Securities
      and Exchange Commission


Washington,
      D.C. 20549








**FORM
      10-KSB**








**[X]**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
                for the year ended December 31,
                2006**




**[  ]**
            **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 small business issuer as specified in its charter)







HAIRMAX
      INTERNATIONAL, INC.


(Former
      name of registrant)







**Nevada** (State
        or
        other jurisdiction of  incorporation
        or organization)




**13-3422912**


(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





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





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





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





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





State
      issuer's revenues for its most recent fiscal year: $15,523,026.





As
      of
      March 23, 2007, there were 31,602,365 common shares outstanding and the
      aggregate market value of the common shares (based upon the average of the
      bid
      price of $0.53 and the asked price of $0.55 reported by brokers) held by
      non-affiliates was approximately $4,510,277.





Transitional
      Small Business Disclosure Format (check one): Yes [  ] No [X]





Number
      of
      shares of common stock outstanding as of March 23, 2007: 31,602,365




Number
      of
      shares of preferred stock outstanding as of March 23, 2007:
      1,875,000









*Table
          of Contents*





CAUTIONARY
      STATEMENT REGARDING FORWARD LOOKING INFORMATION





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





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




2
 
  TABLE
        OF CONTENTS


****
            ****
            **Page******
            ****
            **No******
            ****
            ******PART
                1**Item
                1.
            Description
                of Business
            4Item
                2.
            Properties
            15Item
                3.
            Legal
                Proceedings
            15Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            15**PART
                II**Item
                5.
            Market
                for Registrant's
                Common Stock, Related Security Holder Matters, and Small
                Business Issuer Purchases of Equity Securities
            16Item
                6.
            Management's
                Discussion and Analysis
            17Item
                7.
            Financial
                Statements and Supplementary Data
            25Item
                8.
            Changes
                with and Disagreements With Accountants on Accounting
                and Financial Disclosure
            51Item
                8A.
            Controls
                and Procedures
            51**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and
                Corporate Governance; Compliance with Section 16(a) of the Exchange
                Act
            52Item
                10.
            Executive
                Compensation
            54Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            55Item
                12.
            Certain
                Relationships and Related Transactions; and Director
                Independence
            57**PART
                IV**Item
                13.
            Exhibits
            58Item
                14.
            Principal
                Accountant Fees and Services.
            59





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 no operations since its incorporation.





In
      February 2006, HuaGuang undertook two joint ventures with the Guizhou Television
      Station. Huaguang currently holds 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
      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.




CDMC,
      CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Guishi Digimedia, Guishi
      Huaguang are hereinafter referred to as (“the Company”). Currently, the Company
      has approximately 285 employees located primarily in the PRC.





**Recent
      Developments**




Commencing
      January 1, 2007, the Company’s subsidiary, M-Rider, terminated an Advertising
      Distribution Agreement with a television station as the exclusive advertising
      agent in Guangdong province of China after one year of services. M-Rider will
      remain as an advertising agent but does not have to pay any fixed commitment
      fee
      to the television station.




On
      January 24, 2007, the Company exercised its option to request the former
      shareholders of HuaGuang to transfer all of their equity interest in HuaGuang
      to
      the Company for approximately US$10 in accordance to the Strategic Alliance
      Agreement dated June 15, 2006 between the Company and Guangdong Pukonyi Culture
      Development Limited (which was later renamed as HuaGuang), subject to the
      approval of all related laws of the People's Republic of China.





As
      of
      February 9, 2007, the Company’s subsidiary, M-Rider, entered into a Sole Agent
      Service Agreement (“Agreement”) with China Yellow River TV Station, a
      corporation organized and existing under the laws of the People's Republic
      of
      China (“YRT”). Pursuant to the terms of the Agreement, M-Rider
      will act as the sole advertising agent for YRT starting from January 1, 2007
      and
      ending December 31, 2011, with an option to renew the Agreement for an
      additional five years upon its expiration.





4
 *Table
          of Contents*





**Current
      Corporate Structure and Mission**





For
      the
      year ended December 31 2006, CDMC owned the following subsidiaries:




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


(b)
            100%
                of AGL through CDHL, a limited liability company incorporated in
                China
                engaging in cable television operations and digital broadcasting
                technology development;


(c)
            100%
                beneficial interest of M-Rider through CDHL, a limited liability
                company
                incorporated in China engaging in advertising sales business;


(d)
            90%
                variable interest of HuaGuang under CDHL, a limited liability company
                incorporated in China investing in production of television series
                (As
                discussed above in “Recent Developments”in
                January 2007 the Company exercised its option to request the former
                shareholders of HuaGuang to transfer all of their equity interest
                in
                HuaGuang to the Company. This purchase is subject to the approval
                of all
                related laws of the People's Republic of China);


(e)
            Two
                joint ventures formed under HuaGuang who owns 51% of Guishi Digimedia
                which is engaged in advertising sales and 49% of Guishi HuaGuang
                which is
                engaged in television channel
                operation;


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




Besides,
      the Company holds 20% interest in Arable, a limited liability company
      incorporated in Hong Kong engaging in developing middleware software and
      application.




Broadcasting
      media and cable television operations 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.




**Operation
      Business**




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





1)
      Cable
      television operations and digital broadcast technology development;


2)
      Television channel operations and advertising sales; and


3)
      Television program production and investment.





**Cable
      Television Operations 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
      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.





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.





Under
      the Co-operative
      A greements,
      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.





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. 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.




5
 *Table
          of Contents*




*Migration
      to DTV Service*


The
      Company has migrated approximately 84,000 subscribers totaling about 220,000
      subscribers to the DTV system as of December 31, 2006, and the migration program
      continues to progress on schedule.





*Basic
      Services*


Basic
      service is available to all cable television subscribers, consisting of 48
      channels of programming. This service is comprised of programming provided
      by
      national television networks, provincial and city television stations, and
      one
      channel provided by AGL. The basic subscription fee is approximately $26 per
      annum for the first STB, of which the Company shares $3 per annum for pre-2004
      residential subscribers, and $13 per annum for post-2004 residential subscribers
      and all commercial subscribers.





*Value
      Added Packages*


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 151 channels,
      including a 48-channel basic package and 103 pay channels bundled into various
      value added packages, such as high definition channels, movie, life &
leisure, sports, drama and family. The annual subscription fees for the
      value-added packages range from $15 to $150 each where the Company shares 70%
      of
      the subscription fees.





*Addition
      STB*


In
      the
      city of Nanhai, there is an average of more than two television sets per
      household. DTV subscribers can buy an additional STB from AGL for their other
      television sets and pay a subscription fee for the additional STB. The yearly
      subscription fee is approximately $15 for each additional STB.





*Other
      Revenue Sources*


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





*High-Definition
      Television (“HDTV”)*




During
      2006, the Company commercially launched high definition TV broadcast platform
      in
      which 3 high definition TV channels are packaged in pay-TV
      programs.





*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,
      a
      software developer that specialises in middleware products and applications
      for
      DTV STB and broadcasting technologies. 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 in which the call center handled over 300,000
      enquiries in 2006.





*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.





*Sales,
      Marketing and Advertising*


AGL
      has
      95 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.




6
 *Table
          of Contents*




**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. In 2006, M-Rider served over
      230
      brand names advertised on the managed channels.





During
      the year of 2006, M-Rider acted as an exclusive agent to manage the advertising
      timeslots for three television channels, one is a provincial television channel
      in Guangdong Province and two are city-level television channels in Nanhai
      city.
      M-Rider paid a fixed fee to the television stations and was responsible for
      selling advertising space to advertising customers as well as providing advice
      and consultation on scheduling and planning to enhance the effectiveness of
      their advertisements.





In
      January 17, 2007, M-Rider decided not to renew the exclusive agent agreement
      with the provincial television station in Guangdong Province, but to remain
      as
      an advertising agent and to not have to pay any fixed commitment fee to the
      television station.





In
      February, 2007, M-Rider signed a new five year sole agent service agreement
      (the
“Sole Agent Agreement”) to provide consultation services and manage advertising
      time slots exclusively with China Yellow River TV Station (“CYR Station”), a
      television station located in Shanxi Province in China which has a population
      of
      over 30 million, starting from January 1, 2007. In
      addition, M-Rider has an option to renew the Agreement for an additional five
      years upon expiration of the Sole Agent Agreement on December 31, 2011.





According
      to the Sole Agent Agreement, M-Rider shall act as the sole agent and provide
      consultation services for media planning advisory, sales analysis and strategic
      planning to CYR Station. In return, M-Rider will get a media services fee based
      on the revenue generated and a performance bonus at the end of each fiscal
      year.





M-Rider
      will also provide CYR Station with weekly media analysis and weekly competition
      and ratings analysis reports. M-Rider will furnish a monthly report analyzing
      broadcast ratings, and media popularity trends including recommendations and
      consulting services for future media strategies.





*Pricing
      of Advertising Sales Space*


M-Rider
      sells advertising timeslots to customers directly or through advertising agents,
      including members of the American Association of Advertising Agencies, usually
      known as a 4As Company. The selling price of advertising timeslots is set in
      two
      folds: (1) fixed price for direct customers based on time slot chosen; and
      (2)
      variable price for the 4As Company based on a cost per rating point schedule
      where the rating report is provided by AC Nielson or Central Viewer Survey
      and
      Consulting Center of China Central Television Station.





*Media
      Planning*


M-Rider
      has years of experience in media planning for direct customers, local
      advertising agents and the 4As Company. M-Rider believes its media planning
      experience assists its customers in delivering their commercials through a
      television channel according to audiences’ profile in a cost effective way and
      to maximize the value of the time slots.





*Sales
      & Marketing*


M-Rider’s
      sales and marketing team conducts research and analysis on media trends,
      competitor analysis and customers survey in order to continuously refine its
      sales and marketing strategy. M-Rider offers different bundled products to
      different categories of customers based on seasonal or yearly terms.





**Television
      Program Production and Investment**





On
      February 2006, HuaGuang, entered into two joint venture agreements with the
      provincial television station, Guizhou Television Station, for a term of 20
      years. Pursuant to the joint venture contracts, the provincial television
      station will provide the exclusive use of a television channel, including
      production resources and equipment, while outsourcing its entire advertising
      air
      time slots to the two joint ventures for an initial term of five years and
      the
      term is extendable by mutual agreement. Guishi Digimedia, a 51% subsidiary
      of
      HuaGuang, will serve as the exclusive advertising agent to manage the television
      commercials. Guishi Huaguang, a 49% owned interest of HuaGuang, will be
      responsible for sourcing and production content, as well as schedule planning.
      Currently, over 100 professionals and experienced staff are working on the
      production, planning and scheduling, and contents sourcing. The channel is
      focusing on fashion, entertainment, lifestyle and sports, 24 hours a day. After
      a few months of operations, this channel has become one of the most popular
      local channels in the province.





The
      Company has also made a minority investment in two television series, XiGuan
      Affairs, with 40 episodes, and The Story of a Small Town, with 24
      episodes.




7
 *Table
          of Contents*





**Strategic
      Partnership**




Since
      October 2005, the Company has engaged Manta Finance Ltd. as a consultant to
      advise our officers and employees on matters relating to digital broadcasting
      technology development and digital broadcasting related strategy. On August,
      2006, as discussed above, the Company strengthened the relationship with Manta
      Finance Ltd. by investing into its subsidiary, Arable Media
      Limited.





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.




**Pending
      Acquisition**




On
      January 31, 2006, we, through
      our affiliate
      HuaGuang, entered
      into an agreement (the “Agreement”) to purchase
      all media related businesses, assets, business contracts and management from
      Guiyang Classic & Fashion Advertising Co., Ltd., a television program
      production and advertising company in China. Pursuant to the terms of the
      Agreement, we will pay $2.2 million, in a combination of cash and restricted
      common stock of the Company, which payment is subject to reduction in the event
      that the acquired assets generate a cumulative profit of less than $2.5 million
      over the next 2 years. The management team of Guiyang Classic & Fashion
      Advertising Co., Ltd. has approximately 10 years of business experience in
      the
      media industry in China. They have produced television programs for different
      television channels, including the well known program, a “true man show”, as
      well as adventure, nature and tourism productions, for which they have obtained
      several national awards in the last few years. The completion of the transaction
      is subject to certain conditions, including official approval, and verification
      of assets and business contracts. Presently, certain conditional precedents
      are
      not entirely satisfied. Completion of the transaction will be subject to
      satisfaction of all due diligence requirements.





**Growth
      Opportunities**





The
      Company believes its strengths in China’s media industry, are in the areas of
      cable television operations 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. For
      instance, there are about 30 cities and 12 million cable TV subscribers in
      Guangdong province, but less than 20% of which had migrated to DTV as at the
      end
      of 2006. 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.





About
      three years of experience has made the Company’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. The Company’s strategy is to come to
      an agreement with two to three more cities in the coming 2 years when the
      Migration in Nanhai is completed. At that time, the Nanhai operation and the
      return on investment from advertising and program production businesses should
      generate sufficient cash flow to support the development of a Migration business
      in other cities. There is no assurance that the Company will be successful
      in
      entering into new agreements for future migrations, or that the Company will
      be
      able to finance any new migrations solely from its cash flows from the Nanhai
      Migration.





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





*Television
      Channel Management and Advertising Sales*





Currently,
      M-Rider acts as an exclusive advertising agent for three television channels
      in
      two provinces and the Company’s strategy is to sign more exclusive contracts
      with television stations in order to drive the growth in this sector.




8
 *Table
          of Contents*





**Growth
      Strategies**





The
      Company has established a successful and profitable model for the DTV services
      in Nanhai. For the near term, the Company’s strategy is to sign additional
      Migration business and exclusive advertising agent contracts to drive growth.
      In
      the mid or longer term, the Company’s strategy is to use cash flow generated
      from existing operations to invest and to replicate its business model in DTV
      services and integrated program production and advertising in other cities
      or
      provinces in China.





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.





In
      order
      to maintain the Company’s competitive position and to assist in its growth, the
      Company will continue to pursue further investment, acquisition and alliance
      partnership arrangements. The Company may also seek further funding from the
      capital markets or private investors when suitable arrangements are available.
      However, the Company does not have any commitments for any such funding at
      this
      time, and there is no assurance that the Company will be successful in obtaining
      any funding in the future.





**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.




9
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          of Contents*





**Competition**





*Cable
      Television Operations 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. For 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 officals
      plan to convert the current analogue television broadcasting signal into digital
      signal. The Company believes that cable television will remain as the main
      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.





