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, 2008
   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
 
 1
  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
  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 31, 2009, 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 $0.015 and the asked price of $0.025 reported by broker) held by
non-affiliates was approximately $229,128.
  Number of
shares of common stock outstanding as of March 30, 2009: 42,706,363
  Number of
shares of preferred stock outstanding as of March 30, 2009:
1,875,000
  Incorporation
by Reference: None
  2
 Table of Contents
  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
                      4Item
      1A.
                      Risk
      Factors
                      9Item
      1B.
                      Unresolved
      Staff Comments
                      11Item
      2.
                      Properties
                      11Item
      3.
                      Legal
      Proceedings
                      12Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      12PART
      IIItem
      5.
                      Market
      for Registrant’s Common Stock, Related Security Holder
    Matters
                      12Item
      6.
                      Selected
      Financial Data
                      12Item
      7.
                      Management’s
      Discussion and Analysis
                      17Item
      7A.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      17Item
      8.
                      Financial
      Statements and Supplementary Data
                      18Item
      9.
                      Changes
      with and Disagreements With Accountants on Accounting and Financial
      Disclosure
                      42Item
      9A.
                      Controls
      and Procedures
                      42Item
      9B.
                      Other
      InformationPART
      IIIItem
      10.
                      Directors,
      Executive Officers and Corporate Governance
                      44Item
      11.
                      Executive
      Compensation
                      45Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      46Item
      13.
                      Certain
      Relationships and Related Transactions; and Director
      Independence
                      47PART
      IVItem
      14.
                      Principal
      Accountant Fees and Services
                      48Item
      15.
                      Exhibits
      and Financial Statement Schedules
                      48
  3
 Table of Contents
 
 PART
I
 
 ITEM
1. Description of Business
 
 Historical
Corporate Development
 
 China
Digital Media Corporation (”CDMC”) was previously known as HairMax
International, Inc. (“Hairmax”), a Nevada corporation. It was incorporated in
Nevada in 1987. Arcotect Digital Technology Limited, a corporation organized
under the laws of Hong Kong, consummated a reverse merger with Hairmax in March,
2005, and Hairmax subsequently changed its name to China Digital Media
Corporation. With the termination of the original businesses of Hairmax, all of
China Digital Media Corporation’s businesses are now located in the People’s
Republic of China (the “PRC” or “China”).  Arcotect Digital Technology
Limited has changed its name to China Digimedia Holdings Limited (“CDHL”), and
is a wholly-owned subsidiary of CDMC.
 
 CDHL was
incorporated in Hong Kong on January 5, 2000 as an investment holding
company.  Its wholly owned subsidiary, Arcotect (Guangzhou) Ltd.
(“AGL”), was incorporated in China as a wholly foreign owned limited liability
company on September 24, 2001.  AGL is engaged in software
development, digital television subscriber and application platform
development.  AGL, through its Nanhai branch established on July 8,
2004, is engaged in the business of converting television signals from
analog into digital signal systems using digital television set-top-boxes
(“STB”) and smart cards.
 
 On June
15, 2005, CDHL entered into a Strategic Alliance Agreement with shareholders of
Guangdong HuaGuang Digimedia Culture Development Limited (“HuaGuang”) whereby
CDHL held a 90% variable interest in HuaGuang.  On January 24, 2007,
CDHL exercised its right to hold 100% interest in HuaGuang.
 
 On August
25, 2005, CDHL acquired a 100% interest in Guangdong M-Rider Media Company
Limited (“M-Rider”), a limited liability company in the PRC.  M-Rider
operates primarily as a Chinese television advertising agency.
 
 On
October 17, 2005, CDHL established a wholly-owned subsidiary in China called
Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”).  This
subsidiary has had no operations since its incorporation.
 
 In
February 2006, HuaGuang undertook two joint ventures with the Guizhou Television
Station. Huaguang held a 51% equity interest in Guizhou Guishi Digimedia
Advertising Company Limited (“Guishi Digimedia”) and a 49% equity interest
in Guizhou Guishi Huaguang Media Company Limited (“Guishi
Huaguang”).  Guishi Digimedia is a television advertising agency and
Guishi Huaguang provides various services to television channels including
program sourcing, schedule planning and the production of television
programming.  On August 19, 2007, HuaGuang sold its shares in Guishi
Digimedia and Guishi Huaguang to Guizhou Tianma Advertising
Company.
 
 On August
23, 2006, CDHL acquired a 20% interest in Arable Media Limited (“Arable”). 
Arable is engaged in the business of developing middleware software and
applications for digital TV STB.
 
 On May
21, 2007, CDHL acquired a 100% interest in Maxcomm Ltd. (“Maxcomm”), its only
asset is the 80% interest in Arable.  After the completion of the
acquisition, CDHL beneficially owns 100% interest in Arable.
 
 On
October 29, 2007, Arable established a wholly-owned subsidiary in China called
Arable (Guangzhou) Limited (“Arable GZ”).  This subsidiary is engaged
in research and development, marketing and promotion of STB
Middleware.
 
 CDMC,
CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Maxcomm, Arable and Arable GZ
are hereinafter referred to as (the “Company”).  Currently, the
Company has approximately 181 employees located primarily in the
PRC.
  Current
Corporate Structure and Mission
 
 For the
year ended December 31, 2008, CDMC owned the following
subsidiaries:
 
 (a)
              100%
      of CDHL, an investment holding company incorporated in Hong
      Kong;
 
 (b)
              100%
      of Maxcomm, a limited liability company incorporated in British Virgin
      Island, which holds 80% equity interest in Arable, and a 20% interest in
      Arable, through CDHL, a limited liability company incorporated in Hong
      Kong;
 
 (c)
              100%
      of AGL through CDHL, a limited liability company incorporated in
      China;
 
 (d)
              100%
      variable interest of HuaGuang under CDHL, a limited liability company
      incorporated in China;
 
 (e)
              100%
      beneficial interest of M-Rider through CDHL, a limited liability company
      incorporated in China;
 
 (f)
              100%
      of Digimedia Shenzhen through CDHL, a dormant company incorporated in
      China;
 
 (g)
              100%
      interest in Arable GZ through Arable, a limited liability company
      incorporated in China;
 
 Broadcasting
media and cable television operational support services in the PRC is our
primary source of business, and is currently a growth industry in China. Our
business plan is to strengthen our brand image and to enlarge our presence and
involvement in the Chinese media industry through investment, mergers,
acquisitions and partnership alliances. We continue to believe there will be
rapid growth and potential opportunities in China's media industry, thus we plan
continue to invest our resources into the market across China.
  4
 Table of Contents
  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 410,000 residential and commercial cable television
subscribers.
 
 On
February 6, 2004, the Company signed a 20-year Co-operative Agreement for Total
Migration into the DTV System for the Nanhai District and subsequently signed a
supplementary agreement on July 8, 2005 (collectively, the “Cooperative
Agreements”) with the Nanhai Network Company, a city-owned cable network
operator located in Guangdong Province. Pursuant to the Co-operative Agreements,
the Company is responsible for migrating all cable television subscribers in
Nanhai from an analog to a digital system (“Migration”) by the end of 2007.
Owing to the technical issue of the local network upgrade by Nanhai Network
Company, the Migration completion date has been re-scheduled to the end of 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 amortised over 15 years annually and evenly out of the increased fee
income after the expected upward price adjustment for DTV basic subscription fee
implemented in 2008.  The said portion is being treated as long term
asset in the financial statements as of December 31, 2008.
 
 On August
23, 2006, the Company entered into a Subscription Agreement and Cooperation
Agreement (the “Agreement”) with Manta Finance Limited for the subscription of a
20% equity interest in Arable Media Limited, a wholly owned subsidiary of Manta
Finance Limited. On May 21, 2007, Company entered into a Share Purchase And
Transfer Agreement (the “2nd Agreement”) with Lippo Star Investment Limited for
acquiring 80% equity interest in Arable Media Limited via Maxcomm Limited where
the only asset of Maxcomm Limited is the equity interest in Arable Media
Limited. Arable is engaged in the business of developing middleware software and
applications for digital TV STB similar to those deployed by the Company in its
digital roll-out program in the City of Nanhai. The Company believes that Arable
could assist in developing customized applications on the digital STB for DTV
subscribers which could provide new sources of revenue from existing customers
in Nanhai and other cities.
 
 Arable GZ
is engaged in research and development, sales and marketing of STB Middleware in
China.
 
 Migration
to DTV Service
 The
Company has migrated approximately 66,000 subscribers in 2008 totaling about
343,000 subscribers to the DTV system as of December 31, 2008, and the Migration
is expected to be completed by 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.
  5
 Table of Contents
  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 152 channels,
including a 46-channel basic package and 106 pay channels bundled into various
value added packages, including 3 high definition channels, movie, life &
leisure, sports, drama and family.
 
 Addition
STB
 In the
city of Nanhai, each household has more than two television sets on
average.  DTV subscribers can buy an additional STB from AGL for their
other television sets and pay a subscription fee for the additional
STB.
 
 Value
Added Services (VAS)
 During
the second quarter of 2007, the Company launched the first value added service
through the DTV platform: a real time stock information system.  The
subscribers can subscribe to receive the real time stock information for the
Chinese companies which are listed in the Chinese stock market (namely “A”
shares and “B” shares) with charts, analysis and related information on the
television set through the Company’s developed middleware platform.
 
 Other
Revenue Sources
 AGL also
generates revenues from installation services, through the sale of additional
STB and reconnection services.
 
 IP
based STB
 The
Company deploys an IP (Internet Protocol) based STB which is integrated with new
middleware applications, JAVA Runtime and XML browser, developed by Arable. The
Company believes the advanced STB will enable the Company to provide additional
value added services that can be deployed in the future; such as targeted
advertising, interactive TV programs, online shopping, console games, stock
trading and interactive education services. The Company is currently negotiating
partnerships with various vendors to provide interactive services, transforming
a television set into an interactive multimedia platform.
 
 Customer
and Technical Service
 The
operating support system, which is developed by AGL’s software team, manages all
operating processes including technical support to customers, database
management, billing services, inventory control, sales support, and call center
services. AGL’s call center provides 24/7 call answering capability and other
technical support services. The call center handled over 360,000 enquiries in
2008.
 
 Sales,
Marketing and Advertising
 AGL has
86 persons in the sales and customer services team.  The Company sells
services through direct customer contact, retail outlets, door-to-door selling,
television advertising and road show promotion.
 
 Technology
Development
 From time
to time, AGL works closely with our technology partners to develop new
technologies and additional features in order to improve and enhance our
operations and services. Since 2006, the Company has partnered with Arable to
design middleware for additional functions and applications for the digital
STB.  Arable GZ was established to provide local support on STB
middleware to AGL, and further develop the China market.
 
 Television
Channel Management and Advertising Sales
 
 M-Rider
is a wholly owned subsidiary of the Company and a limited liabilities company
registered in China.  M-Rider is an advertising sales agent
principally engaged in media planning, production, and distribution of
advertisement through television channels and related consulting
services.
 
 During
the year of 2008, 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 2008, HuaGuang did not have any business activity.
  6
 Table of Contents
  Strategic
Partnership
 
 The
Company is exploring the possibilities of creating alliances with strategic
partners; particularly those that could help expand its territories. The Company
believes that the opportunities in China’s DTV business are enormous and that it
makes more sense to partner with other companies and investors that can
complement the Company’s core strength as a provider of services to operate DTV
and a developer of customized applications for DTV in China.
 
 Growth
Opportunities
 
 The
Company believes its strengths in China’s media industry, are in the areas of
cable television operational support services and digital broadcasting
technology developments, and television channel management and advertising
sales.
 
 Cable
Television Operations and Digital Broadcasting Technology
Development
 
 Currently,
many cities in China have the infrastructure capable to broadcast DTV programs,
but not many cities today are undertaking a city-wide digital
Migration.  The Company believes that this large potential market for
DTV services presents opportunities in the digitization of cable TV services in
China in the coming years. In addition, the pricing of digital TV services are
likely to be improved and be more acceptable to subscribers in coming years.
Furthermore, the Company believes that declining prices of STBs may help to cut
costs of DTV migration and expand coverage of DTV broadcasting.
 
 The
Company believes that five years of experience has made it's operations and
migration process efficient and effective which has created a substantial
platform for the future growth in cable TV digitalization projects in other
cities with a size similar to Nanhai.  The Company is exploring its
ability to utilize its competitive advantages in seeking other cities,
particularly in Guangdong province, to repeat its Migration model. A number of
cities have expressed interest in working with the Company because of the proven
skills and experiences in operation, marketing and technology, although the
Company has not entered into any definitive or preliminary agreements with
any cities.  The operation of a DTV service business is a business
with long term stable recurring cash flow, but substantial upfront capital
investment has prevented the Company from investing in other cities until
additional cash flow can be generated internally or financed
elsewhere.  There is no assurance that the Company will be successful
in entering into new agreements for future migrations, or that the Company will
be able to finance any new migrations solely from its cash flows from the Nanhai
Migration.
 
 The
Company has entered into a Memorandum of Understanding (the ''MOU'') with a city
owned cable network company in the western part of Guangdong province to
implement a digital TV digitalization project during the year.
 
 Pursuant
to the MOU, the Company will invest in digital TV set top boxes to convert all
subscribers in the city from analog into digital TV broadcasting whereas the
cable network company will upgrade its cable network into a 2-way capable one.
Both parties agreed to develop business plans on the digital TV platform,
broadband Internet and other value added services to be deployed into the
market.
 
 Apart
from signing up additional Migration business, the Company will focus on
developing and providing value added services through the STB to DTV
subscribers.  Currently, a number of applications are on trial and
such services are expected to be available in coming months, which the Company
believes will drive its growth organically.
 
