UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form 10-Q





x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For
the Quarterly Period Ended September 30, 2009





OR





o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For
the transition period
from            to





Commission
File No. 000-52934





ZST
DIGITAL NETWORKS, INC.


(Exact
name of Registrant as specified in its charter)





Delaware
              
              20-8057756(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)




Building
28, Huzhu Road


Zhongyuan
District, Zhengzhou, People’s Republic of China


(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)





(86)
371-6771-6850


(COMPANY’S
TELEPHONE NUMBER, INCLUDING AREA CODE)





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x      No  ̈





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





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





Large
      accelerated filero
              
              Accelerated
      filer oNon-accelerated
      filero
              
              Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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





The
number of shares outstanding of the registrant’s Common Stock, par value $0.0001
per share, was 10,216,103 as of November 16, 2009.












ZST
DIGITAL NETWORKS, INC.





FORM 10-Q





For
the Quarterly Period Ended September 30, 2009





INDEX





Part I
                Financial
      Information
                3Item
      1.
                Financial
      Statements
                3Index
      to Unaudited Consolidated Financial Statements
                F-1Consolidated
      Balance Sheets
                F-2Consolidated
      Statements of Operations
                F-3Consolidated
      Statements of Changes in Stockholders’ Equity and Comprehensive
      Income
                F-4Consolidated
      Statements of Cash Flows
                F-5Notes
      to Consolidated Financial Statements
                F-6Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                5Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                14Item
      4.
                Controls
      and Procedures
                14Part II
                Other
      Information
                15Item
      1.
                Legal
      Proceedings
                15Item
      1A.
                Risk
      Factors
                15Item
      2.
                Unregistered
      Sale of Equity Securities and Use of Proceeds
                15Item
      3.
                Default
      Upon Senior Securities
                16Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                16Item
      5.
                Other
      Information
                16Item
      6.
                Exhibits
                16Signatures
                17


2


PART I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accompanying unaudited consolidated financial statements reflect
all adjustments that, in the opinion of management, are considered necessary for
a fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any future period. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited financial statements
of ZST Digital Networks, Inc. as contained in its Registration Statement on Form
S-1, as amended (File No. 333- 160343).


3


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 
 FINANCIAL
STATEMENTS
 
 SEPTEMBER
30, 2009
  4
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 
 INDEX
 
 PAGECONSOLIDATED
      BALANCE SHEETS
                    F-2CONSOLIDATED
      STATEMENTS OF OPERATIONS
                    F-3CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYAND
      COMPREHENSIVE INCOME
                    F-4CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                    F-5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    F-6
      - F-28
  F-1
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Consolidated
Balance Sheets
 (In U.S.
Dollars)
 
 September 30,
                            
                            
                            December 31,2009
                            
                            
                            2008(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                            
                            $
                            1,394,458
                            
                            
                            $
                            1,134,954Trade
      receivables, net (Note 3)
                            
                            
                            25,634,262
                            
                            
                            
                            12,322,099Employee
      advances (Note 5)
                            
                            
                            5,280
                            
                            
                            
                            6,307Inventories,
      net (Note 4)
                            
                            
                            1,494,599
                            
                            
                            
                            775,185Advances
      to suppliers (Note 11)
                            
                            
                            3,442,808
                            
                            
                            
                            3,024,668Prepaid
      expenses and other receivables
                            
                            
                            56,545
                            
                            
                            
                            6,968Total
      current assets
                            
                            
                            32,027,952
                            
                            
                            
                            17,270,181Property
      and equipment, net (Note 6)
                            
                            
                            338,585
                            
                            
                            
                            34,148Intangible
      asset, net (Note 7)
                            
                            
                            613,122
                            
                            
                            
                            -Total
      assets
                            
                            $
                            32,979,659
                            
                            
                            $
                            17,304,329Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable – trade
                            
                            $
                            8,141,403
                            
                            
                            $
                            1,270,096Customer
      deposit
                            
                            
                            -
                            
                            
                            
                            1,467Accrued
      liabilities and other payable
                            
                            
                            230,037
                            
                            
                            
                            501,176Various
      taxes payable
                            
                            
                            331,749
                            
                            
                            
                            188,539Short-term
      loans (Note 8)
                            
                            
                            1,454,244
                            
                            
                            