*Television
      Program Production*





According
      to the PRC regulations, television programs distributed through television
      channels must be pre-approved by the relevant governmental departments before
      production begins. Provincial level television stations usually have Class
      A
      licenses. There are, however, few private Class A license production houses
      in
      China. Production houses with a Class A license have more freedom in the
      selection of programs and can obtain distribution approval before commencing
      production. This shortens the production cycle and the return on investment
      is
      higher. The Company’s television program production investment is through a
      well-known production house with a Class A license, which the Company believes
      will lower its investment. In view of the fierce competitive environment in
      China, the Company has planned cooperation and joint venture arrangements with
      television stations in television program production, and also makes programs
      available for exchange with television channel advertising time. This is also
      one of the successful models operated by some of the advertising
      firms.





**Reports
      to Security Holders**





The
      Company is not required to deliver an annual report to security holders and
      we
      do not presently intend to voluntarily deliver such reports. However, should
      the
      Company choose to create and deliver annual reports to security holders, such
      annual reports will contain audited financial statements. We file all of our
      required information with the Securities and Exchange Commission (the
      "Commission"), including Annual Reports on Form 10-KSB, Quarterly Reports on
      Form 10-QSB, and Current Reports on Form 8-K. The public may read and copy
      any
      materials that are filed by us with the Commission at the Commission's Public
      Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public
      may
      obtain information on the operation of the Public Reference Room by calling
      the
      Commission at 1-800-SEC-0330. The statements and reports filed by us with the
      Commission have been filed electronically and are available for viewing or
      copy
      on the Commission maintained Internet site that contains reports, proxy, and
      information statements, and other information regarding issuers that file
      electronically with the Commission. The Internet address for this site can
      be
      found at: http://www.sec.gov.




10
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          of Contents*





**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 and $15.5 million for fiscal years 2005
      and
      2006, respectively. The Company had net income of $3.1 million and $2.1 million
      for fiscal years 2005 and 2006, respectively. Any investment in the Company
      should be considered a high risk investment 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 are able to sell customers more
      value-added services or additional set-top-boxes.**




The
      Company’s agreement with the Nanhai Network Company provides that the Company
      migrates all cable TV subscribers in Nanhai from an analog signal to a digital
      signal by the end of 2007. In order for the Company to maintain a more stable
      liquidity, the Company must also sell to subscribers additional value-added
      services or sell subscribers 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 Company’s
      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, the Company’s ability to perform cable television migrations
      requires the Company to provide STB for subscribers. If future migration
      arrangements have similar terms, the Company will need significant additional
      capital to provide the boxes to subscribers. 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
      72% of the Company’s accounts receivables are with the Nanhai Network Company in
      connection with the cable television digitization migration being performed
      by
      the Company. These receivables are paid to the Company based on a schedule
      with
      the Nanhai Network Company. Although the Company has no reason to believe that
      these receivables will not be paid in a timely manner, if the Nanhai Network
      Company is to delay its payment to the Company or be unable to pay the monies
      due to the Company, the Company’s high concentration of credit risk may cause
      financial difficulties and may cause the Company to become unable to fulfill
      the
      payment obligations to the Company’s vendors.




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




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




11
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          of Contents*




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




The
      cable
      television industry is new and evolving in China. If there is a lack of
      acceptance or slow growth of the cable industry in China, the number of
      subscribers to the Company’s services and the Company’s revenues will be
      adversely affected. The Company’s future results of operations will depend
      substantially upon the increased acceptance for payment for television
      programming in China, and the willingness of subscribers to purchase value-added
      services, such as premium channels.




**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 as required by the Company on a timely
      basis and in a cost effective manner, or if the Company’s relationship with any
      supplier is damaged or terminated, the Company’s ability to complete the cable
      television digitization migration process in Nanhai or in other cities on
      schedule would be materially adversely effected.




**The
      Company derives a portion of the Company’s revenue from the sale of advertising
      time, and advertising is particularly sensitive to changes in economic
      conditions.**




The
      Company’s results of operations depend heavily on advertising revenue, and
      demand for advertising is affected by prevailing general economic conditions.
      Adverse economic conditions generally, and any downturns in the economy in
      the
      PRC, are likely to negatively impact the advertising industry, causing
      advertisers to reduce the money they spend on purchasing advertising time.
      Any
      such declines in the level of business activity of the Company’s advertising
      customers may also have a material adverse effect on the Company’s revenues and
      results of operations. Although recently there has been significant growth
      in
      the PRC economy, there can be no assurance that this trend will continue or
      that
      any such improvement in general economic conditions will generate increased
      advertising revenue. Global and local downturns in the general economic
      environment may cause the Company’s advertising customers to reduce the amounts
      they spend on advertising, which could result in a decrease in demand for
      advertising airtime with the television stations with which the Company work.
      This could adversely affect the Company’s business, financial condition, results
      of operations and cash flow.




**The
      Company’s operating results are heavily dependent on the importance of
      television as an advertising medium.**




The
      Company generates a significant portion of its revenues from the sale of
      advertising airtime on the television channels with which it works. In the
      advertising market, television competes with various other advertising media,
      such as print, radio, the internet and outdoor advertising. There can be no
      assurances that the television advertising market will maintain its current
      position among advertising media or that changes in the regulatory environment
      will not favor other advertising media. Increases in competition arising from
      the development of new forms of advertising media could have an adverse effect
      on the Company maintaining and developing its advertising revenues and, as
      a
      result, on its results of operations and cash flows.




The
      Company’s advertising revenue depends on the technical reach of the television
      stations with which it works, the pricing of advertising time, television
      viewing levels, changes in audience preferences, shifts in population,
      technological developments relating to media and broadcasting, competition
      from
      other broadcasters and other media operators, and trends in the advertising
      markets in China in which the Company operates. There can be no assurance that
      the Company will be able to continue to respond successfully to such
      developments. Any decline in the appeal of television generally or of the
      television channels with which the Company works, specifically, whether as
      a
      result of the growth in popularity of other forms of media or a decline in
      the
      attractiveness of television as an advertising medium, could have a material
      adverse effect on the Company’s results of operations and cash
      flows.




**The
      Company’s profitability is dependent on the program ratings received by the
      channels with which it works over which the Company has limited or no
      control.**




In
      general, viewer interest in programming offered on a television channel
      determines the audience ratings a channel receives. Ratings are a significant
      factor in the amount of revenues the Company generates as ratings impact the
      pricing that it can charge to its advertisers. Because television stations
      generally make the final decision as to which programs they will broadcast,
      if
      the television stations choose poor quality programming, or due to competitive
      forces are unable to secure popular programs, their channel ratings could be
      negatively affected. The failure by television stations to achieve good ratings
      for their programs could have a material adverse affect on the Company’s
      profitability.




12
 *Table
          of Contents*




**The
      success of the Company’s joint venture arrangements with Guizhou Television
      Station is dependent on Guizhou Television Station.**




Establishing
      and maintaining good relationships with Guizhou Television Station, the
      Company’s Chinese joint venture partner is critical to the ability of the joint
      venture arrangements to achieve commercial success. The Company has limited
      control over the operations of the joint ventures as Guizhou Television Station
      owns 51% of the joint venture responsible for sourcing and producing content,
      as
      well as schedule planning.




**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. The Company will be required to comply
      with the requirements of Section 404 for the Company’s fiscal year ended
      December 31, 2008. 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 the conduct of
      continuing 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.**




Relevant
      Chinese government authorities have recently considered and adopted new
      regulations that have and may continue to influence various aspects of the
      advertising and media industry and the Company cannot predict the timing and
      effects of any new regulations. Because laws and regulations governing the
      advertising and media industry in China change frequently the Company also
      cannot predict the ultimate cost of complying with these requirements, or the
      impact of these requirements on the Company’s business. Changes in laws and
      regulations governing the content of advertising, business licensing or
      otherwise affecting the advertising and media industry in China may materially
      and adversely affect the Company’s results of operations, business or
      prospects.




13
 *Table
          of Contents*




**If
      the Company does not compete successfully against new and existing competitors,
      the Company may lose market share, and the Company’s profitability may be
      adversely affected.**




The
      Company directly competes with other companies that sell television advertising
      time, including, but not limited to, other television broadcasters and certain
      programming companies. The Company may face competition in the future from
      new
      entrants in this sector of the advertising industry. Increased competition
      could
      reduce the Company’s operating margins and profitability and result in a loss of
      market share. Some of the Company’s competitors may have significantly greater
      financial, marketing or other resources than the Company. Moreover, increased
      competition would provide advertisers with a wider range of advertising service
      alternatives, which could lead to lower prices and decreased revenues, gross
      margins and profits.




**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 fourth quarter 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.





**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 76.9% 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.





***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 may be less demand for spending in the
      Company’s markets.




14
 *Table
          of Contents*




**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 slowing of economic growth and decrease the interest in the services
      and products the Company offer, 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 a
      material adverse affect 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 China’s political and economic conditions. 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. Conversely, if the
      Company decides to convert Renminbi into United States dollars for other
      business purposes and the United States dollar appreciates against this
      currency, the United States dollar equivalent of the Renminbi the Company
      convert would be reduced. The Chinese government recently announced that it
      is
      pegging the exchange rate of the Renminbi against a number of currencies, rather
      than just the United States dollar. Fluctuations in the Renminbi exchange rate
      could adversely affect the Company’s business.





**ITEM
      2. Properties**





The
      Company leased offices for its following subsidiaries: (1)AGL, with about 200
      square meters for operation and paid total rent of $28,269 for year 2006 under
      lease term expiring on June 2007; (2) Digimedia Shenzhen, with 13 square meters
      and paid total rent of $4,597 for year 2006 under lease term expired on August
      2006 without further renewal; (3) M-Rider, with 613 square meters and paid
      total
      rent of $30,529 for year 2006 under lease term expiring on December 2007; and
      (4) Guishi Digimedia, with 3,396 square meters for operation and paid total
      rent
      of $29,652 for year 2006 under lease term expiring on July 2011. The Company
      also leased seven staff quarters with total area of 925 square meters and paid
      total rent of $10,803 for year 2006 under various lease terms expiring through
      October 2007.





**ITEM
      3. Legal Proceedings**




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





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




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




The
      Company has made a settlement offer to the plaintiff of an amount equal to
      $9,000, and is awaiting the plaintiff's response. As part of any settlement,
      the
      Company will insist upon the execution and delivery of a binding release of
      all
      claims in favor of the Company. The company has accrued $9,000 as of December
      31, 2006.





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





None.




15
 *Table
          of Contents*





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





03/31/05   1.01  1.30


06/30/05   4.10  4.40


09/30/05   1.85  1.90


12/31/05   1.26  1.55


03/31/06   1.45  1.50


06/30/06   0.94  0.99


09/30/06   0.60  0.65


12/31/06   0.60  0.62





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 Registrant's Common
      Stock was 103 in certificate form and over 2,361 shareholders deposit their
      shares with the clearing house according to the NOBO list provided by ADP Proxy
      Service as of December 31, 2006.




*Dividends*





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





*Dividend
      Policy*





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




16
 *Table
          of Contents*





*Unregistered
      Sales of Equity Securities*





During
      the quarter ended December 31, 2006, the Company completed a private equity
      financing with four accredited investors for $3,100,000, $1,100,000 of which
      was
      rolled over from the investor of the sale the Company completed on July 7,
      2006,
      as disclosed in the Company’s Current Report on Form 8-K filed on July 13, 2006.




The
      securities issued consisted of 31 Units, which consisted of (i) an
      eighteen-month 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 Company 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 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 Common Stock
      at an exercise price of $2.25 per share.




This
      financing was completed pursuant to Section 4(2) and Rule 506 of Regulation
      D of
      the Securities Act of 1933, as amended (the “Securities Act”). The Company
      determined that the purchasers were "accredited investors" as defined in Rule
      501(a) under the Securities Act. The purchasers represented their intention
      to
      acquire the securities for investment only and not with a view to or for sale
      in
      connection with any distribution thereof and appropriate legends were affixed
      to
      the instruments issued pursuant to this financing. The Company paid commissions
      of $79,000 to a registered broker-dealer in connection with this
      financing.




During
      the quarter ended December 31, 2006, the Company issued 155,000 restricted
      shares to consultants as payment for their services. The consultant was an
      “accredited investor” as defined in Rule 501(a) of the Securities
      Act.




**ITEM
      6.**  **Management’s
      Discussion and Analysis**





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





Overview





For
      the
      year ended December 31, 2006, the Company has further expanded its business
      scope and coverage by forming two new joint ventures in Guizhou province of
      the
      PRC - Guishi Digimedia and Guishi HuaGuang. Moreover, the Company has subscribed
      20% of Arable to strengthen the Company’s capabilities in developing customized
      applications for DTV subscribers.





During
      the year under review, the Company reported a turnover of $15,523,026 (2005
      :
      $7,862,281), an increase of 97.4% as compared with last year, and a net income
      of $2,136,990 (2005 restated : $3,115,093).





The
      Company’s business plan is to strengthen its branding and to enlarge presence
      and involvement in the media industry. The Company will continue to focus its
      resources toward replicating its successful migration model to other cities
      of
      China, while seeking opportunities to alliance with strong strategic
      partners.




Critical
      Accounting Policies





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




17
 *Table
          of Contents*




Principles
      of consolidation




The
      2006
      consolidated financial statements include the financial statements of CDMC
      and
      its 100% owned subsidiaries CDHL, AGL and its Nanhai Branch, M-Rider, 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. The 2005 consolidated financial statements
      include the accounts of CDHL, AGL and its Nanhai Branch, M-Rider, Digimedia
      Shenzhen, and its 90% variable interest entity in HuaGuang. All significant
      inter-company transactions and balances have been eliminated in
      consolidation.




Consolidation
      of variable interest entity




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




Property
      and equipment




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




Depreciation
      of STB




As
      required by SAB11:B, depreciation and amortization for property and equipment
      directly attributed to the generation of revenue was classified under “Cost of
      Sales”. Accordingly, depreciation of STB and smart cards of the Company in 2006
      for the amount of $2,450,739 was included in “Cost of Sales”. To conform with
      the current account presentation, the depreciation of STB in 2005 of $1,137,206
      previously classified as “Selling, General and Administrative expenses” is now
      included in “Cost of Sales”.




