectively.
 
 (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 loss and income for the years ended December 31, 2009 and
2008 were $222,423 and $767,458 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 four reportable segments, digitalization of television
signals, software development, television advertising, and investments in
television series.
 
 24
 
 CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 (U)
              Reclassifications
 
 Certain
2008 balances have been reclassified to conform to the 2009
presentation.
 
 (V)
              Recent
      accounting pronouncement
 
 In
October 2008, the Financial Accounting Standards Board ("FASB") issued FSP SFAS
No. 157-3, "Determining the Fair Value of a Financial Asset When the Market
for That Asset is Not Active" (FSP SFAS 157-3), which clarifies the application
of SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), in an inactive market
and provides an example to demonstrate how the fair value of a financial asset
is determined when the market for that financial asset is
inactive.  FSP FAS 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued.  The
adoption of this standard did not have any impact on the Company's results of
operations, cash flows or financial positions for the year ended December 31,
2009.
 
 In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162").  SFAS 162 identifies the sources
of accounting principles and the framework for selecting principles to be used
in the preparation and presentation of financial statements in accordance with
generally accepted accounting principles.  This statement became
effective in November 2008.  Adoption of SFAS 162 did not have a
material impact on the Consolidated Financial Statements.
 
 In
February 2008, the FASB issued FSP SFAS No. 157-2, "Effective Date of FASB
Statement No. 157" ("FSP SFAS 157-2").  FSP SFAS 157-2 delays the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities that are not remeasured at fair value on a recurring basis (at least
annually) until January 2009.  The implementation of FSP SFAS 157-2
did not have a material impact on the Consolidated Financial
Statements.
 
 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.
 
 2.
              INTANGIBLE
      ASSETS
 
 Intangible
assets at of December 31, 2009 and 2008 consisted of the following:
 
 2009
              
              
              2008Goodwill
      recognized upon acquisitions of subsidiaries
              
              $
              4,320,924
              
              
              $
              4,320,924Impairment
      loss
              
              
              (3,996,946
              )
              
              
              (3,996,946
              )$
              324,329
              
              
              $
              324,329
 
 
  3.  RESTRICTED
      CASH
 
 Restricted
cash at December 31, 2009 and 2008 consisted of the following.
  2009
              
              
              2008Zhangjiang
      Commercial Bank
              
              $
              1,960,612
              
              
              $
              -
 
 The
Company obtained a one year renewable bank credit facility for bank loan of
RMB15 million from Zhangjiang Commercial Bank during the year which is secured
by the account receivable from Network Company and overall 60% cash deposit on
the bank.   Such cash deposit is restricted to be withdrawn until
any loan from the bank is fully repaid.  Such deposit is at a 6-month
renewable term which expires in May 2010.
  3.
              ACCOUNTS
      RECEIVABLE, NET
 
 Accounts
receivable at December 31, 2009 and 2008 consisted of the
following:
 
 2009
              
              
              2008Accounts
      receivable, current portion
              
              $
              1,449,800
              
              
              $
              1,078,228Amount
      recoverable beyond 12 months
                classified
      as non-current assets
              
              
              7,436,397
              
              
              
              7,970,844Less:
      allowance for doubtful accounts
              
              
              (7,436,397
              )
              
              
              (7,970,844
              )Amount
      recoverable beyond 12 months
                classified
      as non-current assets (net)
              
              
              -
              
              
              
              -
 
 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 was
classified as non-current assets in the consolidated financial statements
as of December 31, 2007.
 
 At the
year end of 2008, the global financial and economic environment was suffering a
serious downturn which projected an unstable future for the market as a
whole.  The Company considered the collectability of the non-current
portion uncertain.  A full provision was made for such amount at the
year of of 2008 accordingly. Since the Company received $534,447 from the
Network Company for settling the non-current portion in 2009, the balance of
non-current receivable and the allowance for doubtful accounts were both reduced
by such amount.
 
 The
Company considered all accounts receivable collectable after $7,436,397 and
$7,970,844 were provided for doubtful accounts for the years ended December 31,
2009 and 2008, respectively.
 