 Once the
migration program is fully completed, income from additional STB sales as well
as its subscription fee, VAS subscription fee and advertising income are
expected to be increased.  Accordingly, the profitability of our DTV
business is expected to be improved.
 
 Growth
Strategies
 
 DTV
business
 
 The
Company has established a successful and profitable model for the DTV services
in Nanhai. For the near term, the Company’s strategy is to complete the
migration at Nanhai to drive growth. In the mid or longer term, 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.  We may utilize future positive cashflow
generated from the Nanhai DTV to be used for the upfront investment to the new
projects.
  7
 Table of Contents
  Middleware
and VAS business
 
 In
addition to developing its existing businesses, the Company plans to propose
additional services through the cable network such as Internet connection, IPTV
or IP telephony.  These services, however, involve further upfront
cash investment in related equipment and marketing, negotiation with the
business partners, and head to head competition with China Telecom, a dominant
player in the provision of Internet services in China.  While the
Company’s management team has previous operating experience in the provision of
Internet services elsewhere, the Company will formulate development plans for
these services when, and if, market conditions are favorable.
 
 We
started our STB middleware development a few years ago with the commencement of
our Nanhai business operation. This middleware has proved to be successful and
to work smoothly on our STB. We have noticed that the demand for STB middleware
in China keeps increasing where the supply is limited. We believe we could
provide our middleware technique to other customers across China. We believe
this could become one of our main businesses in near future.
 
 Our
Nanhai cable partner is also working on the upgrade of their cable network to a
two-way system which is also expected to be completed shortly. Such upgrade
would enable us to offer various kinds of VAS to our cable subscribers.
Provision of VAS is expected to become one of our core businesses in the
mid-term.
 
 Government
Regulation
 
 The media
industry in the PRC is subject to government control and censorship. Due to the
PRC’s admission to membership in the World Trade Organization, the Company
believes the government is committed to opening its domestic markets for foreign
investors and that this should favorably impact the media industry. Some
restrictions on the Company’s businesses have already been
relaxed.  For example, as a foreign company, we can now own a 100%
equity interest in a company in the advertising business and up to a 49% equity
interest in a company in the program production business.
 
 Currently
in China, foreign capital is prohibited from establishing and running
broadcasting related stations, network, and content production companies. The
Company, with a business license under the name of AGL, is legally permitted to
develop and produce technical products and provide consulting and technical
services to the licensed cable network companies for the operation of DTV in
China, while sharing compensation from those network companies.
 
 Government
regulations still prohibit the Company from qualifying for holding an equity
interest in certain media business. In order to avoid unnecessary delays, and to
be able to invest in the media sectors such as television advertising and
program production, the Company has invested into media businesses in China
through its subsidiary HuaGuang. Through HuaGuang, the Company obtains the
business benefits of companies engaging in the media business while maintaining
their legal status as Chinese enterprises.
 
 Effects
of Inflation
 
 The
Company’s principal business is related to the media industry in
China.  Revenues and expenses remain relatively constant and are not
affected by the levels of inflation in China or elsewhere. For the foreseeable
future, the Company does not anticipate that inflation will affect the existing
business.
 
 Competition
 
 Cable
Television Operational Support Services and Digital Broadcasting Technology
Development
 
 In China,
television broadcasting has been the vehicle for the government to distribute
information to the public. While government officials intend to control and
monitor the content to be delivered through other broadcasting systems, the
exertion of control on other broadcasting systems may not be as dominant as it
is for television.  In the forseeable future, the Company believes
government officials will continue imposing tight control on distribution of
content through the cable television network.  In order to
enhance and effectively control the distribution of content, the Company
believes government officials will plan to fully convert the current analogue
television broadcasting signal into digital signal, and cable television will
remain as the major form of delivery for television programming in China in the
coming years although there will be competition from satellite, IP television
and other media.
 
 Advertising
Sales
 
 Advertising
time sales are directly related to a channel’s audience population and
viewership.  The China Central Television (“CCTV”), the dominant
broadcaster in China, has a strong influence on broadcasting in the country, and
localized television content can serve the needs of audiences down to the city
levels.  Advertising revenues generated by local television stations
are substantial.  In recent years, country-level cable television
stations have tendered their television channels/air time to advertising
agencies at fixed cost in order to generate guaranteed income. Competition in
different parts of the country is fierce between advertising agencies and
television channels at the provincial and city levels.  In order to
maximize profit, advertising agencies have begun to provide their own content to
increase their channels’ viewership. Because of this trend, some advertising
firms are trying to vertically integrate their business into program sourcing
and production.  It is believed that the television advertising
industry will remain fiercely competitive and media firms will integrate their
scope of business to include program production, sourcing and advertising
sales.
  8
 Table of Contents
  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 $7.9 million (restated),
$14.9 million (restated) and $7.5 million for fiscal years 2005, 2006 and 2007
respectively.  The Company  had net income of $3.1 million, net
loss $0.2 million (restated), net loss $4.1 million (restated) and net loss
$13,375,575 for fiscal years 2005, 2006, 2007, and 2008
respectively.  Any investment in the Company should be considered as a
high risk one because the investor will be placing funds at risk in an
unseasoned early stage company with unforeseen costs, expenses, competition and
other problems to which such companies are often subject.
 
 The
Company’s cable television migration operations require the Company to incur
significant upfront costs to supply customers with set-top-boxes, recovery of
which would be better managed if the Company is able to sell customers
sufficient number of value-added services or additional
set-top-boxes.
 
 The
Company’s agreement with the Nanhai Network Company provides that the Company
migrates all cable TV subscribers in Nanhai from an analog signal to a digital
signal by the end of 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 accounts receivable is with the Nanhai
Network Company.
 
 Approximately
99% of the Company’s accounts receivables are with the Nanhai Network Company in
connection with the cable television digitization migration being performed by
the Company. These receivables are paid to the Company based on a schedule with
the Nanhai Network Company. If the Nanhai Network Company is to delay its
payment to the Company or be unable to pay the monies due to the Company, the
Company’s high concentration of credit risk may cause financial difficulties and
may cause the Company to become unable to fulfill the payment obligations to the
Company’s vendors.
 
 The
Company’s revenue recognition in connection with the Company’s cable television
migration project occurs substantially in advance of the Company’s cash receipts
from the migration project.
 
 The
Company recognizes revenues from the Company’s cable television migration
project in Nanhai on a monthly basis.  However, subscribers pay their
subscription fees to the Nanhai Network Company on a quarterly basis, and the
Company receives their portion of the fees after a certain period which could be
as long as six months. As such, there is a considerable delay between the
Company’s recognition of revenues and the cash receipts on such
revenues.
 
 The
Company’s success will depend on public acceptance of cable services in
China.
 
 The
Company’s future results of operations will depend substantially upon the
increased acceptance of pay-TV programs, such as premium channels, and value
added services in China.
 
 The
Company is dependent on three suppliers for the Company’s set-top-boxes and
smart cards.
 
 The
Company’s cable television digitization migration process requires the Company
to supply subscribers with STB and smart cards. Currently, the Company relies on
three suppliers for the Company’s STB and smart cards. If any of these suppliers
is unable to produce STB or smart cards to the Company on a timely basis and in
a cost effective manner, the Company’s ability to complete the cable television
digitization migration plan in Nanhai or in other cities on schedule would be
adversely effected.
 
 The
Company did not receive any government grants in 2008 and there is no assurance
that any government grant will be received in 2009.
 
 Since the
price increase of DTV subscription fee in general is approved by the local
government, the revenue of the Company is increased too. Such increase in
revenue is an additional income to the existing level of income. It is treated
as a substitute of the government grant by the local authority. The government
grant was not received by the Company during 2008.
  9
 Table of Contents
  The
requirements of being a public company may strain the Company’s resources and
distract the Company’s management.
 
 As a
public company, the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may
place a strain on the Company’s systems and resources. The Exchange Act requires
that the Company files annual, quarterly and current reports with respect to the
Company’s business and financial condition. The Sarbanes-Oxley Act requires that
the Company maintains effective disclosure controls and procedures and internal
controls for financial reporting.  The Company is required to document
and test the Company’s internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual
management assessments of the effectiveness of the Company’s internal controls
over financial reporting and a report by the Company’s independent registered
public accountants addressing these assessments. During the course of testing,
the Company may identify deficiencies which the Company may not be able to
remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. In addition, if the Company
fails to achieve and maintain the adequacy of the Company’s internal controls,
as such standards are modified, supplemented or amended from time to time, the
Company may not be able to ensure that the Company can conclude on an ongoing
basis that the Company has effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act.
 
 In order
to maintain and improve the effectiveness of the Company’s disclosure controls
and procedures and internal control over financial reporting, significant
resources and management oversight will be required. This may divert
management's attention from other business concerns, which could have a material
adverse effect on the Company’s business, financial condition, results of
operations and cash flows. In addition, the Company may need to hire additional
accounting and financial staff with appropriate public company experience and
technical accounting knowledge, and the Company cannot assure you that the
Company will be able to do so in a timely fashion.
 
 Technological
advances, the introduction of new products, and new design and manufacturing
techniques could adversely affect the Company’s operations unless the Company is
able to adapt to the resulting change in conditions.
 
 The
Company’s future success and competitive position depends to a significant
extent upon the Company’s proprietary technology, specifically the technology
included in the Company’s set-top-box. The Company will be required to expend
substantial funds for and commit significant resources to conducting research
and development activities, the engagement of additional engineering and other
technical personnel, and the enhancement of design and manufacturing processes
and techniques. There can be no assurance that any new STB will receive or
maintain customer or market acceptance. If the Company is unable to design and
manufacture new STB on a timely and cost-effective basis, such inability could
have a material adverse effect on the Company’s business, financial condition,
results of operations and liquidity.
 
 The
Company’s business operations may be affected by legislative or regulatory
changes in China.
 
 Changes
in laws and regulations governing the content of advertising, business licensing
or otherwise affecting the DTV business, including the content of TV programs
and value added services, in China may also have adverse impact on the Company’s
results of operations, business or prospects.
 
 The
Company has reserved a significant number of shares of its common stock for
issuance upon the exercise of warrants and upon the conversion of
debentures.  The issuance of these shares will have a dilutive effect
on the common stock and may lower the Company’s stock price.
 
 During
the year of 2006, the Company issued warrants to purchase an aggregate of
17,222,205 shares of our common stock and issued convertible debentures which
may be converted into an aggregate of 6,888,882 shares of common stock. The
exercise prices on these warrants range from $0.80 per share to $2.25 per share,
and the conversion price of the debentures is $0.45 per
share.   If issued, the shares underlying the warrants and
debentures would increase the number of shares of common stock currently
outstanding and will dilute the holdings and voting rights of the Company’s
then-existing shareholders.  One of the debenture holders converted an
amount of $135,000 debenture to common stock in December 2007.  The
Company 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.
 
 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.
  10
 Table of Contents
  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 $66,457 for year 2008 under
lease term expiring on January 2014; (2) AGL Nanhai, with 1,045 square meters
for operation and paid total rent of $36,016 for year 2008 under lease term
expiring on March 2009; (3) M-Rider,  with 18 square meters and paid
total rent of $1,269 for year 2008 under lease term expiring on January
2014; (4) HuaGuang, with 45 square meters and paid total rent of $3,250 for
year 2008 under lease term expiring Jan 2014; and  (5) Arable GZ, with
52 square meters and paid total rent of $3,510 for year 2008 under lease term
expiring on July 2011.  The Company also leased nine staff quarters
with total area of 970 square meters and paid total rent of $28,815 for year
2008 under various lease terms expiring through January 2009 to December
2011.
  11
 Table of Contents
  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 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. 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. We
also do not believe that United States District Court for the Southern
District of New York has jurisdiction over us to even hear this case. We
believe we have no liability in this matter.
 
 ITEM
4. Submission of Matters to a Vote of Security Holders
 
 None.
 
 PART
II
 
 ITEM
5. Market for the Registrant’s Common Stock, Related Security Holder Matters,
and Small Business Issuer Purchases of Equity Securities
 
 (a) The
principal market in which our common stock is traded is the Over-the-Counter
Bulletin Board, under the symbol “CDGT”. The table below presents the high and
low bid price for our common stock each quarter during the past two years and
reflects inter-dealer prices, without retail markup, markdown, or commission,
and may not represent actual transactions. We obtained the following information
from QuoteMedia.com, an on-line source that provides historical pricing
information.
 
 Quarter
Ended                       Low      High
 
 03/31/07                                   0.48      0.481
 06/30/07                                   0.42      0.49
 09/30/07                                   0.22      0.24
 12/31/07                                   0.24      0.26
 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
 
 The above
stock prices have been retroactively adjusted in the above table to reflect a
100 for 1 reverse split in 2005.
 
 (b)
Holders. The approximate number of holders of record of the Company's Common
Stock was 108 in certificate form and over 2,120 shareholders deposit their
shares with the clearing house according to the NOBO list provided by Broadridge
Financial Solutions, Inc as of December 31, 2008.
 
 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.
  12
 Table of Contents
  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, 2008, the Company did not issue any
shares.
 
 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
2008, the Company reported a revenue of $7,290,344 (2007: $7,480,453), a
decrease of 3% as compared with last year, and a net loss of $13,375,575 (2007
loss: $4,094,935).
 
 The
Company’s business plan is to complete the DTV migration program in Nanhai. The
Company will focus its resources toward developing VAS 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 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.
 
 The
accompanying 2007 consolidated financial statements include the financial
statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai
Branch, M-Rider and Digimedia Shenzhen, its 90% variable interest entity in
HuaGuang and 51% owned subsidiary of HuaGuang in Guishi Digimedia. The Company
accounts for its 49% investment held by HuaGuang in Guishi Huaguang and its 20%
investment held by CDHL in Arable using the equity method. The minority
interests represent the minority shareholders’ 10% and 54.1% proportionate share
of the results of HuaGuang and Guishi Digimedia respectively.
 