18
 *Table
          of Contents*




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, 2006 and 2005, the Company received
      $1,276,976 and $1,232,386 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. During 2006, the Company purchased blocks of advertising
      spaces and was the primary obligor and carried all of the credit risk for the
      advertisement placements and accordingly, recorded the full amount of such
      billings from the advertisement placements as revenue. 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 deprecation in line with the
      depreciable life of the relevant products; or (c) a reduction of Inventories
      for
      products maintained in stock.





19
 *Table
          of Contents*




Restatement
      of financials for the year ended December 31, 2005





For
      the
      year ended December 31, 2005, the Company had recorded in its Statements of
      Operations as Other Income of $1,794,897, which represented a volume discount
      given by a STB supplier.





The
      original purchase agreement was executed between the Company and the supplier
      on
      March 9, 2004. The Company re-negotiated the terms of the Purchase Agreement
      with the supplier resulting in the execution of a Supplemental Purchase
      Agreement (“the SP Agreement”) with the supplier on August 19, 2005. The
      supplier agreed to fix a lower price for all future purchases and agreed to
      give
      to the Company of one-time “volume discount” of $1,794,897 (the “consideration”)
      to be applied as a reduction to the amount then owed by the Company to the
      supplier. The Company and its independent accountants had reviewed the EITF
      Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain
      Consideration Received from a Vendor.”, and determined that the issues discussed
      therein did not apply to the Company’s situation, as the Company interpreted the
      consideration as a one-time inducement for future purchases. Accordingly, the
      consideration had been recorded as Other Income of the Company in the year
      2005.





Subsequently,
      the Securities and Exchange Commission (“SEC”) informed the Company that it had
      a different interpretation on the application of the aforesaid EITF standard.
      The Company has had further discussions with its independent accountants and
      has
      agreed to apply the aforesaid EITF standard as guidance for the Company’s
      accounting treatment on the consideration, which was treated as a kind of
      supplier rebate that in effect reduced the outstanding amount due to the
      supplier for previous purchases.





Accordingly,
      accounting treatment of the consideration has been changed. Instead of crediting
      the entire amount of the consideration as other income, the portion of
      consideration corresponding to the sale of respective STBs will be reclassified
      and credited against Cost of Sales. The portion of consideration corresponding
      to STBs used for the Company’s digital television migration will be treated as a
      reduction of the balance of Property and Equipment, whereas the remaining
      portion represents a reduction of the balance of Inventories which will then
      either be credited against Cost of Sales or credited to the Property and
      Equipment in the following year in accordance with subsequent sale or migration
      of the STB respectively. The aforesaid balances credited to Property and
      Equipment is recognized as income over the depreciable life of STB of five
      years
      by way of a reduced depreciation charge.





Although
      the Company’s net income in the fiscal year of 2005 reduced by $926,526.39,
      being the after-tax amount of consideration credited to Property and Equipment
      and Inventories, the reduction will be offset by increases in net income in
      the
      subsequent years due to the aforesaid reduction in Cost of Sales and
      depreciation. Over a period of five years, the impact of the restatement
      mentioned herein will be leveled. Also, there will be no impact to the Company’s
      previously reported revenue, cash and cash equivalents.





As
      the
      Company’s entitlement to receive the consideration happened in August of 2005,
      no restatement of the financial statements is required prior to that period.
      However, the restatement will affect the financial statements for the year
      ended
      December 31, 2005, and for the fiscal quarters ended September 30, 2005, March
      31, 2006, June 30, 2006, and September 30, 2006. Accordingly, such financial
      statements should no longer be relied upon.




20
 *Table
          of Contents*





Net
      income impacts on each prior period are shown below:





Fiscal
                Quarter ended
            Increase
                or (Decrease) in Net Income
            Cumulative
                effect of the change of retained earningsSeptember
                30, 2005
            (992,182)
            (992,182)December
                31, 2005
            65,656
            (926,526)March
                31, 2006
            56,717
            (869,809)June
                30, 2006
            55,257
            (814,552)September
                30, 2006
            58,934
            (755,618)




The
      restated financial statements of the Company for the year ended December 31,
      2005 are shown in the notes to the Company’s
      Consolidated Financial Statements included in Part II, Item 7 of this
      Report .
      Restated financial statements for the fiscal quarters ended September 30, 2005,
      March 31, 2006, June 30, 2006, and September 30, 2006 will be shown in a Form
      8K
      to be released by the Company as early as practicable.





Financial
      review of the Company for the year 2006:





Selected
                financial dataYears
                Ended December 312006
            
            2005(Restated)Net
                sales
            
            $
            15,523,026
            
            $
            7,862,281Net
                income
            
            
            2,136,990
            
            
            3,115,093Net
                income per share -basic (two classes method)
            
            
            0.06
            
            
            0.10Net
                income per share -fully diluted (two classes method)
            
            
            0.05
            
            
            0.08Weighted
                average shares outstanding - basic
            
            
            31,312,535
            
            
            28,231,555Weighted
                average shares outstanding - fully diluted
            
            
            41,494,583
            
            
            37,627,388Total
                assets
            
            
            25,090,389
            
            
            16,420,214Working
                Capital (Deficit)
            
            
            (1,584,766
            )
            
            (21,140
            )Stockholders'
                equity
            
            
            12,529,348
            
            
            9,656,435




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




21
 *Table
          of Contents*





**CONSOLIDATED
      RESULTS OF OPERATIONS**





*Statements
      of Operations Items:*





Sales





Sales
      for
      the fiscal year ended December 31, 2006 were $15,523,026 as compared to
      $7,862,281 for the fiscal year ended December 31, 2005, an increase of
      $7,660,745 or 97%.  The
      increase in sales was due to: (1) the consolidation of revenue from the newly
      acquired subsidiary, M-Rider and the joint ventures in Guiyang; and (2) increase
      in revenue from DTV operation attributable to the increase in the number of
      television subscribers together with sales of value-added services and STB.
      The
      total number of DTV subscribers increased by 84,328 to 220,431 by the end of
      2006. Sale of additional STB in 2006 was increased by 13,310 to 34,475, an
      increase of 64% as compared with last year, representing approximately 16%
      of
      total DTV subscribers in Nanhai. The number of value added package subscriptions
      increased by 16,977 to 19,611 in 2006, representing approximately 9% of total
      DTV subscribers in Nanhai.





The
      digitalization project will continue in 2007 and the Company expects that
      revenue will continue to grow before the completion of the Nanhai project.
      Revenues from advertising agency and television program production also
      contribute to the total sales amount.





Gross
      Margin





Due
      to
      the increase in depreciation because of the acquisition of STB for the DTV
      migration in Nanhai and the increase in operating costs as a result of business
      expansion into the agency and joint venture business of TV advertising and
      channel management, gross profit margin dropped from 69% in 2005 to 39% in
      2006.





Expenses





Selling,
      general, administrative and depreciation and amortization expenses for the
      fiscal year ended December 31, 2006 increased by $2,188,684 or 160% to
      $3,560,175 in comparison with the last fiscal year ended December 31, 2005.
      The
      increase was mainly due to the increase in business activities to support
      increased TV subscription revenue, hiring of additional personnel for the
      development of new value-added business, the operation of newly acquired
      subsidiaries and finance costs incurred for fund raising.





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.





Minority
      Interests





Minority
      interests in the statement of operation represent the minority shareholders’
share of the profits in our consolidated variable interest entity and a 51%
      subsidiary. For the fiscal year ended December 31, 2006, the Company recognized
      minority’s share of net loss of $131,074.




Net
      Income





The
      Company had net income of $2,136,990 (2005: $3,115,093) or $0.06 per common
      share for the year ended December 31, 2006, a decrease of $978,103 as compared
      with last year. The decrease in net income was due to increase in depreciation
      of $1,313,533 on the STB used for the DTV migration, and the increase in finance
      costs on fund raising, though offset partially by reduction in corresponding
      deferred taxes.





22
 *Table
          of Contents*




*Balance
      Sheet Items:*





Current
      Assets





Current
      Assets of the Company had increased by $4.2 million to $11.0 million as at
      December 31, 2006. As the Company utilized most of the cash on DTV migration,
      it
      has maintained a low level of cash balance of $0.4 million as at December 31,
      2006, a decrease of $0.7 million from December 31, 2005. Accounts Receivable
      had
      increased by $5.4 million in 2006 after consolidation of advertising and joint
      venture businesses, of which $2.9 million attributable to the increase in
      Accounts Receivable from Nanhai Network Company corresponding to the increase
      in
      revenue.





Property
      and Equipment, Net





The
      net
      increase in property and equipment of the Company of $3.6 million mainly
      represented purchase of STB for migration in 2006.





Current
      Liabilities





Current
      Liabilities of the Company had increased by $5.8 million to $12.5 million as
      at
      December 31, 2006. The increase was mainly attributable to the issuance of
      convertible notes of $3.1 million, increase in income tax payable of $0.5
      million and consolidation of advertising agency and joint venture
      businesses.




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 DTV subscribers depends on the digitalization schedule. The number
      of subscribers will increase according to our plan and according to the rate
      of
      increase of residences in Nanhai. The Company is not certain about the impact
      of
      technological changes on its business such as developments in IP TV, satellite
      and terrestrial broadcasting. However, the Company is studying the technology
      and intends to invest more resources in research and development in order to
      compete effectively with all technological development.





In
      advertising sales, the Company plan to enter into more exclusive television
      channel arrangements in order to increase our sales volume and try to boost
      our
      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.




23
 *Table
          of Contents*





**Liquidity
      and Capital Resources**





On
      December 31, 2006, the Company had cash of $402,591 and a working capital
      deficit of $1,584,766. This compares with cash of $1,124,912 and a working
      capital deficit of $21,140 at December 31, 2005. The decrease in cash was mainly
      due to the increase in purchases of STB in Nanhai project as compared with
      the
      same period of last year.





Operating
      activities had a net generation of cash in the amount of $2,495,168 during
      the
      year, reflecting an excess of revenues over operating expenditures.





Net
      cash
      used in investing activities for the fiscal year ended December 31, 2006 was
      $6,710,930 as compared with net cash used in investing activities of $4,216,796
      for the fiscal year ended December 31, 2005. The increase in net cash used
      in
      investing activities was due to the increase in purchases of STBs and investment
      in subsidiaries.





Net
      cash
      provided by financing activities for the fiscal year ended December 31, 2006
      was
      $3,469,262. The majority of net cash provided by financing activities was raised
      through the issuance of the Company’s convertible notes in the second half year
      of 2006.





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 2006. Due
      to
      the migration process in place and formation of joint venture business,
      additional cash generated has been invested during the year. 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. Without
      considering further expansion, the Company is expected to have sufficient cash
      generated from operating activities to get through its business in the next
      12
      months till March 2008.





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.





24
 *Table
          of Contents*





**ITEM
      7. Financial Statements**




**CHINA
        DIGITAL MEDIA CORPORATION**
 **AND
        SUBSIDIARIES**
 
 **CONTENTS**
 
 **Pages**Report
                    of Independent Registered Public Accounting Firm
                26Consolidated
                    Balance Sheets as of December 31, 2006 and 2005
                27Consolidated
                    Statements of Operations and Comprehensive Income for the years
                    ended
                    December 31, 2006 and
                    2005
                28Consolidated
                    Statements of Stockholders’ Equity for the years ended December 31, 2006
                    and 2005
                29-30Consolidated
                    Statements of Cash Flows for the years ended December 31, 2006
                    and
                    2005
                31Notes
                    to the Consolidated Financial Statementsas
                    of December 31, 2006 and 2005
                32-50
  25
 *Table
            of Contents*
  **Jimmy
            C.H. Cheung & Co**
 *Certified
            Public
            Accountants*                                                                                                                  
Registered
            with the Public Company Accounting
 *(A
            member of Kreston International)*
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** ****
  
 To
        the
        Board of Directors of:
 China
        Digital Media Corporation
 
 
 We
        have
        audited the accompanying consolidated balance sheets of China Digital Media
        Corporation and subsidiaries as of December 31, 2006 and 2005 and the related
        consolidated statements of operations and comprehensive income, stockholders’
equity and cash flows for the
        years
        ended December 31, 2006 and 200 5.
        These
        financial statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits of the financial
        statements provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of China Digital Media Corporation
        and
        subsidiaries as of December 31, 2006 and 2005 and the results of its operations
        and its cash flows for the years ended December 31, 2006 and 2005, in conformity
        with accounting principles generally accepted in the United States of America.
  
 /s/
**JIMMY
        C.H. CHEUNG & CO**
 **JIMMY
        C.H. CHEUNG & CO**
 Certified
        Public Accountants
 
 Hong
        Kong
 
 Date:
        January 31, 2007
 
  
 1607
        Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong
 Tel:
        (852) 25295500 Fax: (852) 28651067 Email:
        jchc@krestoninternational.com.hk
 Website:
        http://www.jimmycheungco.com




26
 *Table
          of Contents*




**CHINA
                  DIGITAL MEDIA CORPORATION AND
                  SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS****AS
                  OF DECEMBER 31, 2006 AND 2005****ASSETS****2006**
              
              **2005****CURRENT
                  ASSETS**
              
              
              
              (Restated)Cash
                  and cash equivalents
              
              $
              402,591
              
              $
              1,124,912Accounts
                  receivable, net of allowances
              
              
              9,827,678
              
              
              4,444,087Inventories,
                  net
              
              
              475,481
              
              
              394,992Other
                  receivable and prepaid expenses
              
              
              187,818
              
              
              750,591Value
                  added taxes recoverable
              
              
              63,210
              
              
              -**Total
                  Current Assets**
              
              
              10,956,778
              
              
              6,714,582**INTANGIBLE
                  ASSETS**
              
              
              392,521
              
              
              392,521**INVESTMENTS
                  IN TELEVISION SERIES, NET**
              
              
              616,277
              
              
              771,115**INVESTMENTS
                  IN AFFILIATES**
              
              
              528,581
              
              
              -**PROPERTY
                  AND EQUIPMENT, NET**
              
              
              12,129,494
              
              
              8,541,996**OTHER
                  ASSETS**
              
              
              466,738
              
              
              -**TOTAL
                  ASSETS**
              
              $
              25,090,389
              
              $
              16,420,214**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Convertible
                  debentures
              