 4.
              INVENTORIES,
      NET
 
 Inventories
at December 31, 2009 and 2008 consisted of the following:
 
 2009
              
              
              2008Finished
      goods
              
              $
              658,734
              
              
              $
              1,247,781Less:
      provision of obsolescence
              
              
              --
              
              
              
              --Inventories,
      net
              
              $
              658,734
              
              
              $
              1,247,781
 
 For both
of the years ended December 31, 2009 and 2008, the Company has not recorded a
provision for obsolete inventories.
 
 25
 
 CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 5.
              OTHER
      RECEIVABLES AND PREPAID EXPENSES
 
 Other
receivables and prepaid expenses at December 31, 2009 and 2008 consisted of the
following:
 
 2009
              
              
              2008Deposit
      paid for the sole advertising agency
              
              $
              43,878
              
              
              $
              46,588Advances
      to staff
              
              
              19,360
              
              
              
              52,134Prepayments
              
              
              193,720
              
              
              
              57,945Utility
      deposits
              
              
              51,560
              
              
              
              37,719$
              308,517
              
              
              $
              194,386
 
 6.   PROPERTY
AND EQUIPMENT, NET
 
 The
following is a summary of property and equipment at December 31:
 
 2009
              
              
              2008STB
      and smart cards provided to subscribers
              
              $
              34,242,507
              
              
              $
              25,607,750Motor
      vehicles
              
              
              147,152
              
              
              
              118,670Furniture
      and office equipment
              
              
              1,031,759
              
              
              
              1,050,78335,421,418
              
              
              
              26,777,203Less:
      accumulated depreciation
              
              
              17,354,229
              
              
              
              12,574,962Property
      and equipment, net
              
              $
              18,067,189
              
              
              $
              14,202,241
 
 Depreciation
expense for the years ended December 31, 2009 and 2008 were $4,726,704 and
$4,035,455 respectively.
 
 7.DUE FROM A RELATED
COMPANY
 
 The
amount due from a related company was at $238,016 as of year ended December 31,
2009 (2008: nil) which represents the contract fee advanced to a related company
for the design of content for the advertising customer of M-Rider for the one
year contract.  The total contract fee paid to this related company
was $294,187 which is to be amortised by one year corresponding to the same
basis of the revenue received in advance from the customer.
  8.   DEFERRED
TAX ASSET
 
 The
deferred tax asset was at $1,064,552 as of year ended December 31, 2009 (2008:
52,820) which represents the value added tax credit not utilized at year end as
a result of large quantity of STB purchased during the year as a result of the
new tax rule in China for allowing the value added tax credit from capital
expenditure to be offset against the value added tax liability incurred from
sales revenue.  Such tax credit is to be carried forward to offsetting
future value added tax payable out of the sales of STB.
  9.
              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 2009, the Company has issued the following
convertible debentures;
 
 On
      November 17, 2006 to a financial institution for $
    2,150,000
 
 On
      November 17, 2006 to a financial institution for $
  200,000
 
 On
      November 17, 2006 to a financial institution for $
  500,000
 
 On
      November 17, 2006 to an individual investor for $
  150,000
 
 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.  In
December 2009, debenture amounted to $100,750 was redeemed from one of the
debenture holders.
 
 On
December 08, 2008, March 24, 2009 and December 1, 2009, the Company entered into
various extension agreements (the “Extension Agreement”) with three of the
debenture holders in connection with the convertible debenture for the amount of
$2,665,000 because the Company did not have sufficient fund to repay the
debenture due. One of the Extension Agreement was filed with the Form 8-K on
December 12, 2008.  The Company is also in contact with other
debenture holders but has not agreed on any terms of extension up to the date of
this report.
 
 The
following is a summary of convertible debentures as of December 31, 2009 and
2008:
  December
      31,
                
                
                December
      31,2009
                
                
                2008(Audited)
                
                
                (Audited)$2,150,000
      Convertible Debentures, net of $135,000 conversions, $100,750 redemption
      and unamortized discount of $0 as of December 31, 2009 and December 31,
      2008 at 13% interest per annum for the first quarter and at 10% interest
      per annum due each quarter end in 2009, 2010 and expired at June 30,
      2010.$
                1,914,250
                
                
                $
                2,015,000$500,000
      Convertible Debentures, net of unamortized discount of $0 as of December
      31, 2009 and December 31, 2008 at 13% interest per annum for the year 2009
      due at the end of 2009, and at 14% interest per annum for the year 2010
      due at the end of 2010 upon maturity.500,000
                