 All
significant inter-company transactions and balances have been eliminated in
consolidation.
  13
 Table of Contents
  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, 2008 and 2007, the Company
received $nil and $1,317,992 of government grant respectively.  There
is a possibility the government grant for 2008 may not be received in the future
owing to an expected upward price adjustment of DTV subscription fee
income, which would reduce the government grant.
 
 Advertising
sales
 
 The
Company acts as an advertising agent for certain television channels by selling
advertising air time spaces and television program backdrops to
customers.  The Company's advertising services revenue is derived from
billings that are earned when the advertisements are placed and revenue is
recognized as the media placements appear. Deferred revenues are recognized as a
liability when billings are received in advance of the date before revenues are
earned.
 
 Software
development
 
 The
Company provides various information technology professional services to its
customers based on a negotiated fixed-price time and materials contract. The
Company recognizes services-based revenue from all of its contracts when the
services have been performed, the customers have approved the completion of the
services and invoices have been issued and collectibility is reasonably
assured.
 
 Television
series
 
 The
Company invested in the production of two television series. Revenue from
investments in television series is recognized upon receipt from the production
company.
  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.
  14
 Table of Contents
  Financial
review of the Company for the year 2008:
 
 Selected
      financial dataYear
      Ended December 312008
                    
                    2007Net
      sales
                    $
                    7,290,344
                    
                    $
                    7,480,453Net
      loss
                    
                    (13,375,575
                    )
                    
                    (4,094,935
                    )Net
      loss per share –basic (two classes method)
                    
                    (0.31
                    )
                    
                    (0.11
                    )Net
      income per share -fully diluted (two classes method)
                    
                    (0.31
                    )
                    
                    (0.11
                    )Weighted
      average shares outstanding – basic
                    
                    42,595,450
                    
                    
                    37,725,894Weighted
      average shares outstanding - fully diluted
                    
                    42,595,450
                    
                    
                    37,725,894Total
      assets
                    
                    17,535,847
                    
                    
                    29,057,363Working
      Capital (Deficit)
                    
                    (7,805,558
                    )
                    
                    (8,114,014)Stockholders'
      equity
                    
                    4,372,380
                    
                    
                    16,811,326
 
 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, 2008 were $7,290,344 as compared to
$7,480,453 for the fiscal year ended December 31, 2007, a decrease of $190,109
or 3%.   The decrease in sales was due to the reduction in
government grant which is offset by the increase in the revenue from the DTV
basic subscription fee income owing to the upward adjustment of the basic
subscription fee from Nanhai DTV subscribers effective from June 1,
2008.
 
 The total
number of DTV subscribers increased by 53,647 to 298,999 by the end of
2008.  Sale of additional STB in 2008 was increased by 4,921 to
17,854, an increase of 38% from last year, representing approximately 6% of
total DTV subscribers in Nanhai.  The number of value added package
subscriptions decreased by 1,248 to 32,493 in 2008, representing approximately
11% of total DTV subscribers in Nanhai.  The digitalization project
will continue in 2009 and the Company expects that revenue from DTV business
will grow as a result of the completion of migration process in
2009.
 
 Gross
Margin
 
 Due to
the increase in depreciation charge of STB for the year, gross profit margin
decreased from 36% in 2007 to 30% in 2008, and the gross profit amount
decreased by $503,558 from last year.
 
 Expenses
 
 Selling,
general, administrative and depreciation and amortization expenses for the
fiscal year ended December 31, 2008 decreased by $1,310,228 or 37% to
$2,199,254 in comparison with the last fiscal year ended December 31,
2007.  The increase is mainly due to the decreased in R&D expenses
and other general overheads. The porvision for doubtful debts for the year ended
December 31, 2008 increased by $6,631,380 from last year, which was due to the
increase in provision on the long term portion of account receivable from
the Network Company.
 
 The
Company entered into an agreement with Network Company at the end of 2007
for amortizing a major portion of the receivable amount of $7,78,997 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 is amounted to $7,847,084 was
necessary as of the year end.
 
 Reclassifications
have been made to the comparative figures for the year ended December 31, 2007
for showing the amortization of convertible debt discount under operating
expenses where it was shown under other expenses in the last
report.  Also that for provision of doubtful debts has been separately
shown under operating expenses where the comparative figure of this item for the
year ended 2007 was included in the selling, general and administrative expenses
in the last report.
  15
 Table of Contents
  Income
Taxes
 
 Income
taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), “Accounting for Income Taxes
..” A deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting and net operating loss-carry
forwards.
 
 Income
from Discontinued Operation
 
 Income
from discontinued operation in the statement of operation represents the
shareholders’ share of an operating result in Guishi Digimedia, a 51%
subsidiary, and Guishi Huaguang, a 49% affiliate, being disposed of during the
period.  For the year ended December 31, 2008, the income from the
discontinued operation is nil (2007: $327,083).
 
 Net
Loss
 
 The
Company had net loss of $13,375,575 (2007 loss: $4,094,935) or $0.31 loss per
common share for the year ended December 31, 2008, an increase of net loss
$9,280,640 as compared with last year. The increase in net loss was due to drop
in gross profit $503,558, the increase in doubtful debt provision $6,869,112,
and the increase in impairment of goodwill $3,996,946.
 
 Balance
Sheet Items:
 
 Current
Assets
 
 Current
Assets of the Company decreased by $0.5 million to $3.0 million as at December
31, 2008. As the Company utilized most of its cash on DTV migration, it has
maintained a low level of cash balance of $0.4 million as at December 31, 2008,
an increase of $0.1 million from December 31, 2007. Accounts Receivable
decreased by $0.8 million to $1.1 million in 2008.
 
 Intangible
Assets
 
 Intangible
assets decreased by $4.0 million during 2008, which is the due to the impairment
of goodwill generated from the acquisition of Maxcomm.  Owing to the
weakening economy globally including China, the Company revised the income
projection of the middleware company, Arable, for the coming
years.  Such revision also resulted in a much lower profitability
projection which in turn reduce the net worth of its holding company, Maxcomm,
as well.  Accordingly, an impairment adjustment on the goodwill out of
the acquisition of Maxcomm is required.
 
 Property
and Equipment, Net
 
 The net
increase in property and equipment of the Company of $1.0 million in 2008 mainly
represented purchase of STB for migration in 2008.
 
 Current
Liabilities
 
 Current
Liabilities of the Company have decreased by $0.8 million to $10.8 million as at
December 31, 2008. The decrease was mainly attributable to the classification of
part of convertible debenture as long term liability which is offset by the
accounting treatment for reinstating the debenture costs out of the convertible
feature.
 
 Impact of
Inflation
 
 The
Company believes that inflation has had a negligible effect on operations over
the past two years.
 
 Trends,
Events, and Uncertainties
 
 The
Company believes that the demand for its DTV services is stable as cable
television service in Nanhai is monopolized by the local television
bureau.  The increase of the number of DTV subscribers depends on the
digitalization schedule.  The increase of subscribers is dependent on
our migration plan and the rate of increase of residents in Nanhai.
 
 On the
technology side, the Company is not certain about the impact of technological
changes on its business as such development in IPTV, satellite and terrestrial
broadcasting.  However, assuming the Company has sufficient cash
resources, the Company intends to continue to put more resources in research and
development in order to catch up with the technological development especially
with a focus on DTV related businesses.
 
 In
advertising sales, the Company plans to enter into more exclusive television
channel arrangements in order to increase its sales volume and try to boost its
advertising rate.  The Company expects that revenue will increase as
the 2008 Olympic Games hosted by the PRC in Beijing approach.  The
Company, however, has a concern that the cost to obtain exclusive television
channel arrangements will escalate since the PRC is opening its advertising
market to foreign investors.
 
 The
Company believes television program production will generate stable revenue for
the Company. The Company believes that the government policy of the PRC to
control the production and publication of media content, especially movie and
television drama, is the most important factor. However, due to the demand for
television programs and the digitalization of television as the primary task for
SARFT, the Company anticipates that more investors will be allowed to enter the
market and competition will be increased.
  16
 Table of Contents
  Liquidity
and Capital Resources
 
 On
December 31, 2008, the Company had cash of $436,062 and a working capital
deficit of $7,805,558.  This compares with cash of $334,410 and a
working capital deficit of $8,114,014 at December 31, 2007.
 
 Operating
activities had a net surplus of cash in the amount of $4,599,248 during the
year, reflecting an excess of revenues over operating expenditures.
 
 Net cash
used in investing activities for the fiscal year ended December 31, 2008 was
$4,114,665 as compared with net cash used in investing activities of $3,241,369
for the fiscal year ended December 31, 2007. The increase in net cash used in
investing activities was due to the increase in purchases of STBs for migration
purpose.
 
 Net cash
used in financing activities for the fiscal year ended December 31, 2008 was
$220,123. The majority of net cash used in financing activities was to pay down
a related company.
 
 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 2008. 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
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 one major debenture holder holding $2.105,000 in principal
amount of debenture to extend the maturity date to June 2010.
 
 ITEM
7A. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
applicable.
  17
 Table of Contents
 
 ITEM
8. Financial Statements
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 
 CONTENTS
  PageReport
      of Independent Registered Public Accounting Firm
              19Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              21Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2008 and 2007
              22Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2008
      and 2007
              23Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
              24Notes
      to the Consolidated Financial Statements as of December 31, 2008 and
      2007
              2 5- 42
  18
 Table of Contents
  Jimmy
      C.H. Cheung & Co
                      Certified Public Accountants
                      (A
      member of Kreston
      International)                                                                                                   
                       
                            Registered
      with the Public Company Accounting Oversight
    Board
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
the Board of Directors of:
  China
Digital Media Corporation
   We
have audited the accompanying consolidated balance sheet of China Digital Media
Corporation and subsidiaries as of December 31, 2007 and the related
consolidated statements of operations and comprehensive income, stockholders’
equity and cash flows for the year ended December 31, 2007. 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 audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the financial
statements provides a reasonable basis for our opinion.
  In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Digital Media Corporation and
subsidiaries as of December 31, 2007 and the results of its operations and its
cash flows for the year ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 24
to the consolidated financial statements, the Company had a net loss of
13,375,575, an accumulated deficit of $14,346,279 and a working capital
deficiency of $7,805,558.  These factors raise substantial doubt about
its ability to continue as a going concern.  Management’s plans
concerning this matter are also described in Note 24.  The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
   JIMMY
C.H. CHEUNG & CO
  Certified
Public Accountants
   Hong
Kong
  Date:
 February 26, 2008
  1607
Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong
 Tel:  (852)
25295500   Fax:  (852) 28651067
 Email: jimmycheung@jimmycheungco.com
 Website:  http://www.jimmycheungco.com
  19
  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 sheet of China Digital Media
Corporation and subsidiaries as of December 31, 2008 and the related
consolidated statements of operations and comprehensive income, stockholders’
equity and cash flows for the year ended December 31, 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 audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the 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 audit provides 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, 2008 and the results of its operations and its
cash flows for the year ended December 31, 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 24
to the consolidated financial statements, the Company had a net loss of
13,375,575, an accumulated deficit of $14,346,279 and a working capital
deficiency of $7,805,558.  These factors raise substantial doubt about
its ability to continue as a going concern.  Management’s plans
concerning this matter are also described in Note 24.  The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
   BONGIOVANNI
& ASSOCIATES, CPA's
  Certified
Public Accountants
   Cornelius,
N.C.
 
 Date:
 February 18, 2009
 20
  CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSASSETSDecember
      31, 2008
                              
                              
                              December
      31, 2007(Audited)
                              
                              
                              (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                              
                              $
                              436,062
                              
                              
                              $
                              334,410Accounts
      receivable, net of allowances
                              
                              
                              1,078,228
                              
                              
                              
                              1,851,193Inventories,
      net
                              
                              
                              1,247,781
                              
                              
                              
                              781,561Other
      receivables and prepaid expenses
                              
                              
                              194,386
                              
                              
                              
                              500,229Value
      added taxes recoverable
                              
                              
                              52,820
                              
                              
                              
                              45,530Total
      Current Assets
                              
                              
                              3,009,277
                              
                              
                              
                              3,512,923ACCOUNTS
      RECEIVABLE, long term portion, net of allowances
                              
                              
                              -
                              
                              
                              
                              7,781,997INTANGIBLE
      ASSETS, NET of impairment of $3,996,595
                              
                              
                              324,329
                              
                              
                              
                              4,320,924INVESTMENTS
      IN TELEVISION SERIES, NET of impairment of $223,421
                              
                              
                              -
                              
                              
                              
                              -PROPERTY
      AND EQUIPMENT, NET
                              
                              
                              14,202,241
                              
                              
                              
                              13,193,066DEFERRED
      TAX ASSET
                              
                              
                              -
                              
                              
                              
                              123,982OTHER
      ASSETS
                              
                              
                              -
                              
                              
                              
                              124,471TOTAL
      ASSETS
                              
                              $
                              17,535,847
                              
                              
                              $
                              29,057,363LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESConvertible
      debentures, net of discount
                              
                              $
                              950,000
                              
                              
                              $
                              2,212,631Accounts
      payable
                              
                              
                              5,178,216
                              
                              
                              
                              5,109,728Other
      payables and accrued liabilities
                              
                              
                              923,980
                              
                              
                              
                              707,932Due
      to directors
                              
                              
                              285,642
                              
                              
                              
                              241,239Due
      to a stockholder
                              
                              
                              396,331
                              
                              
                              
                              384,581Due
      to related companies
                              
                              
                              454,555
                              
                              
                              