              $
              3,100,000
              
              $
              -Accounts
                  payable
              
              
              5,968,778
              
              
              4,792,339Other
                  payables and accrued liabilities
              
              
              753,292
              
              
              248,675Due
                  to a director
              
              
              84,656
              
              
              41,981Due
                  to related companies
              
              
              380,486
              
              
              218,394Business
                  tax payable
              
              
              265,655
              
              
              -Value
                  added taxes payable
              
              
              -
              
              
              16,330Income
                  tax payable
              
              
              1,954,800
              
              
              1,418,003Other
                  tax payable
              
              
              33,877
              
              
              -**Total
                  Current Liabilities**
              
              
              12,541,544
              
              
              6,735,722**COMMITMENTS
                  AND CONTINGENCIES**
              
              
              -
              
              
              -**MINORITY
                  INTERESTS**
              
              
              19,497
              
              
              28,057**STOCKHOLDERS'
                  EQUITY**Series
                  A convertible preferred stock ($0.001 par value, 40,000,000
                  sharesauthorized,1,875,000
                  shares issued and outstanding as ofDecember
                  31, 2006 and 2005)
              
              
              1,875
              
              
              1,875Common
                  stock ($0.001 par value, 500,000,000 shares authorized,31,602,365
                  shares issued and outstanding as of December 31, 2006;31,039,676
                  shares issued and outstanding as of December 31, 2005)
              
              
              31,602
              
              
              31,040Additional
                  paid-in capital
              
              
              5,663,917
              
              
              4,907,679Deferred
                  stock compensation
              
              
              (84,800
              )
              
              (50,433
              )Retained
                  earningsUnappropriated
              
              
              5,984,383
              
              
              3,848,637Appropriated
              
              
              957,586
              
              
              956,343Accumulated
                  other comprehensive loss
              
              
              (25,215
              )
              
              (38,706
              )**Total
                  Stockholders' Equity**
              
              
              12,529,348
              
              
              9,656,435**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              25,090,389
              
              $
              16,420,214The
                  accompanying notes are an integral part of these consolidated financial
                  statements




27
 *Table
          of Contents*


**CHINA
                  DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF OPERATIONS AND****COMPREHNSIVE
                  INCOME****FOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005****2006**
              
              **2005****(Restated)****NET
                  SALES**Revenue
                  from digitalization of television signals
              
              $
              7,214,110
              
              $
              5,391,730Revenue
                  from television advertising
              
              
              6,712,087
              
              
              1,048,175Revenue
                  from software development
              
              
              51,688
              
              
              66,716Revenue
                  from investments in television series
              
              
              268,165
              
              
              123,274Government
                  grant received
              
              
              1,276,976
              
              
              1,232,38615,523,026
              
              
              7,862,281**COST
                  OF SALES**Cost
                  of Sales - digitalization of television signals
              
              
              (1,009,846
              )
              
              (522,313
              )Depreciation
                  - digitalization of television signals
              
              
              (2,450,739
              )
              
              (1,137,206
              )Cost
                  of Sales - television advertising
              
              
              (5,815,154
              )
              
              (718,799
              )Cost
                  of Sales - software development
              
              
              -
              
              
              (370
              )Cost
                  of Sales - investment in television series
              
              
              (182,738
              )
              
              (83,668
              )**GROSS
                  PROFIT**
              
              
              6,064,549
              
              
              5,399,926**OPERATING
                  EXPENSES**Selling,
                  general and administrative expenses
              
              
              (3,427,901
              )
              
              (1,320,950
              )Depreciation
                  and amortization
              
              
              (132,274
              )
              
              (50,541
              )Total
                  Operating Expenses
              
              
              (3,560,175
              )
              
              (1,371,491
              )**INCOME
                  FROM OPERATION**
              
              
              2,504,374
              
              
              4,028,435**OTHER
                  INCOME (EXPENSES)**Equity
                  loss of affiliates
              
              
              (1,886
              )
              
              -Interest
                  income
              
              
              3,737
              
              
              218,035Other
                  income
              
              
              45,670
              
              
              -Interest
                  expenses
              
              
              (23,832
              )
              
              -Interest
                  paid to related companies and directors
              
              
              (17,257
              )
              
              (9,542
              )Other
                  expenses
              
              
              (35,910
              )
              
              (14,516
              )Total
                  Other Income (Expenses), net
              
              
              (29,478
              )
              
              193,977**NET
                  INCOME BEFORE TAXES AND MINORITY INTERESTS**
              
              
              2,474,896
              
              
              4,222,412Income
                  tax expense
              
              
              (468,980
              )
              
              (1,099,420
              )Minority
                  interests
              
              
              131,074
              
              
              (7,899
              )**NET
                  INCOME**
              
              $
              2,136,990
              
              $
              3,115,093**OTHER
                  COMPREHENSIVE INCOME (LOSS)**Foreign
                  currency translation gain(loss)
              
              
              13,491
              
              
              (38,706
              )**COMPREHENSIVE
                  INCOME**
              
              $
              2,150,481
              
              $
              3,076,387**Net
                  income per share-basic - two classes method**
              
              $
              0.06
              
              $
              0.10**Net
                  income per share-diluted**
              
              $
              0.05
              
              $
              0.08Weighted
                  average number of shares outstanding during the year -
                  basic
              
              
              31,312,535
              
              
              28,231,555Weighted
                  average number of shares outstanding during the year-
                  diluted
              
              
              41,494,583
              
              
              37,627,388The
                  accompanying notes are an integral part of these consolidated financial
                  statements
  28
 *Table
            of Contents*


**CHINA
                  DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY****FOR
                  THE YEARS ENDED DECEMBER 31, 2006 and 2005**Series
                  A
                Convertible
              
              Series
                B Convertible
              
              
              
              
              
              
              
              Additional
              
              Deferred
              
              Unappropriated
              
              Appropriated
              
              
              
              Accumulated
                  otherPreferred
                Stock
              
              Preferred
                Stock
              
              Common
                Stock
              
              paid-in
              
              stock
              
              retained
              
              retained
              
              Due
                  to a
              
              comprehensiveShares
              
              
              
              Amount
              
              Shares
              
              
              
              Amount
              
              Shares
              
              
              
              Amount
              
              capital
              
              compensation
              
              earnings
              
              earnings
              
              stockholder
              
              loss
              
              TotalBalance
                  at December 31, 2004
              
              
              -
              
              
              
              
              $
              -
              
              
              -
              
              
              
              
              $
              -
              
              
              1,500,000
              
              
              
              
              $
              1,500
              
              $
              1,303,678
              
              
              -
              
              $
              1,380,409
              
              $
              309,478
              
              $
              223,934
              
              $
              -
              
              $
              3,218,999Stock
                  issued in recapitalization
              
              
              1,975,000
              
              
              
              
              
              1,975
              
              
              -
              
              
              
              
              
              -
              
              
              1,993,363
              
              
              
              
              
              1,993
              
              
              6,905,364
              
              
              -
              
              
              (6,909,332
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Recapitalization
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              (6,909,332
              )
              
              -
              
              
              6,909,332
              
              
              -
              
              
              -
              
              
              -
              
              
              -Stock
                  issue for convertible
              
              
              (100,000
              )
              
              
              
              
              (100
              )
              
              -
              
              
              
              
              
              -
              
              
              20,000,000
              
              
              
              
              
              20,000
              
              
              (19,900
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -perferredstockStock
                  issued for promissory notes
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              6,586,500
              
              
              
              
              
              6,587
              
              
              2,283,438
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,290,025Stock
                  issued for reverse split
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              113
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Stock
                  issued for services
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              7,500
              
              
              
              
              
              8
              
              
              32,242
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              32,250Stock
                  issued for acquisitions
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              29,158
              
              
              
              
              
              29
              
              
              62,112
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              62,141Stock
                  issued for acquisitions
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              83,042
              
              
              
              
              
              83
              
              
              182,917
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              183,000Stock
                  issued for services
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              40,000
              
              
              
              
              
              40
              
              
              67,960
              
              
              (50,433
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              17,567Stock
                  issued for placement
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              800,000
              
              
              
              
              
              800
              
              
              999,200
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000,000Net
                  income for the year
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              3,115,093
              
              
              -
              
              
              -
              
              
              -
              
              
              3,115,093Repaid
                  to a stockholder
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (223,934
              )
              
              -
              
              
              (223,934
              )Other
                  comprehensive loss
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (38,706
              )
              
              (38,706
              )Transfer
                  to statutory and staffwelfare
                  reserves
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              (646,865
              )
              
              646,865
              
              
              -
              
              
              -
              
              
              -Balance
                  at December 31, 2005
              
              
              1,875,000
              
              
              
              
              
              1,875
              
              
              -
              
              
              
              
              
              -
              
              
              31,039,676
              
              
              
              
              
              31,040
              
              
              4,907,679
              
              
              (50,433
              )
              
              3,848,637
              
              
              956,343
              
              
              -
              
              
              (38,706
              )
              
              9,656,435The
                  accompanying notes are an integral part of these consolidated financial
                  statements




29
 *Table
            of Contents*
  **CHINA
                    DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)****FOR
                    THE YEARS ENDED DECEMBER 31, 2006 and 2005**Series
                    A
                  Convertible
                
                Series
                  B Convertible
                
                
                
                
                
                
                
                Additional
                
                Deferred
                
                Unappropriated
                
                Appropriated
                
                
                
                Accumulated
                    otherPreferred
                  Stock
                
                Preferred
                  Stock
                
                Common
                  Stock
                
                paid-in
                
                stock
                
                retained
                
                retained
                
                Due
                    to a
                
                comprehensiveShares
                
                
                
                Amount
                
                Shares
                
                
                
                Amount
                
                Shares
                
                
                
                Amount
                
                capital
                
                compensation
                
                earnings
                
                earnings
                
                stockholder
                
                loss
                
                TotalStock
                    issued for placement
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                310,000
                
                
                
                
                
                310
                
                
                387,190
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                387,500Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                2,381
                
                
                
                
                
                2
                
                
                2,998
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,000Stock
                    issued for oustanding participation costs in the production of
                    a televsion
                    series
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                335,308
                
                
                
                
                
                335.31
                
                
                565,665
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                566,000Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                40,000
                
                
                
                
                
                40
                
                
                46,360
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                46,400Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                30,000.00
                
                
                
                
                
                30.00
                
                
                29,970.00
                
                
                (26,667.00
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,333Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                30,000
                
                
                
                
                
                30
                
                
                20,370
                
                
                (18,133
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,267Repurchase
                    of stock
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                (310,000
                )
                
                
                
                
                (310
                )
                
                (387,190
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (387,500
                )Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                60,000
                
                
                
                
                
                60
                
                
                44,940
                
                
                (40,000
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                5,000Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                15,000
                
                
                
                
                
                15
                
                
                10,485
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                10,500Stock
                    issued for services
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                50,000
                
                
                
                
                
                50
                
                
                35,450
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                35,500Amortisation
                    on stock compensation
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                50,433
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                50,433Net
                    income for the year
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                2,136,990
                
                
                -
                
                
                -
                
                
                -
                
                
                2,136,990Other
                    comprehensive income
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                13,491
                
                
                13,491Transferred
                    to statutory surplus reserve
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,243
                )
                
                1,243
                
                
                -
                
                
                -
                
                
                -Balance
                    at December 31, 2006
                
                
                1,875,000
                
                
                
                
                $
                1,875
                
                
                0
                
                
                
                
                $
                0
                
                
                31,602,365
                
                
                
                
                $
                31,602
                
                $
                5,663,917
                
                $
                (84,800
                )
                $
                5,984,384
                
                $
                957,586
                
                $
                0
                
                $
                (25,215
                )
                $
                12,529,348The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements
  30
 *Table
            of Contents*


**CHINA
                  DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****FOR
                  THE YEARS ENDED DECEMBER 31, 2006 and 2005****2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES**
              
              
              
              **(Restated)**Net
                  income
              
              $
              2,136,990
              
              $
              3,115,093Adjusted
                  to reconcile net income to cash providedby
                  operating activities:Equity
                  loss of affiliate
              
              
              1,149
              
              
              -Amortization
                  - cost of sales
              
              
              154,838
              
              
              83,668Depreciation-cost
                  of sales
              
              
              2,450,739
              
              
              1,137,206Depreciation
              
              
              132,274
              
              
              50,541Provision
                  for doubtful debts
              
              
              392,198
              
              
              -Stock
                  issued for services
              
              
              106,000
              
              
              49,817Amortization
                  on stock compensation
              
              
              50,433
              
              
              -Minority
                  interests
              
              
              (131,074
              )
              
              7,899Changes
                  in operating assets and liabilities(Increase)
                  decrease in:Accounts
                  receivable
              
              
              (5,775,789
              )
              
              (4,003,333
              )Other
                  receivables and prepaid expenses
              
              
              562,773
              
              
              (481,972
              )Inventories
              
              
              (80,489
              )
              
              224,640Other
                  assets
              
              
              (466,738
              )
              
              -Due
                  from a director
              
              
              -
              
              
              26,442Other
                  assets
              
              
              
              
              
              -Increase
                  (decrease) in:Due
                  to a director
              
              
              -
              
              
              (20,483
              )Accounts
                  payable
              
              
              1,742,439
              
              
              465,157Other
                  payables and accrued liabilities
              
              
              462,636
              
              
              214,704Business
                  tax payable
              
              
              265,655
              
              
              -Value
                  added taxes payable
              
              
              (79,540
              )
              
              (315,993
              )Income
                  tax payable
              
              
              536,797
              
              
              1,412,056Other
                  tax payable
              
              
              33,877
              
              
              -Net
                  cash provided by operating activities
              
              
              2,495,168
              
              
              1,965,442**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Investments
                  in affiliates
              
              
              (529,730
              )
              
              (41,696
              )Purchase
                  of property and equipment
              
              
              (6,181,200
              )
              
              (4,175,100
              )Net
                  cash used in investing activities
              
              
              (6,710,930
              )
              
              (4,216,796
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Due
                  to related companies
              
              
              162,092
              
              
              188,704Proceeds
                  from stock issuance in private placement
              
              
              -
              
              
              1,000,000Proceeds
                  from issuance of common stock
              
              
              -
              
              
              2,290,025Investments
                  from a minority stockholder
              
              
              122,514
              
              
              -Proceeds
                  from convertible debentures
              
              
              3,100,000
              
              
              -Due
                  to a stockholder
              
              
              -
              
              
              (223,934
              )Due
                  to a director
              
              
              84,656
              
              
              -Net
                  cash provided by financing activities
              
              
              3,469,262
              
              
              3,254,795**EFFECT
                  OF EXCHANGE RATE ON CASH**
              
              
              24,181
              
              
              (38,706
              )**NET
                  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**
              
              
              (722,320
              )
              
              964,735**CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF YEAR**
              
              
              1,124,912
              
              
              160,177**CASH
                  AND CASH EQUIVALENTS AT END OF YEAR**
              
              $
              402,591
              
              $
              1,124,912**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION**Cash
                  paid for interest
              
              $
              26,133
              
              $
              9,542**SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING AND FINANCING
                  ACTIVITIES:**During
                  2006, the Company issued 335,308 shares of restricted common stock
                  for the
                  outstanding participation costs in the production of two television
                  series
                  with a fair value of $566,000.The
                  accompanying notes are an integral part of these consolidated financial
                  statements




31
 *Table
          of Contents*




CHINA
        DIGITAL MEDIA CORPORATION
 AND
        SUBSIDIARIES
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
        OF
        DECEMBER 31, 2006 AND 2005
 
  **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.
  32
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 
 
  1. **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
            (CONTINUED)**
 
 (A)  
        Organization (Continued)
 
 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.
 