                
                
                500,000$200,000
      Convertible Debentures, net of unamortized discount of $0 as of December
      31, 2009 and December 31, 2008 respecitively at 4% interest per annum due
      May 2008, in default200,000
                
                
                
                200,000$150,000
      Convertible Debentures, net of unamortized discount of $0 as of December
      31, 2009 and December 31, 2008 respecitively150,000
                
                
                
                150,000$100,000
      Convertible Debentures, net of unamortized discount of $0 as of December
      31, 2009 and December 31, 2008 at 4% interest per annum due June 2008, in
      default100,000
                
                
                
                100,000$
                2,864,250
                
                
                $
                2,965,000
 26
 
 CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 10.    BANK
LOANS
 
 Bank
loans owing to Zhangjiang Commercial Bank of Guangzhou at December 31, 2009 and
2008 consists of the following.
 
 InterestCompany
              
              Principals
              
              Maturity
      date
              
              Rate
      p.a. (%)
              
              
              Security
      depositAGL
              
              $
              438,289
              
              February
      13, 2010
              
              
              2.88
              
              
              $
              131,487AGL
              
              
              511,337
              
              February
      28, 2010
              
              
              2.88
              
              
              
              153,401AGL
              
              
              949,626
              
              April
      15, 2010
              
              
              2.88
              
              
              
              284,888AGL
              
              
              1,227,209
              
              June
      6, 2010
              
              
              3.024
              
              
              
              368,163Subtotal
              
              $
              3,126,461
              
              
              
              
              
              
              
              $
              937,938Arable
      GZ
              
              $
              511,337
              
              May
      9, 2010
              
              
              2.88
              
              
              $
              511,337Arable
      GZ
              
              
              511,337
              
              May
      11, 2010
              
              
              2.88
              
              
              
              511,337Subtotal
              
              $
              1,022,674
              
              
              
              
              
              
              
              $
              1,022,674Total
              
              $
              4,149,135
              
              
              
              
              
              
              
              $
              1,960,612
 
 
 The
Company obtained a one year renewable credit facility from a local bank of $2.2
million during the year which is secured over the account receivable from
Network Company and an overall 60% security deposit with the
bank.  The loan is drawn against the bank in a form of 6-month bill
payable to the STB supplier.  The supplier has the option to collect
the cash from the bank after six months or to cash the bill immediately by
discounting the bill to the bank.  The Company bears the discounting
interest expense of the discounted bill.
  11.
              ACCOUNTS
      PAYABLE
  Accounts
payable at December 31, 2009 and 2008 consists of the following.
 
 2009
              
              
              2008Accounts
      payable
              
              $
              9,630,797
              
              
              $
              5,511,848Less:
      current portion
              
              
              7,505,024
              
              
              
              5,178,216Long
      term liabilities payable from January to December 2011
              
              $
              2,125,773
              
              
              $
              333,632
 
 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,
2009 are classified as long-term liabilities.
 
 12.
              OTHER
      PAYABLES AND ACCRUED LIABILITIES
 
 Other
payables and accrued liabilities at December 31, 2009 and 2008 consist of the
following:
 
 2009
              
              
              2008Other
      payables
              
              $
              700,869
              
              
              $
              409,103Deposits
      received from customers
              
              
              173,423
              
              
              
              133,072Accrued
      liabilities
              
              
              539,687
              
              
              
              381,805$
              1,413,979
              
              
              $
              923,980
 
 13.
              INCOME
      TAX
 
 a)
              CDMC
      was incorporated in the United States and has incurred net operating loss
      for income tax purposes for 2009 and
2008.
 
 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 2009 and 2008.
 
 AGL was
incorporated in the PRC and is subject to PRC income tax which is computed
according to the relevant laws and regulations in the PRC. The applicable tax
rate has been 25%.  Since AGL was granted the Software Enterprise
Certification in 2008 and was approved for a tax holiday of 5 years at the end
of 2009 with full income tax exemption in the first two years and reduced tax
rate in the following three years starting 2008.  The reduced tax rate
starting from 2010 is 15%.
 