                              730,831Business
      and other tax payable
                              
                              
                              23,099
                              
                              
                              
                              157,646Income
      tax payable
                              
                              
                              2,603,012
                              
                              
                              
                              2,082,349Total
      Current Liabilities
                              
                              
                              10,814,835
                              
                              
                              
                              11,626,937LONG
      TERM LIABILITIESConvertible
      debentures, net of discount
                              
                              
                              2,015,000
                              
                              
                              
                              0Accounts
      payable
                              
                              
                              333,632
                              
                              
                              
                              619,100Total
      Long Term Liabilities
                              
                              
                              2,348,632
                              
                              
                              
                              619,100COMMITMENTS
      AND CONTINGENCIES
                              
                              
                              -
                              
                              
                              
                              -STOCKHOLDERS'
      EQUITYSeries
      A convertible preferred stock ($0.001 par value, 40,000,000
      sharesauthorized,1,875,000
      shares issued and outstanding as ofDecember
      31, 2008 and December 31, 2007)
                              
                              
                              1,875
                              
                              
                              
                              1,875Common
      stock ($0.001 par value, 500,000,000 shares authorized,42,706,363
      shares and 42,117,057 shares issued and outstanding as of December
      31, 2008and
      December 31, 2007 respectively)
                              
                              
                              42,706
                              
                              
                              
                              42,117Additional
      paid-in capital
                              
                              
                              14,984,021
                              
                              
                              
                              14,836,639Deferred
      stock compensation
                              
                              
                              -
                              
                              
                              
                              (21,200
                              )Retained
      earningsUnappropriated
                              
                              
                              (14,346,279
                              )
                              
                              
                              (970,704
                              )Appropriated
                              
                              
                              1,521,997
                              
                              
                              
                              1,521,997Accumulated
      other comprehensive income
                              
                              
                              2,168,060
                              
                              
                              
                              1,400,602Total
      Stockholders' Equity
                              
                              
                              4,372,380
                              
                              
                              
                              16,811,326TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              17,535,847
                              
                              
                              $
                              29,057,363
  The
accompanying notes are an integral part of these consolidated financial
statements.
  21
 Table of Contents
  CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE
      LOSS (AUDITED)FOR
      THE YEAR ENDED DECEMBER 31, 2008 AND 20072008
                                    
                                    
                                    2007NET
      SALESRevenue
      from digitalization of television signals
                                    
                                    $
                                    6,855,420
                                    
                                    
                                    $
                                    5,714,471Revenue
      from television advertising
                                    
                                    
                                    392,296
                                    
                                    
                                    
                                    384,423Revenue
      from software development
                                    
                                    
                                    42,628
                                    
                                    
                                    
                                    63,567Government
      grant received
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,317,9927,290,344
                                    
                                    
                                    
                                    7,480,453COST
      OF SALESCost
      of Sales - digitalization of television signals
                                    
                                    
                                    (891,836
                                    )
                                    
                                    
                                    (560,085
                                    )Depreciation
      - digitalization of television signals
                                    
                                    
                                    (3,952,496
                                    )
                                    
                                    
                                    (3,023,468
                                    )Cost
      of Sales - television advertising
                                    
                                    
                                    (271,419
                                    )
                                    
                                    
                                    (428,234
                                    )(5,115,751
                                    )
                                    
                                    
                                    (4,802,302
                                    )GROSS
      PROFIT
                                    
                                    
                                    2,174,593
                                    
                                    
                                    
                                    2,678,151OPERATING
      EXPENSESSelling,
      general and administrative expenses
                                    
                                    
                                    (2,199,254
                                    )
                                    
                                    
                                    (3,509,482
                                    )Provision
      for doubtful debts
                                    
                                    
                                    (7,847,084
                                    )
                                    
                                    
                                    (1,215,704
                                    )Amortization
      of convertible debt discount
                                    
                                    
                                    (752,369
                                    )
                                    
                                    
                                    (2,100,779
                                    )Depreciation
      and amortization
                                    
                                    
                                    (82,959
                                    )
                                    
                                    
                                    (99,920
                                    )Total
      Operating Expenses
                                    
                                    
                                    (10,881,666
                                    )
                                    
                                    
                                    (6,925,885
                                    )LOSS
      FROM OPERATION
                                    
                                    
                                    (8,707,073
                                    )
                                    
                                    
                                    (4,247,734
                                    )OTHER
      INCOME (EXPENSES)Loss
      on disposal of investment in television series
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (261,187
                                    )Impairment
      of goodwill
                                    
                                    
                                    (3,996,946
                                    )
                                    
                                    
                                    -Interest
      income
                                    
                                    
                                    2,808
                                    
                                    
                                    
                                    2,629Other
      income
                                    
                                    
                                    207,863
                                    
                                    
                                    
                                    142,370Interest
      expenses
                                    
                                    
                                    (279,000
                                    )
                                    
                                    
                                    (125,049
                                    )Interest
      paid to related companies and directors
                                    
                                    
                                    (30,091
                                    )
                                    
                                    
                                    (17,400
                                    )Other
      expenses
                                    
                                    
                                    (52,095
                                    )
                                    
                                    
                                    (35,009
                                    )Total
      Other Expenses , net
                                    
                                    
                                    (4,147,461
                                    )
                                    
                                    
                                    (293,646
                                    )NET
      LOSS BEFORE TAX
                                    
                                    
                                    (12,854,534
                                    )
                                    
                                    
                                    (4,541,380
                                    )Income
      tax (expense) income
                                    
                                    
                                    (521,041
                                    )
                                    
                                    
                                    119,362NET
      LOSS FROM CONTINUING OPERATIONS
                                    
                                    $
                                    (13,375,575
                                    )
                                    
                                    $
                                    (4,422,018
                                    )DISCONTINUED
      OPERATIONSEquity
      gain (loss) of affiliate
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (14,391
                                    )Gain
      on disposal of subsidiary
                                    
                                    
                                    -
                                    
                                    
                                    
                                    255,415Gain
      on disposal of affiliate
                                    
                                    
                                    -
                                    
                                    
                                    
                                    86,059GAIN
      FROM DISCONTINUED OPERATIONS
                                    
                                    
                                    -
                                    
                                    
                                    
                                    327,083NET
      LOSS
                                    
                                    
                                    (13,375,575
                                    )
                                    
                                    
                                    (4,094,935
                                    )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
                                    
                                    
                                    767,458
                                    
                                    
                                    
                                    1,425,817COMPREHENSIVE
      LOSS
                                    
                                    $
                                    (12,608,117
                                    )
                                    
                                    $
                                    (2,669,118
                                    )Net
      loss per share - basic - two classes method-
      From continuing operations
                                    
                                    $
                                    (0.31
                                    )
                                    
                                    $
                                    (0.12
                                    )-
      From discontinued operations
                                    
                                    
                                    0.00
                                    
                                    
                                    
                                    0.01Net
      loss per share - diluted-
      From continuing operations
                                    
                                    $
                                    (0.31
                                    )
                                    
                                    $
                                    (0.12
                                    )-
      From discontinued operations
                                    
                                    
                                    0.00
                                    
                                    
                                    
                                    0.01Weighted
      average number of shares outstanding during the period -
    basic
                                    
                                    
                                    42,595,450
                                    
                                    
                                    
                                    37,725,894Weighted
      average number of shares outstanding during the period -
      diluted
                                    
                                    
                                    42,595,450
                                    
                                    
                                    
                                    37,725,894
  The
accompanying notes are an integral part of these consolidated financial
statements.
  22
 Table of Contents
  CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (AUDITED)Series
      A Convertible
                                                      Preferred
      Stock
                                                    
                                                    
                                                    Common
      Stock
                                                    
                                                    
                                                    Additional
                                                    
                                                    
                                                    Deferred
                                                    
                                                    
                                                    Unappropriated
                                                    
                                                    
                                                    Appropriated
                                                    
                                                    
                                                    Accumulated
      otherpaid-in
                                                    
                                                    
                                                    stock
                                                    
                                                    
                                                    retained
                                                    
                                                    
                                                    retained
                                                    
                                                    
                                                    comprehensive
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    ComprehensiveShares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    capital
                                                    
                                                    
                                                    compensation
                                                    
                                                    
                                                    earnings
                                                    
                                                    
                                                    earnings
                                                    
                                                    
                                                    loss
                                                    
                                                    
                                                    Total
                                                    
                                                    
                                                    (Loss)
      IncomeBalance
      at December 31, 2006
                                                    
                                                    
                                                    1,875,000
                                                    
                                                    
                                                    
                                                    1,875
                                                    
                                                    
                                                    
                                                    31,602,365
                                                    
                                                    
                                                    
                                                    31,602
                                                    
                                                    
                                                    
                                                    10,812,806
                                                    
                                                    
                                                    
                                                    (84,800
                                                    )
                                                    
                                                    
                                                    3,688,643
                                                    
                                                    
                                                    $
                                                    957,585
                                                    
                                                    
                                                    $
                                                    (25,215
                                                    )
                                                    
                                                    $
                                                    15,382,496Audit
      adjustment for opening balance
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Stock
      issued for acquisition
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    10,000,000
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    
                                                    3,750,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    3,760,000Stock
      issued for private placement
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    550,000
                                                    
                                                    
                                                    
                                                    550
                                                    
                                                    
                                                    
                                                    249,450
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    250,000Cancellation
      of stocks
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (335,308
                                                    )
                                                    
                                                    
                                                    (335
                                                    )
                                                    
                                                    
                                                    (110,317
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (110,652
                                                    )Stock
      issued for converted debenture
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    300,000
                                                    
                                                    
                                                    
                                                    300
                                                    
                                                    
                                                    
                                                    134,700
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    135,000Amortization
      on stock compensation
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    63,600
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    63,600Transferred
      to statutory surplus reserve
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (564,412
                                                    )
                                                    
                                                    
                                                    564,412
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      loss for the year
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (4,094,935
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (4,094,935
                                                    )Foreign
      currency translation gain
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,425,817
                                                    
                                                    
                                                    
                                                    1,425,817Comprehensive
      loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,669,118
                                                    )Balances
      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
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    21,200Stock
      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
      loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (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
                                                    
                                                    
                                                    $
                                                    4,372,380
  The
accompanying notes are an integral part of these consolidated financial
statements.
  23
 Table of Contents
  CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2008 and 2007(AUDITED)2008
                                              
                                              
                                              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss from continuing operations
                                              
                                              $
                                              (13,375,575
                                              )
                                              
                                              $
                                              (4,422,018
                                              )Net
      income from discontinued operations
                                              
                                              
                                              -
                                              
                                              
                                              
                                              327,083Total
      net loss
                                              
                                              
                                              (13,375,575
                                              )
                                              
                                              
                                              (4,094,935
                                              )Adjusted
      to reconcile net loss to cash provided by operating
      activities:Equity
      loss of affiliate - discontinued operation
                                              
                                              
                                              -
                                              
                                              
                                              
                                              14,391Impairment
      loss of goodwill
                                              
                                              
                                              3,996,946Loss
      on disposal of investment in television series
                                              
                                              
                                              -
                                              
                                              
                                              
                                              261,187Impairment
      loss of investment in television series
                                              
                                              
                                              -
                                              
                                              
                                              
                                              223,421Depreciation-cost
      of sales
                                              
                                              
                                              3,952,496
                                              
                                              
                                              
                                              3,023,468Depreciation
      and amortization
                                              
                                              
                                              82,959
                                              
                                              
                                              
                                              86,518Depreciation
      and amortization of discontinued operation
                                              
                                              
                                              -
                                              
                                              
                                              
                                              13,402Provision
      for doubtful debts
                                              
                                              
                                              7,847,084
                                              
                                              
                                              
                                              1,215,704Amortization
      of convertible debt discount
                                              
                                              
                                              752,369
                                              
                                              
                                              
                                              2,100,779Loss
      on disposal of affiliate
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (86,059
                                              )Amortization
      on stock compensation
                                              
                                              
                                              21,200
                                              
                                              
                                              
                                              63,600Gain
      on disposal of interest in subsidiary
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (255,415
                                              )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                                              
                                              
                                              707,878
                                              
                                              
                                              
                                              (1,060,143
                                              )Other
      receivables and prepaid expenses
                                              
                                              
                                              253,023
                                              
                                              
                                              
                                              624,396Inventories
                                              
                                              
                                              (466,220
                                              )
                                              
                                              
                                              (306,080
                                              )Deferred
      tax asset
                                              
                                              
                                              123,982
                                              
                                              
                                              
                                              (123,982
                                              )Other
      assets
                                              
                                              
                                              124,471
                                              
                                              
                                              
                                              935,023Increase
      (decrease) in:Due
      to a related company
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Accounts
      payable
                                              
                                              
                                              (216,980
                                              )
                                              
                                              
                                              (162,510
                                              )Other
      payables and accrued liabilities
                                              
                                              
                                              364,019
                                              
                                              
                                              
                                              (1,077,413
                                              )Business
      tax payable
                                              
                                              
                                              (134,547
                                              )
                                              
                                              
                                              (141,886
                                              )Value
      added taxes payable
                                              
                                              
                                              45,530
                                              
                                              
                                              
                                              17,680Income
      tax payable
                                              
                                              
                                              520,663
                                              
                                              
                                              
                                              127,549Net
      cash provided by operating activities
                                              
                                              
                                              4,599,298
                                              
                                              
                                              
                                              1,398,695CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      cash inflow from business combination
                                              
                                              
                                              -
                                              
                                              
                                              
                                              61Disposal
      of affiliates
                                              
                                              
                                              -
                                              
                                              
                                              
                                              265,924Investment
      in affiliate
                                              
                                              
                                              -
                                              
                                              
                                              
                                              360,684Disposal
      of subsidiary
                                              
                                              
                                              -
                                              
                                              
                                              
                                              87,333Purchase
      of property and equipment
                                              
                                              
                                              (4,114,665
                                              )
                                              
                                              
                                              (3,955,371
                                              )Net
      cash used in investing activities
                                              
                                              
                                              (4,114,665
                                              )
                                              
                                              
                                              (3,241,369
                                              )CASH
      FLOWS FROM FINANCING ACTIVITIESDue
      to related companies
                                              
                                              
                                              (276,276
                                              )
                                              
                                              
                                              350,345Minority
      interests
                                              
                                              
                                              -
                                              
                                              
                                              
                                              92,918Proceeds
      from issuance in private placement
                                              
                                              
                                              -
                                              
                                              
                                              
                                              250,000Due
      to a stockholder
                                              
                                              
                                              11,750
                                              
                                              
                                              
                                              384,581Due
      to directors
                                              
                                              
                                              44,403
                                              
                                              
                                              
                                              156,583Net
      cash provided by (used in) financing activities
                                              
                                              
                                              (220,123
                                              )
                                              
                                              
                                              1,234,427EFFECT
      OF EXCHANGE RATE ON CASH
                                              
                                              
                                              (162,858
                                              )
                                              
                                              
                                              540,066NET INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                                              
                                              
                                              101,652
                                              
                                              
                                              
                                              (68,181
                                              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                                              
                                              
                                              334,410
                                              
                                              
                                              
                                              402,591CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                                              
                                              $
                                              436,062
                                              
                                              
                                              $
                                              334,410SUPPLEMENTAL 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.
  24
 Table of Contents
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1.SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ORGANIZATION
 
 (A)
              Organization
  China
Digital Media Corporation (“CDMC”) (previously HairMax International, Inc.) was
incorporated in the State of Nevada on August 13, 1987.
 