 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
        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.
 
 CDMC,
        CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Guishi Digimedia and Guishi
        HuaGuang 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 2006 consolidated financial statements include the financial
        statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai
        Branch, M-Rider and Digimedia Shenzhen, its 90% variable interest entity
        in
        HuaGuang and 51% owned subsidiary of HuaGuang in Guishi Digimedia. The Company
        accounts for its 49% investment held by HuaGuang in Guishi Huaguang and its
        20%
        investment held by CDHL in Arable using the equity method. The minority
        interests represent the minority shareholders’ 10% and 54.1% proportionate share
        of the results of HuaGuang and Guishi Digimedia respectively.
 
 The
        accompanying 2005 consolidated financial statements include the accounts
        of
        CDHL, AGL and its Nanhai Branch, M-Rider, Digimedia Shenzhen, and 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.
  33
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 
  1. **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
            (CONTINUED)**
 
 (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, 2006 and 2005, the Company considers all its accounts receivable
        to
        be collectible after provision for doubtful accounts made in the financial
        statements.
 
 (G)
            Inventories 
 Inventories
        are stated at lower of cost or market value, cost being determined on a first
        in
        first out method. The Company provided inventory allowances based on excess
        and
        obsolete inventories determined principally by customer demand. Inventory
        consists of finished goods purchased directly from manufacturers.
 
 (H)
            Property
                and equipment 
 Property
        and equipment are stated at cost, less accumulated depreciation. Expenditures
        for additions, major renewals and betterments are capitalized and expenditures
        for maintenance and repairs are charged to expense as incurred.
 
 Depreciation
        is provided on a straight-line basis, less estimated residual value over
        the
        assets’ estimated useful lives. The estimated useful lives are as
        follows:
  Set
        Top
        Box (“STB”) and smart cards  5
        Years
 Motor
        vehicles  10
        Years
 Furniture,
        fixtures and equipment  5
        and 8
        Years
 
 Depreciation
        of STB
 
 As
        required by SAB11:B, depreciation and amortization for property and equipment
        directly attributed to the generation of revenue was classified under “Cost of
        Sales”. Accordingly, depreciation of STB and smart cards of the Company in 2006
        for the amount of $2,450,739 was included in “Cost of Sales”. To conform with
        the current account presentation, the depreciation of STB in 2005 of $1,137,206
        previously classified as “Selling, General and Administrative expenses” is now
        included in “Cost of Sales”.
 
 (I)
            Investments
                in television series 
 Investments
        in television series represent the unamortized costs of acquired television
        series production and participation costs. The investments are stated at
        the
        lower of cost less accumulated amortization or fair values. The investments
        are
        amortized, using the individual television series forecast method, in the
        proportion that current revenue bears to management’s estimate of ultimate
        revenue expected to be recognized from the exploitation and exhibition of
        the
        television series. The ultimate revenue which includes estimates over a period
        not to exceed 10 years following the date of initial release are prepared
        on a
        title-by-title basis and reviewed periodically based on current market
        conditions. Estimate of future revenue involve measurement uncertainty and
        it is
        therefore possible that reduction in the carrying value of investments in
        television series may be required as a consequence of changes in management’s
        future revenue estimates.
 
 (J)
            Long-lived
                assets 
 The
        Company accounts for long-lived assets under the Statements of Financial
        Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other
        Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
        Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144,
        long-lived assets held and used by the Company are reviewed for impairment
        annually in the fourth quarter or  more
        frequently if events or changes in circumstances indicate that the carrying
        amount of an asset may not be recoverable. For purposes of evaluating the
        recoverability of long-lived assets, when undiscounted future cash flows
        will
        not be sufficient to recover an asset’s carrying amount, the asset is written
        down to its fair value. The Company believes that no impairment of property
        and
        equipment, goodwill and other investments exist at December 31,
        2006.
  34
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
                (CONTINUED)** 
 (K)
            Valuation
                of 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.
  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.
  The
        Company accounts for non-hedging contracts that are indexed to, and potentially
        settled in, its own common stock in accordance with the provisions of Emerging
        Issues Task Force 00-19, “Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”).
        These non-hedging contracts accounted for in accordance with EITF 00-19 include
        freestanding warrants to purchase the Company’s common stock as well as embedded
        conversation features that have been bifurcated from the host contract in
        accordance with the requirements of SFAS 133, “Accounting for Derivative
        Instruments and Hedging Activities” (“SFAS 133”). Under certain circumstances
        that could require the Company to settle these equity items in cash or stock,
        and without regard to probability, EITF 00-19 could require the classification
        of all or part of the item as a liability and the adjustment of that
        reclassified amount to fair value at each reporting period, with such
        adjustments reflected in the line item of change in valuation of derivative
        as
        other income (expenses) in the statements of operations.
 
 During
        the year, the Company issued 4% secured convertible debentures in a face
        amount
        of US$3,100,000 which are due and payable in full in 18 months from their
        issuance. As fixed prices are set for the conversion prices of such convertible
        debentures and the attached warrants, the Company is in a position to be
        sure it
        had adequate authorized shares for the future conversion of convertible
        debentures and warrants. Therefore, no embedded derivatives and warrants
        are
        required to be recorded at fair value and marked-to-market at each reporting
        period.
  (L)
            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.
  35
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
                (CONTINUED)** 
 (L)
            Revenue
                recognition (Continued) 
 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 purchase of STB and smart cards for sale
        and
        lease to subscribers. The grant is recognized as revenue on a straight line
        basis.
 
 As
        of
        December 31, 2006 and 2005, the Company received $1,276,976 and $1,232,386
        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. During 2006, the Company purchase blocks of advertising
        spaces and was the primary obligor and carried all of the credit risk for
        the
        advertisement placements and accordingly, recorded the full amount of such
        billings from the advertisement placements as revenue. 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 deprecation in line with the
        depreciable life of the relevant products; or (c) a reduction of inventories
        for
        products maintained in stocks.
  (M)
            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.
  36
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
                (CONTINUED)** 
 (N)
            Foreign
                currency transactions 
 CDMC
        and
        CDHL maintain their accounting records in their functional currencies of
        US$ and
        Hong Kong Dollars (“HK$”) respectively, whereas AGL, M-Rider, HuaGuang, Guishi
        Digimedia, Guishi 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 (loss)
        for the
        years ended December 31, 2006 and 2005 were $13,491(gain) and
        $38,706 (loss) respectively.
 
 (O)
            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 gain in the statements of operations and stockholders’
equity. Comprehensive income (loss) for the years ended December 31, 2006
        and
        2005 were $13,491(income) and $38,706 (loss) respectively.
  (P)
            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.
 
 (Q)
            Segments 
 The
        Company operates in five reportable segments, digitalization of television
        signals, software development, television advertising, investments in television
        series and other.
  37
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
                (CONTINUED)**  (R)**
            Recent
                accounting pronouncements 
 In
        July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
        Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”),
        which clarifies the accounting for uncertainty in tax positions. This
        Interpretation provides that the tax effects from an uncertain tax position
        can
        be recognized in the Company’s financial statements, only if the position is
        more likely than not of being sustained on audit, based on the technical
        merits
        of the position. The provisions of FIN 48 are effective as of the beginning
        of
        fiscal 2007, with the cumulative effect of the change in accounting principle
        recorded as an adjustment to opening retained earnings. The Company is currently
        evaluating the impact this new Standard, but believes that it will not have
        a
        material impact on the Company’s financial position.
 
 In
        September 2006, FASB issued Statement 157, Fair Value Measurements. This
        statement defines fair value and establishes a framework for measuring fair
        value in generally accepted accounting principles (GAAP). More precisely,
        this
        statement sets forth a standard definition of fair value as it applies to
        assets
        or liabilities, the principal market (or most advantageous market) for
        determining fair value (price), the market participants, inputs and the
        application of the derived fair value to those assets and liabilities. The
        effective date of this pronouncement is for all full fiscal and interim periods
        beginning after November 15, 2007. The Company is currently evaluating the
        impact this new Standard, but believes that it will not have a material impact
        on the Company’s financial position.
 
 In
        September 2006, FASB issued Statement 158, Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans, which amend FASB
        Statements No. 87, 88, 106 and 132(R). This statement requires employers to
        recognize the overfunded or underfunded status of a defined benefit
        postretirement plan as an asset or liability in its financial statements
        and to
        recognize changes in that funded status in the year in which the changes
        occur.
        The effective date for the Company would be for any full fiscal years ending
        after December 15, 2006. The Company is currently evaluating the impact
        this new Standard, but believes that it will not have a material impact on
        the
        Company’s financial position.
  **2.**
            **RESTATEMENT
                OF FINANCIAL STATEMENTS**  The
        financial statements for the year ended December 31, 2005 have been restated
        to
        reclassify a volume discount of $1,794,897 (“consideration”) agreed with its STB
        supplier previously recorded as other income to be applied as a reduction
        against inventory, cost of goods sold or as a reduction of the balance of
        Property and Equipment for STB that have been leased to customers. The change
        in
        accounting treatment resulting in this restatement is in accordance with
        the
        Company’s accounting policy on supplier rebate shown in note 1 (L). The portion
        of consideration credited to Property and Equipment is recognized as income
        over
        the depreciable life of STB of five years by way of a reduced depreciation
        charge.
  38
 *Table
            of Contents*
 CHINA
          DIGITAL MEDIA CORPORATION
 AND
          SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
          OF
          DECEMBER 31, 2006 AND 2005
  The
        restated financial statements for the year ended December 31, 2005 are shown
        as
        follows:
  **CONSOLIDATED
        BALANCE SHEETS**
  **ASSETS*****As
                  previously******reported***
              
              ***Adjustments***
              
              ***Restated*****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              1,124,912
              
              
              
              1,124,912Accounts
                  receivable, net of allowances
              
              4,444,087
              
              
              
              4,444,087Inventories,
                  net
              
              426,027
              
              (31,035)
              
              394,992Other
                  receivable and prepaid expenses
              
              750,591
              
              
              
              750,591Value
                  added taxes recoverable
              
              -
              
              
              
              -**Total
                  Current Assets**
              
              6,745,617
              
              (31,035)
              
              6,714,582**INTANGIBLE
                  ASSETS**
              
              392,521
              
              
              
              392,521**INVESTMENTS
                  IN TELEVISION SERIES, NET**
              
              771,115
              
              
              
              771,115**INVESTMENTS
                  IN AFFILIATES**
              
              -
              
              
              
              -**PROPERTY
                  AND EQUIPMENT, NET**
              
              9,893,836
              
              (1,351,840)
              
              8,541,996**OTHER
                  ASSETS****TOTAL
                  ASSETS**
              
              17,803,089
              
              (1,382,875)
              
              16,420,214**CURRENT
                  LIABILITIES**Convertible
                  debentures
              
              -
              
              
              
              -Accounts
                  payable
              
              4,792,339
              
              
              
              4,792,339Other
                  payables and accrued liabilities
              
              248,675
              
              
              
              248,675Due
                  to a director
              
              41,981
              
              
              
              41,981Due
                  to related companies
              
              218,394
              
              
              
              218,394Business
                  tax payable
              
              -
              
              
              
              -Value
                  added taxes payable
              
              16,330
              
              
              
              16,330Income
                  tax payable
              
              1,874,352
              
              (456,349)
              
              1,418,003Other
                  tax payable
              
              -
              
              
              
              -**Total
                  Current Liabilities**
              
              7,192,071
              
              (456,349)
              
              6,735,722**COMMITMENTS
                  AND CONTINGENCIES**
              
              -
              
              
              
              -**MINORITY
                  INTERESTS**
              
              28,057
              
              
              
              28,057**STOCKHOLDERS'
                  EQUITY**Series
                  A convertible preferred stock ($0.001 par value, 40,000,000
                  sharesauthorized,1,875,000
                  shares issued and outstanding as ofDecember
                  31, 2006 and 2005)
              
              1,875
              
              
              
              1,875Common
                  stock ($0.001 par value, 500,000,000 shares authorized,31,039,676
                  shares issued and outstanding as of December 31, 2005)
              
              31,040
              
              
              
              31,040Additional
                  paid-in capital
              
              4,907,679
              
              
              
              4,907,679Deferred
                  stock compensation
              
              (50,433)
              
              
              
              (50,433)Retained
                  earningsUnappropriated
              
              4,775,163
              
              (926,526)
              
              3,848,637Appropriated
              
              956,343
              
              
              
              956,343Accumulated
                  other comprehensive loss
              
              (38,706)
              
              
              
              (38,706)**Total
                  Stockholders' Equity**
              
              10,582,961
              
              (926,526)
              
              9,656,435**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              17,803,089
              
              (1,382,875)
              
              16,420,214
  39
 *Table
            of Contents*
 
 CHINA
          DIGITAL MEDIA CORPORATION
 AND
          SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
          OF
          DECEMBER 31, 2006 AND 2005
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  ***As
                  previously******reported***
              
              ***Adjustments***
              
              ***Restated*****NET
                  SALES**Revenue
                  form digitalization of television signals
              
              $
              5,391,730
              
              
              
              
              
              5,391,730Revenue
                  from television advertising
              
              
              1,048,175
              
              
              
              
              
              1,048,175Revenue
                  from software development
              
              
              66,716
              
              
              
              
              
              66,716Revenue
                  from investments in television series
              
              
              123,274
              
              
              
              
              
              123,274Government
                  grant received
              
              
              1,232,386
              
              
              
              
              
              1,232,386**7,862,281**
              
              
              **0**
              
              
              **7,862,281****COST
                  OF SALES - OPERATING**
              
              
              (1,482,300
              )
              