 M-Rider,
HuaGuang, 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 25%. No tax benefit is expected from
the tax credits in the future. The income tax expenses for 2009 and 2008 are
summarized as follows:
 
 PRC
      Income Tax
              
              2009
              
              
              2008Current
              
              $
              --
              
              
              $
              --Deferred
              
              
              --
              
              
              
              --$
              --
              
              
              $
              --
              )
 
 
 
 (b)   As
of December 31, 2009, CDMC had loss carried forward of approximately $5,630,414
for U.S. income tax purposes available for offset against future taxable U.S.
income expiring in 2028.
 
 As
of December 31, 2009, CDHL has Hong Kong tax loss carry forwards of
approximately $559,283. Currently, the Hong Kong tax losses can be carried
forward indefinitely.
 
 As
of December 31, 2009, Arable has Hong Kong tax loss carry forwards of
approximately $961,041. Currently, the Hong Kong tax losses can be carried
forward indefinitely.
 
 As
of December 31, 2009, all the PRC companies have tax loss carry forwards of
approximately $2,245,969 which is not expected to be utilized in near
future.
 
 27
 
 CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 c)
              The
      reconciliation of income taxes computed at the statutory income tax rates
      to total income taxes for the years ended December 31, 2009 and 2008 is as
      follows:
 
 2009
              
              
              2008CDMCIncome
      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
              
              
              16.5
              %
              
              
              16.5
              %Valuation
      allowance
              
              
              (16.5
              %)
              
              
              (16.5
              %)ArableIncome
      tax computed at applicable tax rate
              
              
              16.5
              %
              
              
              16.5
              %Valuation
      allowance
              
              
              (16.5
              %)
              
              
              (16.5
              %)AGLIncome
      tax computed at applicable tax rate
              
              
              0
              %
              
              
              0
              %Valuation
      allowance
              
              
              0
              %
              
              
              (0
              %)M-RiderIncome
      tax computed at applicable tax rate
              
              
              25
              %
              
              
              25
              %Valuation
      allowance
              
              
              (25
              %)
              
              
              (25
              %)HuaGuangIncome
      tax computed at applicable tax rate
              
              
              25
              %
              
              
              25
              %Valuation
      allowance
              
              
              (25
              %)
              
              
              (25
              %)
  14.
              NET
      INCOME PER SHARE
 
 Income
and loss per share on a diluted basis were $0.04 and $0.30 for the fiscal years
ended December 31, 2009 and 2008 respectively.  As of December 31,
2009, the Company has outstanding:
 
 -  42,706,363
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”);
 - 
warrants to purchase 6,888,882 shares of common stock at an exercise price of
$0.80 per share, expire in November 2012;
 - 
warrants to purchase 6,888,882 shares of common stock at an exercise price of
$1.20 per share, expire in November 2012; and
 - 
warrants to purchase 3,444,441 shares of common stock at an exercise price of
$2.25 per share, expire in November 2012.
 
 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,
2009 and 2008 were calculated as follows:
 
 2009
                
                
                2008Net
      Income (Loss)
                
                $
                2,210,139
                
                
                $
                (13,375,575
                )Basic - 2 classes methodIncome
      (Loss) available to common stockholders
                
                $
                2,210,139
                
                
                $
                (13,375,575
                )Weighted-average
      common stock outstanding
                
                
                42,706,363
                
                
                
                42,595,450Basic
      earnings per share - Common Stock
                
                $
                0.05
                
                
                $
                (0.30
                )DilutedIncome
      (Loss) available to common stockholders
                
                $
                2,210,139
                
                
                $
                (13,375,575
                )Diluted
      weighted-average common stock outstanding
                
                
                63,005,030
                
                
                
                42,595,450Diluted
      earnings per share
                
                $
                0.04
                
                
                $
                (0.30
                )
 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 3,444,441 shares of common stock
at $2.25 per share were outstanding as of December 31, 2009 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 in November, 2012, were still outstanding on December 31,
2009.
 