 China
      Digimedia Holdings Limited (“CDHL”) (previously Arcotect Digital
      Technology Limited) was incorporated in Hong Kong on January 5, 2000 as an
      investment holding company.  Through its wholly owned
      subsidiary, Arcotect (Guangzhou) Ltd. (“ AGL”) incorporated in the
      People’s Republic of China (“PRC”) as a wholly owned foreign limited
      liability company on September 24, 2001, CDHL is engaged in software
      development, digital television subscription and application platform
      development (“software development”).  Through its Nanhai Branch
      (“AGL Nanhai Branch”) established in July 8, 2004, AGL is also engaged in
      the business of converting television signals from analogue into digital
      format (“digitalization of television signals”), using digital television
      set-top-box (STB) and smart cards.
  On
December 28, 2004, CDMC entered into a Plan of Exchange (“the Agreement”) with
CDHL pursuant to which:
 
 (i)
              the
      stockholders of CDHL purchased 2,850,000 shares of the Company’s Series A
      Convertible Preferred Stock from the majority stockholders of the Company
      in return for the payment of $400,000 in
cash.
  (ii)
              the
      stockholders of CDHL has agreed to transfer all of CDHL’s common stock to
      the Company for the issue of 20,000,000 shares of restricted common stock
      of the Company.
  The
Agreement was consummated on March 31, 2005 whereupon 1,500,000 shares of
restricted common stock were issued by the Company to the stockholders of CDHL
in lieu of the 20,000,000 shares of restricted common stock contemplated by the
Agreement.  The reduction was consented by the stockholders of CDHL in
light of the significant increase in the price of the shares of common stock of
the Company since the execution of the Agreement.
  Additionally,
it was subsequently discovered that 875,000 shares of the Company’s Series A
Convertible Preferred Stock were previously converted before the execution of
the Agreement.  The stockholders of CDHL accepted the remaining
1,975,000 shares of the Company’s Series A Convertible Preferred Stock and
1,750,000 shares of common stock converted from the 875,000 shares of the
Company’s Series A Convertible Preferred Stock in lieu of the 2,875,000 shares
of the Company’s Series A Convertible Preferred Stock in return for the payment
of $400,000 in cash.
  On
completion of the Agreement in March 2005, the merger of CDMC and CDHL was
treated for accounting purposes as a capital transaction and recapitalization by
CDHL (“the accounting acquirer”) and re-organization by CDMC (“the accounting
acquiree”). The financial statements have been prepared as if the reorganization
had occurred retroactively.
  Accordingly,
the financial statements include the following:
 
 (1)
              The
      balance sheet consists of the net assets of the acquirer at historical
      cost and the net assets of the acquiree at historical
      cost.
 
 
 (2)
              The
      statement of operations includes the operations of the acquirer for the
      periods presented and the operations of the acquiree from the date of the
      merger.
  The
Company changed its name to China Digital Media Corporation in March
2005.
  On June
15, 2005, CDHL entered into a Strategic Alliance Agreement with shareholders of
Guangdong HuaGuang Digimedia Culture Development Limited (“HuaGuang”) whereby
CDHL will hold a 90% variable interest in HuaGuang for the issue of 83,042
shares of CDMC. On January 24, 2007, CDHL exercised its right to hold 100%
interest in HuaGuang.
  On August
25, 2005, CDHL acquired a 100% interest in Guangdong M-Rider Media Company
Limited (“M-Rider”), a limited liability company in the PRC, from the
shareholders of M-Rider for US$132,927 in cash and 29,158 shares of
CDMC.
  On
October 17, 2005, CDHL established a wholly-owned subsidiary, Digimedia Services
(Shenzhen) Limited (“Digimedia Shenzhen”) in the PRC with a registered capital
of $100,000.  The subsidiary has no operations since its
incorporation.
  25
 Table of Contents
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (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 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.
  The
accompanying 2007 consolidated financial statements include the financial
statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai
Branch, Maxcomm, Arable, Arable GZ, M-Rider and Digimedia Shenzhen, its 90%
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.
 
 (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, 2008 and 2007, the Company considers all its accounts receivable to
be collectible after provision for doubtful accounts made in the financial
statements.
  26
 Table of Contents
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (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 $3,952,496 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.  The Company
believes that no impairment of other long-lived assets including property and
equipment exist at December 31, 2008.
 
 (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.
  27
 Table of Contents
  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, 2008 and are carried at fair value of
$2,965,000.
 
 Upon
conversion or exercise of a derivative instrument, the instrument is marked to
fair value at the conversion date and then that fair value is reclassified to
equity.
 
 (N)
              Revenue
      recognition
  Digitalization
of television signals
  The
Company entered into an agreement with Nanhai Network Company (“Network
Company”) to assist its subscribers on the conversion of television signal from
analog into digital by providing STB and smart cards to the subscribers in
Nanhai City on a lease basis. The Company is entitled to receive a portion of
fees, for subscribers’ television subscription and pay-TV services, payable by
Network Company, under the subscription agreement. Revenue is recognized on a
straight line basis in accordance with the terms of the subscription agreement.
The Company also charges installation fees and sells STB and smart cards to new
subscribers. Revenue arising from these services is recognized when the
subscriber is invoiced for the STB and smart cards upon the completion of
installation works.
  In
addition, the Company is entitled to be reimbursed for its operating expenses
from Network Company in accordance to the subscription agreement. Revenue
arising from costs reimbursement is recognized when the amounts are duly agreed
upon between the Company and Network Company.
  Government
grant
  The local
government of Nanhai City also approved a grant of Rmb10,000,000 each year for
five years from  2004 to finance the conversion of television signal
from analog into digital. The grant is recognized as revenue on a straight line
basis.
  As of
December 31, 2008 and 2007, the Company received nil and $1,317,992 of
government grant respectively.
  Advertising
sales
  The
Company acts as an advertising agent for certain television channels by selling
advertising air time spaces and television program backdrops to customers. The
Company's advertising services revenue is derived from billings that are earned
when the advertisements are placed and revenue is recognized as the media
placements appear. Deferred revenues are recognized as a liability when billings
are received in advance of the date before revenues are earned.
  Software
development
  The
Company provides various information technology professional services to its
customers based on a negotiated fixed-price time and materials contract. The
Company recognizes services-based revenue from all of its contracts when the
services have been performed, the customers have approved the completion of the
services and invoices have been issued and collectibility is reasonably
assured.
  28
 Table of Contents
  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, 2008 and 2007 were
$18,469 and $763,231, respectively.
 
 (P)
              Income
      taxes
  The
Company accounts for income taxes under the Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“Statement
109”).  Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
included the enactment date.
 
 (Q)
              Foreign
      currency transactions
  CDMC,
Arable and CDHL maintain their accounting records in their functional currencies
of US$ and Hong Kong Dollars (“HK$”) respectively, whereas AGL, M-Rider,
HuaGuang, and Shenzhen DigiMedia maintain their accounting records in their
functional currency of RMB.
  Foreign
currency transactions during the year are translated to the functional currency
at the approximate rates of exchange on the dates of
transactions.  Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated at the approximate rates of
exchange at that date.  Non-monetary assets and liabilities are
translated at the rates of exchange prevailing at the time the asset or
liability was acquired.  Exchange gains or losses are recorded in the
statement of operations.
  The
financial statements of the subsidiaries (whose functional currency is HK$ or
RMB) are translated into US$ using the closing rate method.  The
balance sheet items are translated into US$ using the exchange rates at the
respective balance sheet dates.  The capital and various reserves are
translated at historical exchange rates prevailing at the time of the
transactions while income and expenses items are translated at the average
exchange rate for the year.  All exchange differences are recorded
within equity. Translation gain for the years ended December 31, 2008 and
2007 were $752,938 and $1,425,817 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 income for the years ended December 31, 2008 and 2007 were
$752,938 and $1,425,817 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.
  29
 Table of Contents
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  (U)
              Reclassifications
  Certain
2007 balances have been reclassified to conform to the 2008
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,
2008.
 
 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.
  In
December 2007, Statement of Financial Accounting Standards No. 141(R),Business Combinations, was
issued. SFAS No. 141R replaces SFAS No. 141,Business
Combinations.  SFAS 141R retains the fundamental requirements
in SFAS 141 that the acquisition method of accounting (which SFAS 141 called
thepurchase
method ) be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions. This replaces SFAS 141’s
cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. SFAS 141R also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values (or other
amounts determined in accordance with SFAS 141R). SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply it before that date. The adoption of
adopting SFAS No. 141R will have an impact on its accounting for business
combination once adopted, but the effect is dependent upon acquisition at that
time.
  30
 Table of Contents
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 
 2.
              INTANGIBLE
      ASSETS
 
 Intangible
assets at of December 31, 2008 and 2007 consisted of the following:
  2008
                  
                  
                  2007Goodwill
      recognized upon acquisitions of subsidiaries
                  
                  $
                  4,320,924
                  
                  
                  $
                  4,320,924Impairment
      loss
                  
                  
                  (3,996,946
                  )
                  
                  
                  --$
                  324,329
                  
                  
                  $
                  4,320,924
  In
      accordance with SFAS No. 142 “Goodwill and other intangible assets,”
      goodwill is not amortized but is tested for impairment. The Company
      performed an assessment on goodwill arising from the M-Rider and
      Maxcomm acquisitions and concluded there was an impairment of $3,996,946
      as to the carrying value of the goodwill in this reporting
      period.
  31
 Table of Contents
  CHINA
DIGITAL MEDIA CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  3.
              BUSINESS
      COMBINATION
  On May
21, 2007, CDHL entered into a Stock Purchase and Transfer Agreement (the
“Purchase Agreement”) with a third party to purchase 100% of Maxcomm Limited, a
corporation incorporated in the British Virgin Islands, which sole asset is an
80% equity interest in Arable Media Limited (“Arable”) in exchange for
10,000,000 shares of restricted common stock of the Company, having a
fair value of $3.76 million, based on the 10 days' volume weighted average
price. After the acquisition, the Company’s interest in Arable was increased
from 20% to 100%. Arable is a software developer specialized in middleware
products and applications for digital TV set-top box and broadcasting
technologies. The acquisition was accounted for under the purchase method of
accounting in accordance with step acquisition rules in Statement of
Financial Accounting Statements No. 141, “Business
Combinations”. Accordingly, the operating results of Maxcomm have been
included in the consolidated statements of operation and comprehensive loss
after the effective date of the acquisition of May 21, 2007.
  The
preliminary allocation of the net liabilities taken over is as
follows:
 
 Cash
      and cash equivalent
                  
                  $
                  61Other
      receivables and prepaid expenses
                  
                  
                  323,452Total
      current assets
                  
                  
                  323,513Property
      and equipment
                  
                  
                  701Capitalized
      software development cost
                  
                  
                  592,756Total
      assets
                  
                  
                  916,970Accounts
      payable and accruals liabilities
                  
                  
                  (1,106,823
                  )Net
      liabilities acquired
                  
                  
                  (189,853
                  )Minority
      interest
                  
                  
                  (2,559
                  )Share
      of pre-acquisition losses prior to becoming a subsidiary
                  
                  
                  27,361$
                  (165,051
                  )Consideration
      for acquisition
                  
                  
                  3,760,000Goodwill
                  
                  $
                  3,925,051
 
 
 Analysis
      of the net inflow of cash and cash equivalents in respect of the business
      combination is as follows:
 
 
 Cash
      and cash equivalents acquired
                  
                  $
                  61Net
      cash inflow
                  
                  $
                  61
 
 
 The
      following table reflects the unaudited pro forma combined results of
      operations for the year ended December 31, 2007, assuming the
      acquisition had occurred at the beginning of
  2007.
 