              157,150
              
              
              (1,325,150
              )**COST
                  OF SALES - DEPRECIATION**
              
              
              (1,392,077
              )
              
              254,871
              
              
              (1,137,206
              )**GROSS
                  PROFIT**
              
              
              **4,987,904**
              
              
              **412,022**
              
              
              **5,399,926****OPERATING
                  EXPENSES**Selling,
                  general and administrative expenses
              
              
              1,320,950
              
              
              
              
              
              1,320,950Depreciation
                  and amortization
              
              
              50,541
              
              
              
              
              
              50,541Total
                  Operating Expenses
              
              
              1,371,491
              
              
              0
              
              
              1,371,491**INCOME
                  FROM OPERATION**
              
              
              3,616,413
              
              
              412,022
              
              
              4,028,435**OTHER
                  INCOME (EXPENSES)**Equity
                  loss of affiliates
              
              
              -
              
              
              
              
              
              -Interest
                  income
              
              
              218,035
              
              
              
              
              
              218,035Volume
                  discounts earned
              
              
              1,794,897
              
              
              (1,794,897
              )
              
              0Other
                  income
              
              
              -
              
              
              
              
              
              -Interest
                  expenses
              
              
              -
              
              
              
              
              
              -Interest
                  paid to related companies and directors
              
              
              (9,542
              )
              
              
              
              
              (9,542
              )Other
                  expenses
              
              
              (14,516
              )
              
              
              
              
              (14,516
              )Total
                  Other Income (Expenses), net
              
              
              1,988,874
              
              
              (1,794,897
              )
              
              193,977**NET
                  INCOME BEFORE TAXES**
              
              
              5,605,287
              
              
              (1,382,875
              )
              
              4,222,412Income
                  tax expense
              
              
              (1,555,769
              )
              
              456,349
              
              
              (1,099,420
              )Minority
                  interests
              
              
              (7,899
              )
              
              
              
              
              (7,899
              )**NET
                  INCOME**
              
              $
              4,041,619
              
              
              **(926,526**
              **)**
              
              **3,115,093****OTHER
                  COMPREHENSIVE INCOME (LOSS)**Foreign
                  currency translation gain (loss)
              
              
              (38,706
              )
              
              
              
              
              (38,706
              )**COMPREHENSIVE
                  INCOME**
              
              $
              4,002,913
              
              
              (926,526
              )
              
              3,076,387**Net
                  income per share-basic****-
                  two classes method**
              
              $
              0.13
              
              
              (0.03
              )
              
              0.10**Net
                  income per share-diluted**
              
              $
              0.11
              
              
              (0.03
              )
              
              0.08Weighted
                  average number of shares outstanding during the year -
                  basic
              
              
              28,231,555
              
              
              
              
              
              28,231,555Weighted
                  average number of shares outstanding during the year-
                  diluted
              
              
              37,627,388
              
              
              
              
              
              37,627,388
  40
 *Table
            of Contents*
 
 CHINA
          DIGITAL MEDIA CORPORATION
 AND
          SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
          OF
          DECEMBER 31, 2006 AND 2005
 **3.**
            **INTANGIBLE
                ASSETS** 
 Intangible
        assets of the Company represent goodwill recognized upon the acquisition
        of
        M-Rider. On July 12, 2005, pursuant to a Share Transfer Agreement (“ST
        Agreement”), CDHL acquired all of the issued and outstanding capital of M-Rider,
        a PRC company engaged in the design, production and distribution of
        advertisements through television channels. Under the terms of the ST Agreement,
        CDHL purchased all of the issued and outstanding capital of M-Rider for a
        total
        consideration of $1,047,559; $132,927 payable in cash and $914,632 payable
        by
        the issue of shares of the Company’s common stock. The ST Agreement became
        effective on August 25, 2005 when approval from the PRC Government of the
        acquisition was obtained. On the effective date, CDHL paid the cash
        consideration of $132,927 and issued the 29,158 shares of the Company’s
        restricted common stock having a value of $62,141 to the stockholders of
        M-Rider. The balance of $852,491 in value of the Company’s shares of common
        stock is payable one year from the effective date on the conditions that
        the net
        operating cash flow of M-Rider on that day is not less than RMB10 million
        and
        the two stockholders of M-Rider who transferred M-Rider’s shares to the Company
        are to be hired by M-Rider for a period of three years. Since the targeted
        performance has not been achieved, the stockholders of M-Rider are no longer
        entitled to receive the balance of the purchase consideration of
        $852,491.
 
 Goodwill
        of the aforesaid acquisition was calculated as follow:
 Cash
                      and cash equivalents
                  
                  $
                  210,718Accounts
                      receivable
                  
                  
                  129,343Other
                      receivables and prepaid expenses
                  
                  
                  197,877Total
                      current assets
                  
                  
                  537,938Property
                      and equipment, net
                  
                  
                  56,137Total
                      assets
                  
                  
                  594,075Less:
                      Accounts payable and accrued liabilities
                  
                  
                  (791,528
                  )Net
                      liabilities acquired
                  
                  
                  (197,453
                  )Consideration
                      for acquisition
                  
                  
                  195,068Goodwill
                  
                  $
                  392,521
  During
        the fourth quarter of 2006, the Company performed impairment tests on the
        goodwill recognized on M-Rider’s acquisition and believes that no impairment of
        goodwill exists.
 
 **4.**
            **INVESTMENTS
                IN AFFILIATES** 
 (A)
        On
        May 8, 2006, the Company’s 90% VIE, HuaGuang, established Guishi Huaguang, a 49%
        joint venture company in China to provide television programming services
        for a
        period of 20 years.
 
 The
        Company’s effective interest of 44.1% 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.
 
 A
        summary
        of the audited condensed financial statements of the affiliate as of December
        31, 2006 is as follows:
  Current
                  assets
              
              $
              381,553Non-current
                  assets
              
              
              245,115Total
                  Assets
              
              $
              626,668Current
                  liabilities
              
              $
              246,150Stockholders’
                  equity
              
              
              380,518Total
                  Liabilities and Stockholders’ Equity
              
              $
              626,668Revenues
              
              $
              -Gross
                  Profit
              
              $
              -Net
                  loss
              
              $
              (2,575
              )
 
 The
        Company’s share of the loss for the year ended December 31, 2006 is as
        follow:
 Company
                  share at 44.1%
              
              $
              (1,135
              )Equity
                  in loss of affiliate
              
              $
              (1,135
              )
  41
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 
  **4.**
                  **INVESTMENTS
                      IN AFFILIATES (CONTINUED)**
 (B)
        On
        August 23, 2006, the Company subscribed to 20% equity interest in Arable,
        a
        limited liability company organized and existing under the laws of Hong Kong
        for
        $2,568. The Company also loaned $356,991 to Arable as of December 31,
        2006.
 
 The
        Company’s effective interest of 20% in Arable is accounted for using the equity
        method of accounting and is stated at cost plus equity in undistributed earnings
        since subscription.
 
 Current
                  assets
              
              $
              268,140Non-current
                  assets
              
              
              370,344Total
                  Assets
              
              $
              638,484Non-current
                  liabilities, including loan from CDHL
              
              $
              685,198Stockholders’
                  equity
              
              
              (46,714
              )Total
                  Liabilities and Stockholders’ Equity
              
              $
              638,484Revenues
              
              $
              -Gross
                  Profit
              
              $
              -Net
                  loss
              
              $
              (59,555
              )
 The
        Company’s share of the loss for the period from the date of subscription to
        December 31, 2006 is as follows:
 
 Company
                  share at 20%
              
              $
              (750
              )Equity
                  in loss of affiliate
              
              $
              (750
              )
 
 **5.**
            **ACCOUNTS
                RECEIVABLE, NET** 
 Accounts
        receivable at December 31, 2006 and 2005 consisted of the following:
 2006
                  
                  2005Accounts
                      receivable
                  
                  $
                  10,219,876
                  
                  $
                  4,444,087Less:
                      allowance for doubtful accounts
                  
                  
                  (392,198
                  )
                  
                  -Accounts
                      receivable, net
                  
                  $
                  9,827,678
                  
                  $
                  4,444,087
  As
        of
        December 31, 2006 and 2005, the Company considered all accounts receivable
        collectable after a provision for doubtful accounts was made which was $392,198
        and $0 for the years ended December 31, 2006 and 2005
        respectively.
 
 **6.**
            **INVENTORIES,
                NET** 
 Inventories
        at December 31, 2006 and 2005 consisted of the following:
 2006
                  
                  2005Finished
                      goods
                  
                  $
                  475,481
                  
                  $
                  394,992Less:
                      provision of obsolescence
                  
                  
                  -
                  
                  
                  -Inventories,
                      net
                  
                  $
                  475,481
                  
                  $
                  394,992
  For
        both
        of the years ended December 31, 2006 and 2005, the Company has not recorded
        a
        provision for obsolete inventories.
  **7.**
            **OTHER
                RECEIVABLES AND PREPAID EXPENSES** 
 Other
        receivables and prepaid expenses at December 31, 2006 and 2005 consisted
        of the
        following:
 2006
                  
                  2005Deposit
                      paid for the sole advertising agency
                  
                  
                  -
                  
                  
                  631,319Advances
                      to staff
                  
                  
                  83,659
                  
                  
                  17,851Prepayments
                  
                  
                  85,252
                  
                  
                  85,743Trade
                      deposits
                  
                  
                  10,156
                  
                  
                  7,280Utility
                      deposits
                  
                  
                  8,751
                  
                  
                  8,398$
                  187,818
                  
                  $
                  750,591
  42
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
  **8.**
            **INVESTMENTS
                IN TELEVISION SERIES, NET** 
 Investments
        in television series related to the Company’s participations in the production
        of two television series through HuaGuang, a 90% held VIE:-
 2006
                  
                  2005Television
                      participation costs
                  
                  
                  885,711
                  
                  
                  854,783Less:
                      accumulated amortization
                  
                  
                  269,434
                  
                  
                  83,668Television
                      participation costs, net
                  
                  $
                  616,277
                  
                  $
                  771,115
  a)
            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, 2006, the Company reviewed future revenue
                projections supporting the carrying value of its investments in television
                series in accordance with its accounting policy described in note
                1 (i).
                No impairment to the carrying values of the investments in television
                series is required.  **9.**
            **PROPERTY
                AND EQUIPMENT, NET** 
 The
        following is a summary of property and equipment at December 31:
 2006
                  
                  2005STB
                      and smart cards leased to subscribers
                  
                  $
                  15,744,782
                  
                  $
                  9,891,389Motor
                      vehicles
                  
                  
                  103,868
                  
                  
                  71,955Furniture
                      and office equipment
                  
                  
                  498,285
                  
                  
                  202,39116,346,935
                  
                  
                  10,165,735Less:
                      accumulated depreciation
                  
                  
                  4,217,441
                  
                  
                  1,623,739Property
                      and equipment, net
                  
                  $
                  12,129,494
                  
                  $
                  8,541,996
  Depreciation
        expense for the years ended December 31, 2006 and 2005 was $2,906,051 and
        $1,442,618 respectively.
 
 10.
            **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 during the year totaling $620,480. Deferred finance
        costs are amortized over the life of the debenture of 18 months from November
        2006. In 2006, costs amortized as expenses were $68,942 and costs classified
        as
        deferred stock compensation were $84,800.
 
 11.
            **CONVERTIBLE
                DEBENTURES** 
 On
        July
        7, 2006, the Company sold 20 units of securities to a corporate investor
        for
        $1,000,000 and on July 21, 2006, the Company sold 2 units of securities to
        an
        accredited investor for $100,000. Each unit consists of a 8% interest bearing
        convertible debenture in the principal amount of $50,000, convertible at
        $0.80
        per share, together with certain rights of warrants. On November 17, 2006,
        the
        Company completed a private equity financing with four accredited investors
        for
        $3,000,000, $1,000,000 of which was rolled over from the investor of the
        sale
        completed on July 7, 2006. The investor’s previously purchased securities were
        returned to the Company in partial exchange for the units issued on this
        private
        equity financing.  Upon
        the
        closing of this private equity financing, the investor waived all rights
        associated with the previously purchased securities and waived all interest
        payments accrued on the previously purchased securities. Furthermore, on
        December 13, 2006, the Company has completed another private equity financing
        with an accredited investor for $100,000.
 
 As
        a
        result of the above, during 2006, the Company has issued the following
        convertible debentures;
 
 a)
            On
                November 17, 2006 to a financial institution for $
                2,150,000 b)
            On
                November 17, 2006 to a financial institution for $
                200,000 c)
            On
                November 17, 2006 to a financial institution for $
                500,000 d)
            On
                November 17, 2006 to an individual investor for $
                150,000 e)
            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.
  43
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 
 **12.**
            **OTHER
                PAYABLES AND ACCRUED LIABILITIES** 
 Other
        payables and accrued liabilities at December 31, 2006 and 2005 consist of
        the
        following:
  2006
                  
                  2005Other
                      payables
                  
                  $
                  229,116
                  
                  $
                  87,546Deposits
                      received from customers
                  
                  
                  239,466
                  
                  
                  74,302Accrued
                      liabilities
                  
                  
                  284,710
                  
                  
                  86,827$
                  753,292
                  
                  $
                  248,675
 
 **13.**
            **INCOME
                TAX** 
 a
            CDMC
                was incorporated in the United States and has incurred net operating
                loss
                for income tax purposes for 2006 and
                2005. 
 CDHL
        was
        incorporated in Hong Kong and is subject to Hong Kong profits tax. No provision
        for Hong Kong profits tax has been made since CDHL incurred a loss during
        2006
        and 2005.
 