 28
 
 CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 15.
              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,
2009 and 2008:
 
 Digitalization
                
                
                
                
                
                
                
                
                Investmentsof
      Television
                
                
                Television
                
                
                Software
                
                
                in
      TelevisionSignals
                
                
                Advertising
                
                
                Development
                
                
                Series
                
                
                Total2009Revenues
                
                $
                9,123,942
                
                
                $
                334,379
                
                
                $
                66,820
                
                
                $
                -
                
                
                $
                9,525,141Gross
      profit
                
                
                2,627,781
                
                
                
                16,961
                
                
                
                66,820
                
                
                
                -
                
                
                
                2,711,562Net
      Income (loss)
                
                
                3,240,773
                
                
                
                (38,217
                )
                
                
                (159,603
                )
                
                
                (12,730
                )
                
                
                3,030,223Total
      assets
                
                
                21,426,360
                
                
                
                827,466
                
                
                
                3,352,588
                
                
                
                105,309
                
                
                
                25,711,723Capital
      expenditure
                
                
                8,573,306
                
                
                
                1,879
                
                
                
                32,146
                
                
                
                454
                
                
                
                8,607,785Depreciation
      and amortization
                
                $
                4,697,399
                
                
                $
                -
                
                
                $
                29,022
                
                
                $
                283
                
                
                $
                4,726,7042008Revenues
                
                $
                6,855,420
                
                
                $
                392,296
                
                
                $
                42,628
                
                
                $
                -
                
                
                $
                7,290,344Gross
      profit
                
                
                2,011,087
                
                
                
                120,878
                
                
                
                42,628
                
                
                
                -
                
                
                
                2,174,593Net
      loss
                
                
                (7,924,314
                )
                
                
                (9,338
                )
                
                
                (128,033
                )
                
                
                (17,525
                )
                
                
                (8,079,210
                )Total
      assets
                
                
                16,615,629
                
                
                
                476,417
                
                
                
                337,671
                
                
                
                106,130
                
                
                
                17,535,847Capital
      expenditure
                
                
                3,824,376
                
                
                
                12,020
                
                
                
                156,926
                
                
                
                121,343
                
                
                
                4,114,665Depreciation
      and amortization
                
                $
                4,005,096
                
                
                $
                -
                
                
                $
                23,228
                
                
                $
                7,131
                
                
                $
                4,035,455
 A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.
 
 2009
                  
                  
                  2008Total
      net income (loss) for reportable segments
                  
                  $
                  3,030,223
                  
                  
                  $
                  (8,079,210
                  )Unallocated
      amounts relating to corporate operationsImpairment
      of goodwill
                  
                  
                  -
                  
                  
                  
                  3,996,946Interest
      expenses
                  
                  
                  319,239
                  
                  
                  
                  277,305Amortization
      of convertible debt discount
                  
                  
                  -
                  
                  
                  
                  752,369Interest
      paid to related companies and directors
                  
                  
                  22,792
                  
                  
                  
                  30,091Administration
      expenses
                  
                  
                  406,658
                  
                  
                  
                  190,289Professional
      fees
                  
                  
                  53,576
                  
                  
                  
                  32,578Others
                  
                  
                  17,819
                  
                  
                  
                  16,787Total
      net income (loss)
                  
                  $
                  2,210,139
                  
                  
                  $
                  (13,375,575
                  )
  
 16.
              STOCKHOLDERS’
      EQUITY
 
 (A)  Stock
issuances
 
 
 
 During
the year, the Company did not issue any stock.
 
 (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.  The Company is to contribute to one statutory reserve fund
at 1% 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
2009 and 2008, the Company appropriated $57,930 and $0 respectively to the
reserves funds based on its net income in accordance with the laws and
regulations of the PRC.
 
 (C)  Contributed
capital
 
 During
2009, no restricted capital was being contributed.
 
 17.
              RELATED
      PARTY TRANSACTIONS
 
 As of
December 31, 2009 and 2008, the Company owed to two directors $180,194 and
$298,544 respectively for short-term advances. Interest is charged at 6% per
annum on the amount owed.  During the year, the Company repaid
$105,789 to one of the director for his loan to the Company in 2008 with an
original amount of $131,574.
 
 As of
December 31, 2009 and 2008, the Company owed to related companies $157,456 and
$454,555 respectively for short-term unsecured advances made. Interest is
charged at 6% per annum on the amount owed.
 
 As of
December 31, 2009 and 2008, the Company owed to a stockholder $9,270 and
$387,062 respectively for short-term unsecured advances made. Interest is
charged at 6% per annum on the amount owed.  During the year, the
Company obtained a third party loan to repay this stockholder for
$377,792.
 