 
 Revenue
                  
                  $
                  7,480,453Net
      loss
                  
                  $
                  (4,211,390
                  )Net
      loss per share  -  basic and diluted
                  
                  $
                  0.00
  4.
              DISCONTINUED
      OPERATIONS
  On August
17, 2007, the Company disposed its 51% owned subsidiary, Guishi
Digimedia.  The operation of Guishi Digimedia has been reclassified as
discontinued operations in the accompanying consolidated statement of operations
for the year ended December 31, 2007 and is summarized as follows:
  Net
      Sales
                  
                  $
                  650,344Cost
      of Sales
                  
                  
                  (195,362
                  )Gross
      Profit
                  
                  
                  454,982Selling
      and Administrative Expenses
                  
                  
                  (656,916
                  )Other
      Income
                  
                  
                  763Income
      Tax
                  
                  
                  0Net
      Loss
                  
                  
                  (201,171
                  )Share
      of Loss
                  
                  $
                  (102,597
                  )
  32
 Table of Contents
  CHINADIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  5.
              BUSINESS
      DISPOSAL
 
 On August
17, 2007, HuaGuang entered into an Agreement to Transfer the Equity in Guishi
Digimedia  and Guishi Huaguang (the “Transfer of Equity Agreement”)
with a third party to sell its 51% equity interest in Guishi Digimedia and 49%
equity interest in Guishi Huaguang to the third party for a total consideration
of US$ 450,442.  The consideration will be payable in three installments:
(i) 40% of the purchase price was payable within seven business days of
execution of the agreement, (ii) 30% of the purchase price is payable within
five business days of the completion of the equity transfer, and (iii) 30% of
the purchase price is payable by November 30, 2007. If the equity transfer is
not completed for reasons not attributable to either party, either party may
terminate the agreement and the transaction will be reversed in its entirety. On
the completion of the sale, the Company recorded a gain on the disposal of
Guishi Digimedia and Guishi Huaguang of $255,415 and $86,059
respectively.
  The
following table summarizes the assets and liabilities of Guishi Digimedia as of
August 17, 2007 foregone:
 
 Fixed
      Assets
                  
                  $
                  628,560Cash
      and bank balance
                  
                  
                  97,186Accounts
      receivable
                  
                  
                  38,927Other
      receivables
                  
                  
                  85,898Prepaid
      expenses
                  
                  
                  216,080Due
      to stockholders
                  
                  
                  (779,101
                  )Accounts
      payable
                  
                  
                  (77,440
                  )Other
      payables
                  
                  
                  (128,361
                  )Accrued
      liabilities
                  
                  
                  (35,607
                  )Deposit
      received
                  
                  
                  (48,922
                  )Minority
      interest
                  
                  
                  (68,116
                  )(70,896
                  )Gain
      on disposal of interest in subsidiary
                  
                  
                  255,415Consideration
                  
                  $
                  184,519Satisfied
      by:Cash
      consideration received
                  
                  $
                  184,519Net
      cash inflow arising on disposalCash
      consideration received
                  
                  $
                  184,519Cash
      and bank balance disposed of
                  
                  
                  (97,186
                  )$
                  87,333
  6.
              INVESTMENTS
      IN AFFILIATES
  The
Company’s effective interest of 49% in Guishi Huaguang is accounted for using
the equity method of accounting and is stated at cost plus equity in
undistributed earnings or losses since acquisition. The Company’s share of the
net loss for the year ended December, 2007 was $14,391. The Company disposed its
49% equity interest in Guishi Huaguang on August 17, 2007.
  A summary
of the unaudited condensed financial statements of the affiliate as of August
17, 2007 is as follows:
 
 Current
      assets
                  
                  $
                  520,779Non-current
      assets
                  
                  
                  225,746Total
      assets
                  
                  $
                  746,525Current
      liabilities
                  
                  $
                  379,454Stockholders’
      equity
                  
                  
                  367,071Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  746,525Revenues
                  
                  $
                  -Gross
      Profit
                  
                  $
                  -Net
      loss
                  
                  $
                  29,669
  33
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
   The
Company’s share of the loss of this year up to August 17, 2007 is as
follows:
 
 Company
      share at 49%
                  
                  $
                  14,391Equity
      in loss of affiliate
                  
                  $
                  14,391
  7.
              ACCOUNTS
      RECEIVABLE, NET
  Accounts
receivable at December 31, 2008 and 2007 consisted of the
following:
  2008
                            
                            
                            2007Accounts
      receivable, current portion
                            
                            $
                            1,078,228
                            
                            
                            $
                            1,851,193Amount
      recoverable beyond 12 months
                              classified
      as non-current assets
                            
                            
                            7,970,844
                            
                            
                            
                            7,781,997Less:
      allowance for doubtful accounts
                            
                            
                            (7,970,844
                            )
                            
                            
                            -Amount
      recoverable beyond 12 months
                              classified
      as non-current assets (net)
                            
                            
                            -
                            
                            
                            
                            7,781,997
  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.  Under the current global unstable
financial and economic environment, the Company considered the collectability of
the non-current portion uncertain.  A full provision is made for such
amount.
 
 As of
December 31, 2008 and 2007, the Company considered all accounts receivable
collectable after $7,847,084 and $1,215,704 were provided for doubtful accounts
for the years ended December 31, 2008 and 2007, respectively.
  8.
              INVENTORIES,
      NET
 
 Inventories
at December 31, 2008 and 2007 consisted of the following:
  2008
                  
                  
                  2007Finished
      goods
                  
                  $
                  1,247,781
                  
                  
                  $
                  781,561Less:
      provision of obsolescence
                  
                  
                  --
                  
                  
                  
                  --Inventories,
      net
                  
                  $
                  1,247,781
                  
                  
                  $
                  781,561
  For both
of the years ended December 31, 2008 and 2007, the Company has not recorded a
provision for obsolete inventories.
  34
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  9.
              OTHER
      RECEIVABLES AND PREPAID EXPENSES
  Other
receivables and prepaid expenses at December 31, 2008 and 2007 consisted of the
following:
  2008
                  
                  
                  2007Deposit
      paid for the sole advertising agency
                  
                  $
                  46,588
                  
                  
                  $
                  134,350Proceeds
      from the disposal of subsidiary and affiliate
                  
                  
                  -
                  
                  
                  
                  138,946Advances
      to staff
                  
                  
                  52,134
                  
                  
                  
                  45,528Prepayments
                  
                  
                  57,945
                  
                  
                  
                  145,148Utility
      deposits
                  
                  
                  37,719
                  
                  
                  
                  36,257$
                  194,386
                  
                  
                  $
                  500,229
 
  10.
              INVESTMENTS
      IN TELEVISION SERIES, NET
  The
following is a summary of investments in television series related to the
Company’s participations in the production of two television series through
HuaGuang, a 100% held VIE:
  2008
                  
                  
                  2007Television
      participation costs
                  
                  $
                  -
                  
                  
                  $
                  223,421Less:
      impairment loss
                  
                  
                  -
                  
                  
                  
                  223,421Television
      participation costs, net
                  
                  $
                  -
                  
                  
                  $
                  -
  a)
              During
      the year ended December 31, 2005, HuaGuang, a VIE, entered into two
      investment contracts to participate in the production of two television
      series. The Company’s participation is 20% and 34% of the total production
      costs. These investments, for which the Company does not have significant
      influence, are accounted for under the cost method of
      accounting.
 
 
 b)
              During
      the year ended December 31, 2007, the Company disposed of its 34% interest
      in a television series to the original producer who returned 335,308
      shares of common stock previously issued to the producer as consideration.
      This disposal resulted in a loss of
$261,187.
 
 
 c)
              Impairment
      loss of $0 and $223,421 was recorded for the years ended December 31, 2008
      and 2007 respectively.
 
 11.   PROPERTY
AND EQUIPMENT, NET
  The
following is a summary of property and equipment at December 31:
  2008
                  
                  
                  2007STB
      and smart cards provided to subscribers
                  
                  $
                  25,607,750
                  
                  
                  $
                  20,257,843Motor
      vehicles
                  
                  
                  118,670
                  
                  
                  
                  111,353Furniture
      and office equipment
                  
                  
                  1,050,783
                  
                  
                  
                  736,10226,777,203
                  
                  
                  
                  21,105,298Less:
      accumulated depreciation
                  
                  
                  12,574,962
                  
                  
                  
                  7,912,232Property
      and equipment, net
                  
                  $
                  14,202,241
                  
                  
                  $
                  13,193,066
  Depreciation
expense for the years ended December 31, 2008 and 2007 were $4,035,455 and
$3,123,388 respectively.
  35
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  12. OTHER ASSETS
  Other
assets represent deferred finance costs relate to commission, legal and
financial advisory fees directly attributable to the issuance of the convertible
debenture by the Company. Deferred finance costs are amortized over the life of
the debenture of 18 months from November 2006. In 2008, costs amortized as
expenses were $752,369.
 
 13.
              CONVERTIBLE
      DEBENTURES
 
 On
November 17, 2006, the Company completed a private equity financing with four
accredited investors for $3,000,000, $1,000,000 of which was rolled over from
the investor of the sale completed on July 7, 2006.  The investor’s
previously purchased securities were returned to the Company in partial exchange
for the units issued on this private equity financing.  Upon the
closing of this private equity financing, the investor waived all rights
associated with the previously purchased securities and waived all interest
payments accrued on the previously purchased securities. Furthermore, on
December 13, 2006, the Company has completed another private equity financing
with an accredited investor for $100,000.
  As a
result of the above, during 2008, the Company has the following convertible
debentures outstanding;
  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.
 
 On
December 08, 2008, the Company's Board of Directors entered into an extension
agreement (the “Extension Agreement”) with one of the debenture holders in
connection with the convertible debenture for the amount of $2,015,000 because
the Company did not have sufficient funds to repay the debenture due. The
Extension Agreement was filed with the Form 8-K on December 12,
2008. During the extension period, a principal amount of $100,750 is
due on March 31, 2009, and the balance of $1,914,250 is due on June 30,
2010. 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
debenture holder currently holds three warrants, as adjusted, consisting of (i)
a Class A warrant to purchase 4,777,773 commonn shares at an exercise price of
$.80 per share, (ii) a Class B warrant to purchase 4,777,773 common
shares at an exercise price of $1.20 per share, and (iii) a Class C warrant
to purchase 2,388,887 common shares at an exercise price of $2.25 per
share. Its convension price was also reduced to $.25, all pursuant to the
Extension Agreement.
    The
following is a summary of the principal portion of the convertible
debentures outstanding as of December 31, 2008 and 2007:
  2008
                  
                  
                  2007$2,150,000
      Convertible Debentures, net of $135,000 as of December 31, 2008 and 2007
      conversions and unamortized discount of $0 and $376,350 as of December 31,
      2008 and 2007 respectively at 10% per annuum for the period from May 18,
      2008 to December 31, 2008, at 13% interest per annum for the year
      ended 2009 due quarterly and 14% interest per annum due June
      2010
                  
                  $
                  2,015,000
                  
                  
                  $
                  1,503,650$500,000 Convertible
      Debentures, net of unamortized discount of $0 and $126,852 as of December
      31, 2008 and 2007 respectively at 4% interest per annum due May
      2008
                  
                  
                  500,000
                  
                  
                  
                  373,148$200,000 Convertible
      Debentures, net of unamortized discount of $0 and $50,741 as of December
      31, 2008 and 2007 respectively at 4% interest per annum due May
      2008
                  
                  
                  200,000
                  
                  
                  
                  149,259$150,000 Convertible
      Debentures, net of unamortized discount of $0 and $38,056 as of
      December 31, 2008 and 2007 respectively at 4% interest per annum due
      May 2008
                  
                  
                  150,000
                  
                  
                  
                  111,944$100,000 Convertible
      Debentures, net of unamortized discount of $0 and $25,370 as of
      December 31, 2008 and 2007 respectively at 4% interest per annum due
      June 2008
                  
                  
                  100,000
                  
                  
                  
                  74,6302,965,000
                  
                  
                  
                  2,212,631Less:
      current maturities
                  
                  
                  (950,000
                  )
                  
                  
                  (2,212,631
                  )Long
      term portion
                  
                  $
                  2,015,000
                  
                  
                  $
                  -
  36
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  14.
              ACCOUNTS
      PAYABLE
  Accounts
payable at December 31, 2008 and 2007 consists of the following.
  2008
                  
                  
                  2007Accounts
      payable
                  
                  $
                  5,511,848
                  
                  
                  $
                  5,728,828Less:
      current portion
                  
                  
                  5,178,216
                  
                  
                  
                  5,109,728Long
      term liabilities payable from January to December 2010
                  
                  $
                  333,632
                  
                  
                  $
                  619,100
 
 During
2007, the Company entered into an agreement with one of its major suppliers to
extended the payment of its purchases over 24 equal monthly installments. The
amounts owed to this supplier payable beyond one year as of December 31,
2008 are classified as long-term liabilities.
 
 15.
              OTHER
      PAYABLES AND ACCRUED LIABILITIES
 
 Other
payables and accrued liabilities at December 31, 2008 and 2007 consist of the
following:
  2008
                  
                  
                  2007Other
      payables
                  
                  $
                  409,103
                  
                  
                  $
                  320,469Deposits
      received from customers
                  
                  
                  133,072
                  
                  
                  
                  89,030Accrued
      liabilities
                  
                  
                  381,805
                  
                  
                  
                  298,433$
                  923,980
                  
                  
                  $
                  707,932
  16.
              INCOME
      TAX
  a)
              CDMC
      was incorporated in the United States and has incurred net operating loss
      for income tax purposes for 2008 and
2007.
  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 2008 and 2007.
  AGL,
M-Rider, HuaGuang, Shenzhen DigiMedia and Arable GZ were incorporated in the PRC
and are subject to PRC income tax which is computed according to the relevant
laws and regulations in the PRC. The applicable tax rate has been 25%. No tax
benefit is expected from the tax credits in the future. The income tax expenses
for 2008 and 2007 are summarized as follows:
  PRC
      Income Tax
                  
                  2008
                  
                  
                  2007Current
                  
                  $
                  --
                  
                  
                  $
                  --Deferred
                  
                  
                  --
                  
                  
                  
                  (119,362
                  )$
                  --
                  
                  
                  $
                  (119,362
                  )
                    )
  Deferred
tax liabilities result from temporary differences for revenues earned but not
yet taxable under PRC tax regulations.
  b)
              The
      Company’s deferred tax asset at December 31, 2008 and 2007 consists of net
      operating losses carry forwards calculated using statutory effective tax
      rates. Due to its history of losses, the Company believes that sufficient
      objective, positive evidence currently exists to conclude that
      recoverability of its net deferred tax assets is unlikely rather than not.
      Consequently, the Company has provided a valuation allowance covering 100%
      of its net deferred tax assets with the exception of those of
      AGL.
  As of
December 31, 2008, CDMC had loss carried forward of approximately $5,229,793 for
U.S. income tax purposes available for offset against future taxable U.S. income
expiring in 2028.
  As of
December 31, 2008, CDHL has Hong Kong tax loss carry forwards of approximately
$310,743. Currently, the Hong Kong tax losses can be carried forward
indefinitely.
 