 AGL,
        M-Rider, HuaGuang, Guishi Digimedia, Guishi HuaGuang and Shenzhen DigiMedia
        were
        incorporated in the PRC and are subject to PRC income tax which is computed
        according to the relevant laws and regulations in the PRC. The applicable
        tax
        rate has been 33%, and for HuaGuang, Guishi Digimedia, Guishi HuaGuang and
        Shenzhen DigiMedia, no tax benefit is expected from the tax credits in the
        future. The income tax expenses for 2006 and 2005 are summarized as
        follows:
 PRC
                      Income Tax
                  
                  2006
                  
                  2005Current
                  
                  $
                  -
                  
                  $
                  -Deferred
                  
                  
                  468,980
                  
                  
                  1,099,420$
                  468,980
                  
                  $
                  1,099,420
  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, 2006 and 2005 consists of net
                operating losses carry forwards calculated using statutory effective
                tax
                rates. Due to their history of losses for CDMC and CDHL, 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.  As
        at
        December 31, 2006, CDMC had loss carry forwards of approximately $366,051
        for
        U.S. income tax purposes available for offset against future taxable U.S.
        income
        expiring in 2025.
  As
        at
        December 31, 2006, CDHL has Hong Kong tax loss carry forwards of approximately
        $40,794. Currently, the Hong Kong tax losses can be carried forward
        indefinitely.
 
 c
            The
                reconciliation of income taxes computed at the statutory income tax
                rates
                to total income taxes for the years ended December 31, 2006 and 2005
                is as
                follows:  **2006**
                  
                  2005CDMCIncome
                      tax computed at the federal statutory rate
                  
                  
                  **34%**
                  
                  
                  34%State
                      income taxes, net of federal tax benefit
                  
                  
                  **5%**
                  
                  
                  5%Valuation
                      allowance
                  
                  
                  **(39%)**
                  
                  
                  (39%)CDHLIncome
                      tax computed at applicable tax rate
                  
                  
                  **17.5%**
                  
                  
                  17.5%Valuation
                      allowance
                  
                  
                  **(17.5%)**
                  
                  
                  (17.5%)Total
                      deferred tax asset
                  
                  
                  **0%**
                  
                  
                  0%
  44
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **14.**
            **NET
                INCOME PER SHARE** 
 Earnings
        per share on a diluted basis were $0.05 and $0.08 for the fiscal years ended
        December 31, 2006 and 2005 respectively. As of December 31, 2006, the Company
        has outstanding:
 
 -
        31,602,365 shares of common stock;
 -
        1,875,000 shares of preferred stock;
 -
        6,888,882 shares of common stock to be issued upon conversion of convertible
        debenture (“CD”);
 -
        warrants to purchase 6,888,882 shares of common stock at an exercise price
        of
        $0.80 per share, expire in November 2012;
 -
        warrants to purchase 6,888,882 shares of common stock at an exercise price
        of
        $1.20 per share, expire in November 2012; and
 -
        warrants to purchase 3,444,441 shares of common stock at an exercise price
        of
        $2.25 per share, expire in November 2012.
 
 In
        accordance with paragraph 40 and 41 of SFAS 128 and EITF 03-6, basic and
        diluted
        earnings per share on a two class method for the fiscal year ended December
        31,
        2006 and 2005 were calculated as follows:
 2006
              
              2005Earnings
              
              
              
              (Restated)Net
                  Income
              
              
              2,136,990
              
              
              3,115,093Basic-
                  2 classes methodIncome
                  available to common stockholders
              
              
              2,136,990
              
              
              3,115,093Weighted-average
                  common stock outstanding
              
              
              31,312,535
              
              
              28,231,555Number
                  of preferred stock
              
              
              1,875,000
              
              
              1,875,000Weighted-average
                  common stock outstanding - assume CD converted
              
              
              807,048
              
              
              -Basic
                  earnings per share - Common Stock
              
              
              0.06
              
              
              0.10Basic
                  earnings per share - Preferred Stock
              
              
              0.06
              
              
              0.10Basic
                  earnings per share - CD
              
              
              0.06
              
              
              -DilutedIncome
                  available to common stockholders
              
              
              2,136,990
              
              
              3,115,093Income
                  available to common stockholders and assumed conversions
              
              
              2,151,993
              
              
              -Weighted-average
                  common stock outstanding
              
              
              31,312,535
              
              
              28,231,555Number
                  of preferred stock - converted bases
              
              
              9,375,000
              
              
              9,375,000Weighted-average
                  common stock outstanding for 4% convertible debenture - assumed
                  conversions
              
              
              807,048
              
              
              -Diluted
                  weighted-average common stock outstanding
              
              
              41,494,583
              
              
              37,627,388Diluted
                  earnings per share
              
              
              0.05
              
              
              0.08
 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, 2006 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,
          2006.
 45
 *Table
              of Contents*
  CHINA
              DIGITAL MEDIA CORPORATION
 AND
              SUBSIDIARIES
 NOTES
              TO
              THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
              OF
              DECEMBER 31, 2006 AND 2005
 
 **15.**
                    **SEGMENTS**
 
 The
        Company operates in five reportable segments; digitalization of television
        signals, software development, television advertising, investments in television
        series and other. The accounting policies of the segments are the same as
        described in the summary of significant accounting policies. The Company
        evaluates segment performance based on income from operations. All inter-company
        transactions between segments have been eliminated. As a result, the components
        of operating income for one segment may not be comparable to another segment.
        The following is a summary of the Company’s segment information for the years
        ended December 31, 2006 and 2005:
 
 **Digitalization**
              
              
              
              
              
              **Investments****of
                  Television**
              
              **Television**
              
              **Software**
              
              **in
                  television****Signals**
              
              **Advertising**
              
              **Development**
              
              **series**
              
              **Other**
              
              **Total****2006****Revenues**
              
              $
              8,491,087
              
              $
              6,712,087
              
              $
              51,687
              
              $
              268,165
              
              $
              -
              
              $
              15,523,026**Gross
                  profit**
              
              
              5,030,502
              
              
              896,933
              
              
              51,687
              
              
              85,427
              
              
              -
              
              
              6,064,549**Net
                  Income**
              
              
              2,937,200
              
              
              (271,961
              )
              
              (147,337
              )
              
              92,535
              
              
              (473,446
              )
              
              2,136,990**Total
                  assets**
              
              
              19,576,969
              
              
              3,667,181
              
              
              69,450
              
              
              1,214,012
              
              
              562,777
              
              
              25,090,389**Capital
                  expenditure**
              
              
              5,440,334
              
              
              626,045
              
              
              3,488
              
              
              104,137
              
              
              7,197
              
              
              6,181,200**Depreciation
                  and amortization**
              
              
              2,478,810
              
              
              46,051
              
              
              12,669
              
              
              191,911
              
              
              8,409
              
              
              2,737,851**2005
                  (Restated)****Revenues**
              
              $
              6,624,116
              
              $
              1,048,175
              
              $
              66,716
              
              $
              123,274
              
              $
              -
              
              $
              7,862,281**Gross
                  profit**
              
              
              4,964,598
              
              
              329,376
              
              
              66,346
              
              
              39,606
              
              
              -
              
              
              5,399,926**Net
                  Income**
              
              
              3,367,760
              
              
              133,567
              
              
              (99,738
              )
              
              (67,574
              )
              
              (218,923
              )
              
              3,115,093**Total
                  assets**
              
              
              13,486,491
              
              
              1,573,084
              
              
              268,576
              
              
              908,211
              
              
              183,852
              
              
              16,420,214**Capital
                  expenditure**
              
              
              4,026,584
              
              
              6,476
              
              
              5,424
              
              
              125,105
              
              
              11,511
              
              
              4,175,100**Depreciation
                  and amortization**
              
              
              1,158,991
              
              
              3,914
              
              
              11,694
              
              
              90,521
              
              
              6,295
              
              
              1,271,415
  46
 *Table
            of Contents*
 CHINA
          DIGITAL MEDIA CORPORATION
 AND
          SUBSIDIARIES
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
          OF
          DECEMBER 31, 2006 AND 2005
  **16.**
              **STOCKHOLDERS’
                  EQUITY**
 
 **(A)
        Stock issuances**
 
 (1)
            Stock
                issued for placement 
 On
        March
        15, 2006, the Company issued 310,000 shares of restricted common stock at
        $1.25
        per share to a corporate investor for an aggregate consideration of $387,500
        under a Stock Purchase and Repurchase Agreement dated March 14, 2006. The
        Company relied on an exemption from registration pursuant to Regulation S
        under
        the Securities Act of 1933 in connection with the issuance of these
        shares.
 
 On
        October 25, 2006, the corporate investor exercised its option in accordance
        with
        the agreement to have the Company repurchased all of the 310,000 shares at
        a
        fixed price of $1.25 per share plus a premium, for a total of $436,548. The
        difference between the purchase consideration and the repurchased sum, being
        $49,048, was recognized as expense in the Company’s statements of
        operations.
 
 (2)
            Stock
                issued for services 
 During
        the year, the Company issued 2,381 shares of its restricted common stock
        to a
        consultant for services retained. The shares were valued at the market on
        the
        date of issuance, yielding an aggregate fair value of total $3,000. This
        expense
        was included in the Company accompanying statements of operations.
 
 During
        the year, the Company issued 40,000 shares of its restricted common stock
        to a
        consultant for services retained. The shares were valued at the market on
        the
        date of issuance, yielding an aggregate fair value of total $46,400. This
        expense was included in the Company accompanying statements of
        operations.
 
 During
        the year, the Company issued 15,000 shares of its restricted common stock
        to a
        consultant for services retained. The shares were valued at the market on
        the
        date of issuance, yielding an aggregate fair value of total $10,500. This
        expense was included in the Company accompanying statements of
        operations.
 
 During
        the year, the Company issued 50,000 shares of its restricted common stock
        to a
        consultant for services retained. The shares were valued at the market on
        the
        date of issuance, yielding an aggregate fair value of total $35,500. This
        expense was included in the Company accompanying statements of
        operations.
 
 During
        the year, the Company issued 30,000 shares of restricted common stock to
        a
        consultant for services retained in relation to the issuance of convertible
        debentures as stated in note 9 above. The shares issued were valued at the
        market value on the date of issuance, yielding a fair value of $30,000. The
        fair
        value of the services will be amortized over the life of the debentures of
        eighteen months. The Company recognized expense of $3,333 and recorded deferred
        stock compensation of $26,667 as of December 31, 2006 for these
        services.
 
 During
        the year, the Company issued 30,000 shares of restricted common stock to
        a
        consultant for services retained in relation to the issuance of convertible
        debentures as stated in note 9 above. The shares were valued at the market
        value
        on the date of issuance, yielding a fair value of total $20,400. The fair
        value
        of the services will be amortized over the life of the debentures of eighteen
        months. The Company recognized expense of $2,267 and recorded deferred stock
        compensation of $18,133 as of December 31, 2006 for these services.
 
 During
        the year, the Company issued 42,000 shares of restricted common stock to
        a
        consultant for services retained in relation to the issuance of convertible
        debentures as stated in note 9 above. The shares were valued at the market
        value
        on the date of issuance, yielding a fair value of total $31,500. The fair
        value
        of the services will be amortized over the
        life
        of the debentures of eighteen months .
        The
        Company recognized expense of $3,500 and recorded deferred stock compensation
        of
        $28,000 as of December 31, 2006 for these services.
  47
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **(A)
        Stock issuances (Continued)**
 
 During
        the year, the Company issued 18,000 shares of restricted common stock to
        a
        consultant for services retained in relation to the issuance of convertible
        debentures as stated in note 9 above. The shares were valued at the market
        value
        on the date of issuance, yielding a fair value of total $13,500. The fair
        value
        of the services will be amortized over the life of the debentures of eighteen
        months. The Company recognized expense of $1,500 and recorded deferred stock
        compensation of $12,000 as of December 31, 2006 for these
        services.
 
 (3)
            Stock
                issued for investment 
 On
        March
        30, 2006, the Company issued 335,308 shares of restricted common stock with
        a
        fair value of $566,000 for the outstanding participation costs in the production
        of a television series. The Company relied on an exemption from registration
        pursuant to Section 4(2) under the Securities Act in connection with the
        issuance of these shares.
  **(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
        2006 and 2005, the Company appropriated $1,243 and $646,865 respectively
        to the
        reserves funds based on its net income in accordance with the laws and
        regulations of the PRC.
 
 **(C)
        Contributed capital**
 
 During
        2006 and 2005, CDHL contributed restricted capital of $779,207 and $2,885,804
        respectively to AGL.
 
 **17.**
            **RELATED
                PARTY TRANSACTIONS** 
 In
        2006
        and 2005, the Company owed a director $84,656 and $41,981 respectively for
        short-term advances. Interest is charged at 6% per annum on the amount
        owed.
 
 As
        of
        December 31, 2006 and 2005, the Company owed to a related company $62,519
        and
        $218,394 respectively for short-term unsecured advances made. Interest is
        charged at 6% per annum on the amount owed.
 
 As
        of
        December 31, 2006, the Company owed to an affiliate, Guishi HuaGuang, $317,967
        for short-term unsecured interest free advances made.
 
 On
        August
        23, 2006, the Company entered into an agreement with a 20% affiliate to advance
        a total of $770,416 to support the research and development on the middleware
        applications for digital television STB. The advances will be used to pay
        for
        license fees in the future and other expenses or refunded to the Company
        if the
        applications cannot be applied to the Company’s STB. As of December 31, 2006,
        the Company has advanced $356,991 to the affiliate. The advance is interest
        free
        for a period of five years and thereafter interest is charged at the rate
        of
        LIBOR plus 2% on the outstanding balance.
  48
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 18.
            **COMMITMENTS** 
 (A)
            Employee
                benefits 
 The
        full
        time employees of the Company in China are entitled to employee benefits
        including medical care, welfare subsidies, unemployment insurance and pension
        benefits through a Chinese government mandated multi-employer defined
        contribution plan. The Company is required to accrue for those benefits based
        on
        certain percentages of the employees’ salaries and make contributions to the
        plans out of the amounts accrued for medical and pension benefits. The total
        provision and contributions made for such employee benefits was $70,574 and
        $18,018 for the years ended December 31, 2006 and 2005, 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 $4,563 and $2,448 for the years ended December 31, 2006 and 2005
        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 two operating leases
        which
        expire on December 31, 2007, June 15, 2007, and July 14, 2011 at monthly
        rental
        of $4,697, $2,044 and $3,903 respectively. The Company also leases spaces
        for
        staff quarters from third parties under five operating leases which expire
        from
        March 21, 2007 to October 16, 2007 with total monthly rental of $664.
        Accordingly, for the years ended December 31, 2006 and 2005, the Company
        recognized rental expense for office spaces in the amount of $90,731 and
        $46,713, respectively
 
 As
        of
        December 31, 2006, the Company has outstanding commitments with respect to
        the
        above non-cancelable operating leases, which are due as follows:
 2007
                  
                  $
                  114,4422008
                  
                  
                  46,8362009
                  
                  
                  46,8362010
                  
                  
                  46,836Thereafter
                  
                  
                  25,370$
                  280,320
  (C)
            Capital
                commitments 
 According
        to the joint venture agreements with Guizhou Television Station, the Company
        has
        committed to invest as capital contributions totalling $2,553,952 (RMB20
        million) into the 51% owned subsidiary, Guishi HuaGuang and the 49% owned
        affiliate, Guishi Digimedia over a period of two years. As of December 31,
        2006,
        the Company has invested a total of $317,967 (RMB2,490,000) as capital
        contributions into the two joint ventures. The outstanding capital contribution
        of $2,235,985 (RMB17,510,000) is due by February 15, 2008.
 