 The
Company entered into an advertising service contract with a related company for
a total fee $294,187 paid in advance for the design of content for the
advertising customer of M-Rider for the one year term.  The balance
due from this related company is $238,280 as at December 31, 2009.
  18.
              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 $108,552 and
$90,746 for the years ended December 31, 2009 and 2008, 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 $6,824 and $4,680 for the years ended
      December 31, 2009 and 2008 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 in September, 2012 , and three leases expire on Jan 8, 2014 for
total monthly rentals of $11,120. The Company also leases spaces for warehouse
from third party under operating lease which expires in December 31, 2011 for a
total monthly rent of $4,093.  The Company also leases spaces for
staff quarters from third parties under eight operating leases which expire from
July to October, 2010 with total monthly rentals of
$1,109.  Accordingly, for the years ended December 31, 2009 and 2008,
the Company recognized rental expense for office spaces in the amount of
$130,171 and $139,367, respectively
 
 As of
December 31, 2009, the Company has outstanding commitments with respect to the
above non-cancelable operating leases, which are due as follows:
 
 2010
              
              $
              143,4492011
              
              
              141,8692012
              
              
              132,2902013
              
              
              91,916Thereafter
              
              
              96,512$
              606,037
 
  29
 
 CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 19.
              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, 2009.
 
 20.
              CONCENTRATIONS
      AND RISKS
 
 During
2009 and 2008, 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, 2009 and 2008 are as follows:
 
 For
      the year ended
              
              Supplier
      A
              
              
              Supplier
      BDecember
      31, 2009
              
              
              89
              %
              
              
              8
              %December
      31, 2008
              
              
              88
              %
              
              
              11
              %
 
 At
December 31, 2009 and 2008, accounts payable to those two suppliers totaled
$9,307,627 and $5,008,624 respectively.
 
 21.
              GOING
      CONCERN


As
reflected in the accompanying consolidated financial statements, the Company has
an accumulated deficit of $10,614,143 at December 31, 2009 that includes
comprehensive income of $1,987,716 for the year ended December 31,
2009. The Company’s total current liabilities exceed its total current
assets by $9,905,650. 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


30
  
 ITEM
9. Changes with and Disagreements With Accountants on Accounting And Financial
Disclosure
 
 None.
 
 ITEM
9A. Controls and Procedures
 
 Evaluation of Controls. As of
the end of the period covered by this annual report on Form 10-K, 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 (“CEO”), Ng Chi Shing
and Chief Financial Officer ("CFO"), Chung Lai Lok. 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 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 CEO and CFO (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, 2009.
 
 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.
 
 ITEM
9B.  Other Events
 
 None.
  31
 
 PART
III
 
 ITEM
10. Directors, Executive Officers and Corporate Governance
 
 Identification
of Directors
 
 The
following information, as of December 31, 2009 is furnished with respect to each
Director and Executive Officer:
 
 Name
      of Director
              
              Age
              
              
              Date
      of Service
              
              Position
      with CompanyNg
      Chi Shing
              
              
              45
              
              
              
              2004
              
              President,
      Chief Executive Officer, DirectorChen
      Lu
              
              
              40
              
              
              
              2005
              
              DirectorChen
      Juan
              
              
              33
              
              
              
              2005
              
              DirectorChung
      Lai Lok
              
              
              42
              
              
              
              2007
              
              Chief
      Financial Officer
 
 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.  Mr. Ng is the
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 17 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 18 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 an assistant lecturer in Guangdong
Dance College since 1999.  Her major was Financial Management when she
graduated from Guangzhou Industrial University in 2003.   She
obtained certificate in Information and Science Technology when she graduated
from Jiejiang University.
 
 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 ten years.
 
 Mr. Chung Lai Lok is the Chief
Financial Officer of the Company.  Mr. Chung is a certified public
accountant in Hong Kong and United Kingdom.  He has over 19 years
experience in auditing, finance and accounting in various industries with
multi-national companies previously.
 
 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 none 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.
 
 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-K, any
failure to comply therewith during the fiscal year ended December 2009. 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.
 