 As of
December 31, 2008, Arable has Hong Kong tax loss carry forwards of approximately
$767,372. Currently, the Hong Kong tax losses can be carried forward
indefinitely.
  As of
December 31, 2008, all the PRC companies have tax loss carry forwards of
approximately $1,543,735 which is not expected to be utilized in near
future.
  37
 Table of Contents
  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, 2008 and 2007 is as
      follows:
  2008
                  
                  
                  2007CDMCIncome
      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
                  %
                  
                  
                  17.5
                  %Valuation
      allowance
                  
                  
                  (16.5
                  %)
                  
                  
                  (17.5
                  %)ArableIncome
      tax computed at applicable tax rate
                  
                  
                  16.5
                  %
                  
                  
                  17.5
                  %Valuation
      allowance
                  
                  
                  (16.5
                  %)
                  
                  
                  (17.5
                  %)AGLIncome
      tax computed at applicable tax rate
                  
                  
                  0
                  %
                  
                  
                  33
                  %Valuation
      allowance
                  
                  
                  0
                  %
                  
                  
                  (33
                  %)M-RiderIncome
      tax computed at applicable tax rate
                  
                  
                  25
                  %
                  
                  
                  33
                  %Valuation
      allowance
                  
                  
                  (25
                  %)
                  
                  
                  (33
                  %)HuaGuangIncome
      tax computed at applicable tax rate
                  
                  
                  25
                  %
                  
                  
                  33
                  %Valuation
      allowance
                  
                  
                  (25
                  %)
                  
                  
                  (33
                  %)
  Under the
current government policy, any company certified as the Software Enterprise in
China is fully exempt from corporate income tax for two years, and 50% exempt
for the following three years starting from its first profitable
year.  Since AGL has been certified as Software Enterprise in China,
its corporate income tax is exempt for the year ended 2008 and 2009 as it had
taxable profit in 2008.
 
 17.
              NET
      LOSS PER SHARE
 
 Loss per
share on a diluted basis were $0.31 and $0.12 for the fiscal years ended
December 31, 2008 and 2007 respectively.  As of December 31, 2008, the
Company has outstanding:
 
 -  42,706,363
shares of common stock;
 -  1,875,000
shares of preferred stock;
 -  10,615,553
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.
  38
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  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,
2008 and 2007 were calculated as follows:
  2008
                        
                        
                        2007Loss
      from continuing operations
                        
                        $
                        (13,375,575
                        )
                        
                        $
                        (4,422,018
                        )Gain
      from discountinued operations
                        
                        
                        -
                        
                        
                        
                        327,083Net
      Loss
                        
                        
                        (13,375,575
                        )
                        
                        
                        (4,094,935
                        )Basic - 2 classes methodLoss
      available to common stockholders
                        
                        $
                        (13,375,575
                        )
                        
                        $
                        (4,094,935
                        )Weighted-average
      common stock outstanding
                        
                        
                        42,595,450
                        
                        
                        
                        37,725,894Basic
      earnings per share - Common Stock-From
      continuing operations
                        
                        
                        (0.31
                        )
                        
                        
                        (0.12
                        )-From
      discontinued operations
                        
                        
                        0.00
                        
                        
                        
                        0.01DilutedLoss
      available to common stockholders
                        
                        $
                        (13,375,575
                        )
                        
                        $
                        (4,094,935
                        )Diluted
      weighted-average common stock outstanding
                        
                        
                        42,595,450
                        
                        
                        
                        37,725,894Diluted
      earnings per share-From
      continuing operations
                        
                        
                        (0.31
                        )
                        
                        
                        (0.12
                        )-From
      discontinuing operations
                        
                        
                        0.00
                        
                        
                        
                        0.01
  Warrants
to purchase 6,888,882 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, 2008 but were not
included in the computation of diluted earnings per share because the warrants’
exercise price was greater than the market price of the common shares. The
warrants, which expire on November, 2012, were still outstanding on December 31,
2008.
  39
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  18.
              SEGMENTS
 
 The
Company operates in five reportable segments; digitalization of television
signals, software development, television advertising, investments in television
series and other. The accounting policies of the segments are the same as
described in the summary of significant accounting policies.  The
Company evaluates segment performance based on income from
operations.  All inter-company transactions between segments have been
eliminated.  As a result, the components of operating income for one
segment may not be comparable to another segment.  The following is a
summary of the Company’s segment information for the years ended December 31,
2008 and 2007:
  Digitalization
                      
                      
                      
                      
                      
                      
                      
                      
                      Investmentsof
      Television
                      
                      
                      Television
                      
                      
                      Software
                      
                      
                      in
      TelevisionSignals
                      
                      
                      Advertising
                      
                      
                      Development
                      
                      
                      Series
                      
                      
                      Total2008Revenues
                      
                      $
                      6,855,420
                      
                      
                      $
                      392,296
                      
                      
                      $
                      42,628
                      
                      
                      $
                      -
                      
                      
                      $
                      7,290,344Gross
      profit
                      
                      
                      2,011,087
                      
                      
                      
                      120,878
                      
                      
                      
                      42,628
                      
                      
                      
                      -
                      
                      
                      
                      2,174,593Net
      Income (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
                      
                      
                      $
                      4,035,4552007Revenues
                      
                      $
                      7,032,463
                      
                      
                      $
                      384,423
                      
                      
                      $
                      63,567
                      
                      
                      $
                      -
                      
                      
                      $
                      7,480,453Gross
      profit (loss)
                      
                      
                      3,448,910
                      
                      
                      
                      (43,811
                      )
                      
                      
                      63,567
                      
                      
                      
                      (790,515
                      )
                      
                      
                      2,678,151Net
      Income (loss)
                      
                      
                      2,077,103
                      
                      
                      
                      (641,986
                      )
                      
                      
                      (1,047,808
                      )
                      
                      
                      (1,805,462
                      )
                      
                      
                      (1,418,153
                      )Total
      assets
                      
                      
                      23,771,154
                      
                      
                      
                      682,482
                      
                      
                      
                      4,452,575
                      
                      
                      
                      151,152
                      
                      
                      
                      29,057,363Capital
      expenditure
                      
                      
                      3,838,186
                      
                      
                      
                      (572,670
                      )
                      
                      
                      39,873
                      
                      
                      
                      22,123
                      
                      
                      
                      3,327,512Depreciation
      and amortization
                      
                      $
                      3,066,146
                      
                      
                      $
                      10,154
                      
                      
                      $
                      8,801
                      
                      
                      $
                      38,287
                      
                      
                      $
                      3,123,388
 A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.
  2008
                    
                    
                    2007Total
      net loss for reportable segments
                    
                    $
                    (8,079,210
                    )
                    
                    $
                    (1,418,153
                    )Unallocated
      amounts relating to corporate operationsImpairment
      of goodwill
                    
                    
                    3,996,946
                    
                    
                    
                    -Interest
      expenses
                    
                    
                    277,305
                    
                    
                    
                    125,049Amortization
      of convertible debt discount
                    
                    
                    752,369
                    
                    
                    
                    2,100,779Interest
      paid to related companies and directors
                    
                    
                    30,091
                    
                    
                    
                    17,400Gain
      from discontinued operations
                    
                    
                    -
                    
                    
                    
                    (355,865
                    )Administration
      expenses
                    
                    
                    190,289
                    
                    
                    
                    542,989Professional
      fees
                    
                    
                    32,578
                    
                    
                    
                    240,346Others
                    
                    
                    16,787
                    
                    
                    
                    6,084Total
      net loss
                    
                    $
                    (13,375,575
                    )
                    
                    $
                    (4,094,935
                    )
  19.
              STOCKHOLDERS’
      EQUITY
  (A)  Stock
issuances
  1.
              Stock
      issued for debenture interest
payment
  During
the year 2008, the Company issued 589,306 shares of its restricted common stock
with a fair value of $147,382 to third parties for paying debenture
interest in lieu of cash.
  (2)
                Stock
      issued for acquisition
  During
the year 2008, the Company issued 10,000,000 shares of its restricted common
stock with a fair value of $3,760,000 to a third party to acquire 100% equity
interest in Maxcomm.
  (3)
                Stock
      issued for converted debenture
  During
the year 2008, the Company issued 300,000 shares of common stock to a debenture
holder who converted $135,000 of the debenture.
  (4)
                Stock
      issued for private placement
  During
the year 2008, the Company issued 550,000 shares of its restricted common stock
to a third party with a fair value of $250,000 for private
placement.
 40
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
 (B)  Appropriated
retained earnings
  The
Company’s PRC subsidiaries are required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on the after-tax net income determined in
accordance with the laws and regulations of the PRC.  Prior to January
1, 2006 the appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the laws and
regulations of the PRC until the reserve is equal to 50% of the entities’
registered capital.  Appropriations to the statutory public welfare
fund are at 5% to 10% of the after tax net income determined by the Board of
Directors.  Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 percent of net income after tax
per annum, such contributions not to exceed 50 percent of the respective
companies’ registered capital.
  The
statutory reserve funds are restricted for use to set off against prior period
losses, expansion of production and operation or for the increase in the
registered capital of the Company. The statutory public welfare fund is
restricted for use in capital expenditures for the collective welfare of
employees. These reserves are not transferable to the Company in the form of
cash dividends, loans or advances. These reserves are therefore not available
for distribution except in liquidation.
  During
2008 and 2007, the Company appropriated $328,113 and $564,412 respectively to
the reserves funds based on its net income in accordance with the laws and
regulations of the PRC.
  (C)  Contributed
capital
  During
2008, no restricted capital was being contributed.
  20.
              RELATED
      PARTY TRANSACTIONS
 
 As of
December 31, 2008 and 2007, the Company owed to two directors $285,642 and
$241,239 respectively for short-term advances. Interest is charged at 6% per
annum on the amount owed.
  As of
December 31, 2008 and 2007, the Company owed to related companies $454,555 and
$730,831 respectively for short-term unsecured advances made. Interest is
charged at 6% per annum on the amount owed.
  As of
December 31, 2008 and 2007, the Company owed a stockholder $396,331 and
$384,581, respectively, for short-term unsecured advances made. Interest is
charged at 6% per annum on the amount owed.
  21.
              COMMITMENTS
 
 
 (A)
              Employee
      benefits
  The full
time employees of the Company in China are entitled to employee benefits
including medical care, welfare subsidies, unemployment insurance and pension
benefits through a Chinese government mandated multi-employer defined
contribution plan. The Company is required to accrue for those benefits based on
certain percentages of the employees’ salaries and make contributions to the
plans out of the amounts accrued for medical and pension benefits. The total
provision and contributions made for such employee benefits was $90,746 and
$93,011 for the years ended December 31, 2008 and 2007, 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 $4,680 and $6,588 for the years
      ended December 31, 2008 and 2007 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 five operating leases; two
leases expire on March 31, 2009 and July 20, 2011, and three leases expire on
January 8, 2014 for total monthly rentals of $9,714. The Company also leases
spaces for staff quarters from third parties under nine operating leases which
expire from January 1, 2009 to December 31, 2011 with total monthly rentals of
$2,057.  Accordingly, for the years ended December 31, 2008 and
2007, the Company recognized rental expense for office spaces in the amount of
$139,367 and $129,407, respectively
  As of
December 31, 2008, the Company has outstanding commitments with respect to the
above non-cancelable operating leases, which are due as follows:
  2009
                  
                  $
                  101,4682010
                  
                  
                  86,3792011
                  
                  
                  88,6712012
                  
                  
                  86,039Thereafter
                  
                  
                  90,341$
                  452,899
  41
 Table of Contents
  CHINA DIGITAL MEDIA
CORPORATION
 AND
SUBSIDIARIES
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (continued)
  22.
              CONTINGENCIES
  The
Company accounts for loss contingencies in accordance with SFAS 5 “Accounting
for Loss Contingencies”, and other related guidance.  Set forth below
is a description of certain loss contingencies as of December 31, 2005 and
management’s opinion as to the likelihood of loss in respect of each loss
contingency.
  On May
24, 2005, Ziegler, Ziegler & Associates LLP and Scott Ziegler filed a
Complaint against the Company in the United States District Court for the
Southern District of New York for using their internet domain name to distribute
the Company’s promotional information over the internet.  The
Plaintiffs seek several types of damages in an amount not less than
$1,250,000.  The Company’s counsel was instructed to vigorously defend
the action as the emails in question were distributed by a party not hired nor
associated with the Company.  Accordingly, no provision for this
contingency has been made as of December 31, 2008 due to the remote chance of an
unfavorable outcome.
  23.
              CONCENTRATIONS
      AND RISKS
 
 During
2008 and 2007, 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, 2008 and 2007 are as follows:
  For
      the year ended
                  
                  Supplier
      A
                  
                  
                  Supplier
      BDecember
      31, 2008
                  
                  
                  88
                  %
                  
                  
                  11
                  %December
      31, 2007
                  
                  
                  72
                  %
                  
                  
                  15
                  %
  At
December 31, 2008 and 2007, accounts payable to those two suppliers totaled
$5,008,624 and $4,951,855 respectively.
  24.
              GOING
      CONCERN
  As
reflected in the accompanying consolidated financial statements, the Company has
an accumulated deficit of $14,346,279 at December 31, 2008 that includes a net
loss of $13,375,575 for the year ended December 31, 2008.  The
Company’s total current liabilities exceed its total current assets by
$7,805,558.  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.
  42
 Table of Contents
 
 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 and Chief Financial
Officer ("CFO"), Ng Chi Shing ("CEO & CFO"). In this section, the Company
presents the conclusions of our CEO & CFO based on and as of the date of the
Evaluation, (i) with respect to the effectiveness of our Disclosure Controls,
and (ii) with respect to any change in our Internal Control that occurred during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect our Internal Control.
 