 According
        to the amended Articles of Association of Digimedia Shenzhen, the Company
        has to
        fulfill registered capital contributions of $100,000 within one year from
        October 17, 2005. As of December 31, 2006, the Company has fulfilled $15,000
        in
        registered capital requirement. As the Company is in the process of closing
        this
        dormant company, the outstanding capital contribution of $85,000 is not required
        to be paid up.
 
 49
 *Table
            of Contents*
  CHINA
            DIGITAL MEDIA CORPORATION
 AND
            SUBSIDIARIES
 NOTES
            TO
            THE CONSOLIDATED FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2006 AND 2005
 **19.**
            **CONTINGENCIES** 
 The
        Company accounts for loss contingencies in accordance with SFAS 5 “Accounting
        for Loss Contingencies”, and other related guidance. Set forth below is a
        description of certain loss contingencies as of December 31, 2005 and
        management’s opinion as to the likelihood of loss in respect of each loss
        contingency.
 
 On
        May
        24, 2005, Ziegler, Ziegler & Associates LLP and Scott Ziegler filed a
        Complaint against the Company in the United States District Court for the
        Southern District of New York for using their internet domain name to distribute
        the Company’s promotional information over the internet. The Plaintiffs seek
        several types of damages in an amount not less than $1,250,000. The Company’s
        counsel was instructed to vigorously defend the action as the emails in question
        were distributed by a party not hired nor associated with the Company.
        Accordingly, no provision has been made as of December 31, 2006.
 
 On
        January 18, 2006, counsel for plaintiff threatened to file a complaint in
        the
        County Court in and for Miami-Dade County, Florida against the Company in
        an
        action for damages that does not exceed $15,000, exclusive of court costs,
        attorney’s fees and interest. The plaintiff alleged that the Company was a
        guarantor of a lease entered into by its Hairmax of Florida, Inc. subsidiary,
        which abandoned the lease and failed to pay the full rental due under the
        lease.
 
 The
        Company has made a settlement offer to the plaintiff of $9,000 and is awaiting
        the plaintiff’s response. The Company has accrued $9,000 as at December 31,
        2006.
 
 **20.**
            **CONCENTRATIONS
                AND RISKS** 
 During
        2006 and 2005, 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, 2006 and 2005 are as follows:
  Supplier
                      A
                  
                  Supplier
                      BFor
                      the year endedDecember
                      31, 2006
                  
                  
                  89%
                  
                  
                  0%December
                      31, 2005
                  
                  
                  75%
                  
                  
                  17%
  At
        December 31, 2006 and 2005, accounts payable to those two suppliers totaled
        $5,316,582 and $3,858,560 respectively.
 
 **21.**
            **SUBSEQUENT
                EVENTS** 
 Commencing
        January 1, 2007, the Company’s subsidiary, M-Rider, terminated its exclusive
        advertising agency with a television station in Guangdong Province, PRC after
        one year of service. M-Rider will not be penalized for the termination of
        the
        exclusive agency and will remain as an advertising agent without any fixed
        commitment to the television station.
  On
        January 24, 2007, the Company exercised its option to request the former
        shareholders of HuaGuang to transfer the remaining 10% equity interest in
        HuaGuang to the Company for $10 in accordance with  a
        Strategic Alliance Agreement dated June 15, 2005 between the Company and
        Guangdong Pukonyi Culture Development Limited (later renamed as HuaGuang),
        subject to the approval PRC Government and in compliance with all the related
        laws of the PRC. When completed the exercise of this option will result in
        the
        Company owing 100% of HuaGuang.
 
 As
        of
        February 9, 2007, the Company’s subsidiary, M-Rider, entered into a Sole Agent
        Service Agreement (“SAS Agreement”) with China Yellow River TV Station, a
        corporation organized and existing under the laws of the PRC (“YRT”). Pursuant
        to the terms of the Agreement, M-Rider
        will act as the sole advertising agent for YRT starting from January 1, 2007
        for
        a period of four years and eleven months, with the option to renew the SAS
        Agreement for an additional five years upon its expiration.


50
 *Table
          of Contents*




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




The
      Company has engaged Jimmy C.H. Cheung & Co., Certified Public Accountants,
      as our independent registered public accounting firm since July 18, 2006. The
      Company had not consulted with Jimmy C.H. Cheung & Co. regarding the
      application of accounting principles to any contemplated or completed
      transactions nor the type of audit opinion that might be rendered on the our
      financial statements, and neither written nor oral advice was provided that
      would be an important factor considered by us in reaching a decision as to
      an
      accounting, auditing or financial reporting issue.





**ITEM
      8A. Controls and Procedures**





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





*CEO
      and 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 Controls* .
      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
      and
      the CFO by others, particularly during the period in which the applicable report
      is being prepared. Internal Controls, 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 Controls
      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 and 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.




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





(a)
            Identification
                of Directors





The
      following information, as of December 31, 2006 is furnished with respect to
      each
      Director and Executive Officer:





Date
      of


Name
      of Director  Age  Service  Position
      with Company





Ng
      Chi
      Shing 42  2004 President,
      Chief Executive Officer, Director


Chen
      Lu 37 2005 Director


Chen
      Juan               30  2005 Director


Zhou
      Wei
      Yu                   34 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. 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 15 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 16 years experience in banking,
      telecom and broadcasting industry in China. Mr.
      Chen
      was the founde r
      and
      general manager of Guangzhou Vispac Telecom Co Ltd. and Guangzhou DaiLin
      Communication Co. Ltd.




**Mr.
      Zhou Wei Yu** is a
      Director of the Company. He is currently general manager of Gu Wu Fei Yung
      Production Company Limited since 2000. Mr. Zhou worked in the Bank of China
      from
      1989 to 2000.





**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.





Section
      16(a) Beneficial Ownership Reporting Compliance





Based
      on
      information furnished to Registrant, no officer, director, or ten percent
      shareholder failed to file on a timely basis reports on Forms 3, 4, or 5 during
      the most recent fiscal year.




52
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          of Contents*





**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 recently adopted new 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 do not currently have a person
      that qualifies as such an expert. Presently, there are only five (5) directors
      serving on our Board, and the Company are 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 is in the process of publishing the
      code
      in the Company’s website.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Under
      Section 16(a) of the Exchange Act, all executive officers, directors, and each
      person who is the beneficial owner of more than 10% of the common stock of
      a
      company that files reports pursuant to Section 12 of the Exchange Act, are
      required to report the ownership of such common stock, options, and stock
      appreciation rights (other than certain cash-only rights) and any changes in
      that ownership with the Commission. Specific due dates for these reports have
      been established, and the Company is required to report, in this Form 10-KSB,
      any failure to comply therewith during the fiscal year ended December 2006.
      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.




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          of Contents*




**ITEM
      10. Executive Compensation**





During
      the fiscal years ended 2006, 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
            2006
            38,473
                (1)
            
            
            38,473





(1)  Includes
      $38,461 (based on a conversion rate of Hong Kong dollars to U.S. dollars of
      7.8
      to 1) payable to Mr. Ng pursuant to his agreement with our subsidiary China
      Digimedia Holdings Limited, and $12 payable by the Company.




**Stock
      Option Grants**





No
      options, warrants, or stock appreciation rights were issued during fiscal year
      2006 to any employees.





**Discussion
      of Employment Agreements and Termination or Change of Control
      Arrangements**




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





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




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**Director
      Compensation**





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





**Director
      Compensation Table - 2006**





**Name**
            **Fees
                Earned or Paid in Cash**
              **($)**
            **Total**
              **($)**Chen
                Lu
            28,650
            28,650Zhou
                Wei Yu
            -
            -Chen
                Juan
            -
            -





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




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





(a)
            Security
                Ownership of Certain Beneficial Owners





All
      persons known by the Registrant to own beneficially more than 5% of any class
      of
      the Company's outstanding stock on December 31, 2006, are listed below:




Title
                of Class
            Name
                and Address
            #
                Shares
            Nature
                of Ownership
            Current
                % OwnedCommon
                Stock, $.001 Par Value
            Modern
                Delta Holdings Ltd.
              2505-06,
                25F, 698 Prince Edward Road E., Hong Kong
            23,250,000
                (x)
            Direct
            76.9%Common
                Stock, $.001 Par Value
            Vision
                Opportunity Master Fund, Ltd.
            3,472,402
                (y)
            Direct
            9.9%
                (y)Preferred
                Stock, $.001 Par Value
              (z)
            Modern
                Delta Holdings Ltd.
              2505-06,
                25F, 698 Prince Edward Road E., Hong Kong
            1,875,000
            Direct
            100%





(x)  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 will own 17,398,440 shares of common stock and
      1,403,100 shares of Series A Convertible Preferred Stock of the Company, and
      Chen Lu will own 5,851,560 shares of common stock and 471,900 shares of Series
      A
      Convertible Preferred Stock of the Company





(y)  Vision
      is
      eligible to purchase an aggregate of 16,722,211 shares of our common stock
      pursuant to the exercise of warrants and the conversion of debentures. However,
      Pursuant to the terms of the transaction documents relating to the purchase
      of
      the foregoing securities, Vision may not acquire shares of common stock upon
      exercise of any such warrants or conversion of the debenture to the extent
      that,
      upon exercise or conversion, respectively, the number of shares of common stock
      beneficially owned by Vision and its affiliates would exceed 9.9% of the issued
      and outstanding shares of our common stock. The amount listed assumes the
      conversion or exercise of the debenture or warrants, as applicable, in an amount
      up to 9.9% of our outstanding common stock after such conversion or exercise.
      Adam Benowitz, in his capacity as managing member of Vision, has ultimate
      dispositive power over the shares held by the Vision. Mr. Benowitz disclaims
      beneficial ownership of the shares disclosed herein.




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




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  (b)
              Security
                  Ownership of Management




The
      following table sets forth the number of shares owned beneficially on December
      31, 2006, by each Director and by all Officers and Directors as a group.
      Information as to the beneficial ownership is based upon statements furnished
      to
      the Company by such persons. No shares listed below have been pledged by the
      holder of such shares.





Title
                of Class
            Name
                and Address
            #
                Shares
            Nature
                of Ownership
            Current
                % Owned (w)Common
                Stock, $.001 Par Value
            Ng
                Chi Shing
              2505-06,
                25F, 698 Prince Edward Road E., Hong Kong
            17,398,440
            In-direct
                (y)
            57.55%Common
                Stock, $.001 Par Value
            Chen
                Lu
              2505-06,
                25F, 698 Prince Edward Road E., Hong Kong
            5,851,560
            In-direct
                (y)
            19.35%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
            Zhou
                Wei Yu
              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
            76.9%Preferred
                Stock, $.001 Par Value
              (z)
            Ng
                Chi Shing
              2505-06,
                25F, 698 Prince Edward Road E., Hong Kong
            1,403,100
            In-direct
                (y)
            74.83%Preferred
                Stock, $.001 Par Value
              (z)
            Chen
                Lu
              2505-06,
                25F, 698 Prince Edward Road E., Hong Kong
            471,900
            In-direct
                (y)
            25.17%





(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 will directly own 17,398,440 shares of common stock
      and
      1,403,100 shares of Series A Convertible Preferred Stock of the Company, and
      Chen Lu will directly own 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.





(c)
            Changes
                in Control




The
      Company knows of no arrangements that may at a subsequent date result in a
      change of control in the Company.




56
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**Securities
      Authorized for Issuance Under Equity Compensation Plans**





As
      of
      December 31, 2006, 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
            200,000
            $1.50
            n/aTotal
            200,000
                (1)
            $1.50
            [_____]





(1)
      Represents warrants issued to a consultant for services. Does not include 30,000
      shares issuable to an executive officer in August 2007 for services rendered,
      and 90,000 shares issuable to the same consultant for services
      rendered.





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





The
      Company has 1,875,000 shares of Series “A” preferred stock outstanding at
      December 31, 2006. These shares are owned by our majority
      shareholder.





On
      August
      23, 2006, CDHL acquired a 20% interest in Arable from one of the Company's
      shareholders, Manta Finance Limited, for $2,568, and has provided a loan to
      Arable for $356,991 during the year of 2006 .





**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 2006 Ms. Chen and Mr. Zhou were
      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.




57
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          of Contents*





**ITEM
      13. Exhibits**




Exhibits





10.2  Form
      of
      Debenture in Private Placement (incorporated by reference from
      our Form
      8-K
      filed November 20, 2006)


10.3  Form
      of
      Class A Warrant in Private Placement (incorporated by reference
      from our
      Form
      8-K filed November 20, 2006)


10.4 Form
      of
      Class B Warrant in Private Placement (incorporated by reference
      from our
      Form
      8-K filed November 20, 2006)


10.5 Form
      of
      Class C Warrant in Private Placement (incorporated by reference from  our
      Form
      8-K filed November 20, 2006)


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


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


32.1Section
      1350 Certifications of Chief Executive
      Officer




58
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**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, 2006 and 2005. Audit
      fees
      and other fees of auditors are listed as follows:





Year
                Ended December 31
            
            2006
            
            
            
            2005Audit
                Fees(1)
            
            $
            53,100
            
            
            (2)
            
            $
            43,500
            
            
            (3)Audit-Related
                Fees(2)
            
            
            --
            
            
            
            
            
            --Tax
                Fees(3)
            
            
            --
            
            
            
            
            
            --All Other Fees(4)
            
            
            --
            
            
            
            
            
            --Total
                Accounting Fees and Services
            
            $
            53,100
            
            
            
            
            $
            43,500




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




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




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




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




**Pre-Approval
      Policies and Procedures**





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




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**SIGNATURES**





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




**CHINA
                DIGITAL MEDIA CORPORATION**
              (Registrant)Date: March
              23, 2007
            By:
            /s/ Ng
              Chi ShingNg Chi Shing
              President, CEO and Director




By:
            /s/ Chen
              LuChen Lu
              Director




By:
            /s/ Chen
              JuanChen Juan
              Director




By:
            /s/ Zhou
              Wei YuZhou Wei Yu
              Director





By:
            /s/ Li
              Wa Tat BenedictLi Wa Tat Benedict
              Chief Financial Officer




60