 32
 
 ITEM
11. Executive Compensation
 
 During
the fiscal years ended December 31, 2008 and 2009, 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
              2009
              
              
              38,478
              (1)
              
              
              
              
              38,4782008
              
              
              38,478
              (1)
              
              
              
              
              38,478
 
 (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 $17.28 payable by the Company.
 
 Stock
Option Grants
 
 No
options, warrants, or stock appreciation rights were issued during fiscal year
2009 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 .  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 2008, 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.  The annual salary for Mr. Ng was
$17.28 in 2009.  Commencing in 2007, Mr. Ng is entitled to receive an
annual bonus as determined by the Board of Directors.  As of the date
of this report, this determination has not been made.  No such bonus
has been declared or paid to Mr. Ng.   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.
 
 Director
Compensation
 
 Directors
who are also employees do not receive compensation for their services as
directors.
 
 Director
Compensation Table – 2009
 
 Name
              
              Fees
      Earned or Paid in Cash
                ($)
              
              
              Total
                ($)Chen
      Lu
              
              
              63,640
              
              
              
              63,640Chen
      Juan
              
              
              -
              
              
              
              -
 
 (1)           Mr.
Ng’s total compensation is reflected in the Summary Compensation
Table.
 
 ITEM
12. 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, 2009, 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
              
              40.7%Common
      Stock, $.001 Par Value
              
              Chen
      Lu
                2505-06
      25/F Stelux House
                698
      Prince Edward Road E.
                Hong
      Kong
              
              5,851,560
              
              Direct
              
              13.7%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
              
              18.7%Preferred
      Stock, $.001 Par Value
                (C)
              
              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
                (C)
              
              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)           Each
share of preferred stock is convertible into five shares of common
stock.
 
 33
  
 Security
Ownership of Management
 
 The
following table sets forth the number of shares owned beneficially on December
31, 2009, 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)
              
              40.7%Common
      Stock,
                $.001
      Par Value
              
              Chen
      Lu
                2505-06,
      25F, 698 Prince Edward Road E., Hong Kong
              
              5,851,560
              
              Direct
      (y)
              
              13.7%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
              
              54.4%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, 2009, 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
 
 The
Company issued warrant shares at an average exercise price of $1.27 per share as
compensation to several consultants for their services in the year
2006.  A total of 1,211,104 warrant shares were outstanding as of end
of the year.
 
 ITEM
13. Certain Relationships and Related Transactions; and Director
Independence
 
 The
Company has 1,875,000 shares of Series “A” preferred stock outstanding at
December 31, 2009. These shares are owned by our majority
shareholders.
 
 The
Company has the following amount due to/from a major shareholder and three
related companies as at December 31, 2009.
 
 Shareholder
 Amount
due to Tam Wei Keung: $9,270
 
 Related
companies
 Amount
due to Arcotect HK Limited: $241,636
 Amount
due to Manta Finance Limited: $154,100
 Amount
due from Shangxin Software Technology Limited: $238,280
 
 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 2009 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.
 
 34
 
 
 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, BONGIOVANNI & ASSOCIATES, CPA's(“B & A”), for our audit of the annual financial statements for the
years ended December 31, 2009 and 2008.  Audit fees and other fees of
auditors are listed as follows:
 
 Year
      Ended December 31
              
              2009
              
              
              
              
              
              2008Audit Fees
    (1)
              
              $
              48,500
              
              
              $
              
              
              
              $
              58,762Audit-Related Fees
      (2)
              
              
              --
              
              
              
              
              
              
              
              --Tax Fees
    (3)
              
              
              --
              
              
              
              
              
              
              
              --All Other Fees
      (4)
              
              
              --
              
              
              
              
              
              
              
              --Total
      Accounting Fees and Services
              
              $
              48,500
              
              
              $
              
              
              
              $
              58,762
 
 
 (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-Q, 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.
 
 ITEM 15. 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
 
 35
 
 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
12, 2010
 
 
 /s/
Ng Chi Shing
 Ng Chi
Shing
 President,
CEO and Director
 
 
 /s/
Chen Lu
 Chen
Lu
 Director
 
 
 /s/
Chen Juan
 Chen
Juan
 Director
 
 
 /s/
Chung Lai Lok
 Chung Lai
Lok
 Chief
Financial Officer