 CEO & CFO
Certifications.  Attached to this annual report, as Exhibits
31.1 and 31.2, are certain certifications of the CEO and CFO, which are required
in accordance with the Exchange Act and the Commission's rules implementing such
section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This section of the
annual report contains the information concerning the Evaluation referred to in
the Rule 13a-14(a)/15d–14(a) Certifications. This information should be read in
conjunction with the Rule 13a-14(a)/15d–14(a) Certifications for a more complete
understanding of the topic presented.
 
 Disclosure Controls and Internal
Control. Disclosure Controls are procedures designed with the objective
of ensuring that information required to be disclosed in our reports filed with
the Commission under the Exchange Act, such as this annual report, is recorded,
processed, summarized and reported within the time period specified in the
Commission's rules and forms. Disclosure Controls are also designed with the
objective of ensuring that material information relating to us is made known to
the CEO & CFO by others, particularly during the period in which the
applicable report is being prepared.  Internal Control, on the
other hand, are procedures which are designed with the objective of providing
reasonable assurance that (i) our transactions are properly authorized, (ii) the
Company's assets are safeguarded against unauthorized or improper use, and (iii)
our transactions are properly recorded and reported, all to permit the
preparation of complete and accurate financial statements in conformity with
accounting principals generally accepted in the United States.
 
 Limitations on the Effectiveness of Controls. Our
management does not expect that our Disclosure Controls or our Internal Control
will prevent all error and all fraud. A control system, no matter how well
developed and operated, can provide only reasonable, but not absolute assurance
that the objectives of the control system are met.  Further, the
design of the control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
so of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of a system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated objectives under all
potential future conditions. Over time, control may become inadequate because of
changes in conditions, or because the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
 
 Conclusions.  Based
upon the Evaluation, our disclosure controls and procedures are designed to
provide reasonable assurance of achieving our objectives. Our CEO & CFO have
concluded that our disclosure controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to the
Company is made known to management, including the CEO and CFO. Additionally,
there has been no change in our Internal Controls that occurred during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
affect, our Internal Controls.
 
 Management’s
Annual Report on Internal Control Over Financial Reporting
 
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, in accordance with Rules 13a-15(f)
and 15d-15(f) of the Exchange Act. Under the supervision and with the
participation of the Company’s management, including the Certifying Officers, we
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
 
 The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America.
The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Based on
its assessment using these criteria, the Company’s management concluded that the
Company maintained effective internal control over financial reporting as of
December 31, 2008.
 
 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.
  43
 Table of Contents
  PART
III
  ITEM
10. Directors, Executive Officers and Corporate Governance
 
 Identification
of Directors
 
 The
following information, as of December 31, 2008 is furnished with respect to each
Director and Executive Officer:
 
 Name
      of Director
                  
                  Age
                  
                  Date
      of Service
                  Position
      with CompanyNg
      Chi Shing
                  
                  
                  44
                  
                  2004
                  President,
      Chief Executive Officer, DirectorChen
      Lu
                  
                  
                  39
                  
                  2005
                  DirectorChen
      Juan
                  
                  
                  32
                  
                  2005
                  Director
  All
Directors serve for one-year terms.
 
 All
officers serve at the pleasure of the Board.
 
 There are
no arrangements or understandings pursuant to which any of them were elected as
officers.
 
 Mr. Ng Chi Shing is our President
and Chief Executive Officer and Director and Chief Financial
Officer.  Mr. Ng is founder and CEO of Arcotect Digital Technology
Limited.  Arcotect Digital Technology Limited was founded to
capitalize on the numerous opportunities in China arising from the digitization
of cable television services and the reform of state owned cable television
enterprises.  Mr. Ng has extensive experience in Cable TV operations,
Internet and information technology industry.  Over his 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 a teacher of computer related courses
in Guangdong Dance College since 1999.
 
 There
have been no events under any bankruptcy act, any criminal proceedings and any
judgments or injunctions material to the evaluation of the ability and integrity
of any director or executive officer during the past 5 years.
 
 Audit
Committee Financial Expert
 
 The
Company does not have a separately designated standing audit committee. The
entire Board of Directors acts as an audit committee for the purpose of
overseeing the accounting and financial reporting processes, and our audits of
the financial statements. The Commission has adopted regulations relating to
audit committee composition and functions, including disclosure requirements
relating to the presence of an "audit committee financial expert" serving on its
audit committee. In connection with these new requirements, our Board of
Directors examined the Commission's definition of "audit committee financial
expert" and concluded that the Company does not currently have a person that
qualifies as such an expert. Presently, there are only three directors serving
on our Board, and the Company is not in a position at this time to attract,
retain and compensate additional directors in order to acquire a director who
qualifies as an "audit committee financial expert". While neither of our current
directors meets the qualifications of an "audit committee financial expert",
each of our directors, by virtue of his past employment experience, has
considerable knowledge of financial statements, finance, and accounting, and has
significant employment experience involving financial oversight
responsibilities. Accordingly, the Company believes that our current directors
capably fulfill the duties and responsibilities of an audit committee in the
absence of such an expert.
 
 Code
of Conduct
 
 The
Company has adopted a code of conduct that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions.  Such code of
ethics will be provided to any person without charge, upon request, by sending
such request to us at our principal office. The Company publishes the code in
the Company’s website at www.chinadigimedia.com.
  44
 Table of Contents
  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 2008. The
Company believes that all of these filing requirements are satisfied by our
executive officers, directors and by the beneficial owners of more than 10% of
our common stock. In making this statement, the Company has relied solely on
copies of any reporting forms received by it, and upon any written
representations received from reporting persons that no Form 5 (Annual Statement
of Changes in Beneficial Ownership) was required to be filed under applicable
rules of the Commission.
 
 Changes
in Nomination Procedures
 
 There
have been no material changes to the procedures by which security holders may
recommend nominees for the Company’s Board since the Company’s filing in which
we discussed such procedures.
 
 ITEM
11. Executive Compensation
 
 During
the fiscal years ended December 31, 2007 and 2008, 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
                  2008
                  
                  
                  38,478
                  (1)
                  
                  
                  
                  
                  38,4782007
                  
                  
                  38,475
                  (1)
                  
                  
                  
                  
                  38,475
 
 (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
2008 to any employees.
 
 Discussion
of Employment Agreements and Termination or Change of Control
Arrangements
 
 Effective
January 1, 2006, Mr. Daniel Ng and our subsidiary, China Digimedia Holdings
Limited (or CDHL), entered into an employment agreement pursuant to which Mr. Ng
agreed to serve as Chief Executive Director of CDHL.  The employment
agreement provides for a base salary of HK $25,000 per month (or approximately
US $3,205) and a discretionary year-end bonus.  The employment
agreement may be terminated by CDHL on three months’ written notice, provided
that CDHL reserves the right to terminate the agreement at any time without
prior notice with cause.  The employment agreement also provides that
during the term of the employment and for one year thereafter, the Mr. Ng shall
not compete in any other business or services similar to that of
CDHL.
 
 Effective
January 1, 2006, we entered into an employment agreement with Mr. Ng pursuant to
which Mr. Ng agreed to serve as our Chief Executive Officer for an initial term
ending December 31, 2008, which may be renewed for additional one-year
periods.  The agreement provides for an annual salary of $12 in 2006,
$14.40 in 2007, and $17.28 in 2008, provided that if our revenues increase by
50% or more in 2006 as compared to 2005.  Commencing in 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 2008.  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.
  45
 Table of Contents
  Director
Compensation
 
 Directors
who are also employees do not receive compensation for their services as
directors.
 
 Director
Compensation Table – 2008
 
 Name
                  
                  Fees
      Earned or Paid in Cash
                    ($)
                  
                  
                  Total
                    ($)Chen
      Lu
                  
                  
                  25,862
                  
                  
                  
                  25,862Chen
      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, 2008, 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%Common
      Stock, $.001 Par Value
                
                Vision
      Opportunity Master Fund, Ltd.
                  20
      West 55th Street
                  5th
      Floor
                  New
      York, Ny 10019
                
                4,227,929
      (C)
                
                Direct
                
                9.9%
      (C)Preferred
      Stock, $.001 Par Value
                  (D)
                
                Ng
      Chi Shing
                  Ste
      B 27/Fk Wah Ctr 191 Java Road, North Point,
                  Hong
      Kong
                
                1,403,100
      (A)
                
                Direct
                
                74.8%Preferred
      Stock, $.001 Par Value
                  (D)
                
                Chen
      Lu
                  2505-06
      25/F Stelux House
                  698
      Prince Edward Road E.
                  Hong
      Kong
                
                471,900
      (A)
                
                Direct
                
                25.2%
  (A)           On
March 21, 2007, Modern Delta transferred 23,250,000 shares of common stock and
1,875,000 shares of Series A Convertible Preferred Stock of the Company owned by
Modern Delta Limited to Daniel Ng and Chen Lu.  After completion of
the restructuring, Daniel Ng owned 17,398,440 shares of common stock and
1,403,100 shares of Series A Convertible Preferred Stock of the Company, and
Chen Lu owned 5,851,560 shares of common stock and 471,900 shares of Series A
Convertible Preferred Stock of the Company
  (B)           
CDHL acquired 100% shares in Maxcomm from Lippo Star Investment Limited (“Lippo
Star”) at a consideration of $3,760,000 on May 21, 2007.   The
consideration was fully settled by issuing 10,000,000 shares of CDGT common
stock to Lippo Star, of which 8,000,000 shares was issued to Mr. Tam as a
shareholder of Lippo Star.
  (C)           Based
on the Schedule 13G/A filed February 12, 2009, Vision held 828,596
shares. Vision is eligible to purchase an aggregate of 20,004,431 shares of
our common stock pursuant to the exercise of warrants and the conversion of
debentures. However, pursuant to the terms of the transaction documents relating
to the purchase of the foregoing securities, Vision may not acquire shares of
common stock upon exercise of any such warrants or conversion of the debenture
to the extent that, upon exercise or conversion, respectively, the number of
shares of common stock beneficially owned by Vision and its affiliates would
exceed 9.9% of the issued and outstanding shares of our common
stock.  The amount listed assumes the conversion or exercise of the
debenture or warrants, as applicable, in an amount up to 9.9% of our outstanding
common stock after such conversion or exercise.  Vision Capital
Advisors, LLC, a Delaware limited liability company (formerly known as Vision
Opportunity Capital Management, LLC) (the "Investment Manager"),  and
Adam Benowitz, in his capacity as managing member of the Investment Manager, may
be deemed to share dispositive and voting power over the shares held by the
Vision. Mr. Benowitz and the Investment Manager disclaims beneficial ownership
of the shares disclosed herein.
  (D)           Each
share of preferred stock is convertible into five shares of common
stock.
  46
 Table of Contents
  Security
Ownership of Management
 
 The
following table sets forth the number of shares owned beneficially on December
31, 2008, 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, 2008, 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, 2008. These shares are owned by our majority
shareholders.
 
 The
Company has the following amount due to a major shareholder and two related
companies as at December 31, 2008.
 
 Shareholder
 Amount
due to Tam Wei Keung: $396,331
 
 Related
companies
 Amount
due to Arcotect HK Limited: $231,787
 Amount
due to Manta Finance Limited: $222,768
 
 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 2008 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.
  47
 Table of Contents
 
 Item
14.  Principal Accountant Fees and Services
 
 Fees
Billed For Audit and Non-Audit Services
 
 The
following table represents the aggregate fees billed for professional audit
services rendered to the independent auditor, Jimmy C.H. Cheung and Co.,
Certified Public Accountants (“Jimmy”), for our audit of the annual financial
statements for the years ended December 31, 2008 and 2007.  Audit fees
and other fees of auditors are listed as follows:
 
 Year
      Ended December 31
                  
                  2008
                  
                  
                  2007Audit Fees
    (1)
                  
                  $
                  58,762
                  
                  
                  $
                  54,600Audit-Related Fees
      (2)
                  
                  
                  --
                  
                  
                  
                  --Tax Fees
    (3)
                  
                  
                  --
                  
                  
                  
                  --All Other Fees
      (4)
                  
                  
                  --
                  
                  
                  
                  --Total
      Accounting Fees and Services
                  
                  $
                  58,762
                  
                  
                  $
                  54,600
  (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
  48
 Table of Contents
  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:  March
30, 2009
  /s/
Ng Chi Shing
 Ng Chi
Shing
 President,
CEO and Director
  /s/
Chen Lu
 Chen
Lu
 Director
  /s/
Chen Juan
 Chen
Juan
 Director
  /s/
Ng Chi Shing
 Ng Chi
Shing
 Chief
Financial Officer