                            3,931,991Employee
      security deposit payable
                            
                            
                            10,312
                            
                            
                            
                            8,911Wages
      payable
                            
                            
                            63,750
                            
                            
                            
                            59,501Corporate
      tax payable (Note 12)
                            
                            
                            434,388
                            
                            
                            
                            -Due
      to related parties (Note 10)
                            
                            
                            -
                            
                            
                            
                            2,359,728Total
      current liabilities
                            
                            
                            10,665,883
                            
                            
                            
                            8,321,409Commitments
      and contingencies (Note 13)
                            
                            
                            -
                            
                            
                            
                            -Stockholders'
      EquityPreferred
      Stock, $0.0001 par value, 10,000,000 shares authorized,
      6,250,000shares
      undesignated, 0 shares issued and outstanding at September 30,
      2009and
      December 31, 2008, respectively.
                            
                            
                            -
                            
                            
                            
                            -Preferred
      Stock Series A Convertible, $0.0001 par value, 3,750,000
      sharesauthorized,
      1,263,723 and 0 shares issued and outstanding at September 30,
      2009and
      December 31, 2008, respectively. Liquidation preference and
      redemptionvalue
      of $4,976,953 at September 30, 2009 (Note 17)
                            
                            
                            126
                            
                            
                            
                            -Common
      stock $0.0001 par value, 100,000,000 shares authorized, 7,091,103
      and5,896,723
      shares issued and outstanding at September 30, 2009and
      December 31, 2008, respectively (Note 1 and Note 16)
                            
                            
                            709
                            
                            
                            
                            590Additional
      paid-in capital
                            
                            
                            8,270,475
                            
                            
                            
                            1,488,924Accumulated
      other comprehensive income
                            
                            
                            39,783
                            
                            
                            
                            590,839Statutory
      surplus reserve fund (Note 1 and Note 16)
                            
                            
                            1,491,963
                            
                            
                            
                            1,491,963Retained
      earnings (unrestricted)
                            
                            
                            12,510,720
                            
                            
                            
                            5,410,604Total
      stockholders' equity
                            
                            
                            22,313,776
                            
                            
                            
                            8,982,920Total
      Liabilities and Stockholders' Equity
                            
                            $
                            32,979,659
                            
                            
                            $
                            17,304,329
 
 The accompanying notes are an integral
part of these consolidated financial statements.
  F-2
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Consolidated
Statements of Operations
 (In U.S.
Dollars)
 (Unaudited)
 
 For the Three Months Ended
                                                      
                                                      
                                                      For the Nine Months EndedSeptember 30,
                                                      
                                                      
                                                      September 30,2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2008Revenue
                                                      
                                                      $
                                                      28,627,644
                                                      
                                                      
                                                      $
                                                      15,209,026
                                                      
                                                      
                                                      $
                                                      70,067,184
                                                      
                                                      
                                                      $
                                                      40,987,329Cost
      of goods sold
                                                      
                                                      
                                                      (23,823,013
                                                      )
                                                      
                                                      
                                                      (12,566,220
                                                      )
                                                      
                                                      
                                                      (58,773,620
                                                      )
                                                      
                                                      
                                                      (33,563,129
                                                      )Gross
      profit
                                                      
                                                      
                                                      4,804,631
                                                      
                                                      
                                                      
                                                      2,642,806
                                                      
                                                      
                                                      
                                                      11,293,564
                                                      
                                                      
                                                      
                                                      7,424,200Operating
      costs and expensesSelling
      expenses
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,165
                                                      
                                                      
                                                      
                                                      35,334
                                                      
                                                      
                                                      
                                                      107.235Depreciation
                                                      
                                                      
                                                      17,954
                                                      
                                                      
                                                      
                                                      15,937
                                                      
                                                      
                                                      
                                                      27,641
                                                      
                                                      
                                                      
                                                      33,637General
      and administrative
                                                      
                                                      
                                                      223,600
                                                      
                                                      
                                                      
                                                      195,093
                                                      
                                                      
                                                      
                                                      725,054
                                                      
                                                      
                                                      
                                                      614,063Research
      and development
                                                      
                                                      
                                                      109,068
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      109,068
                                                      
                                                      
                                                      
                                                      -Merger
      cost
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      566,654
                                                      
                                                      
                                                      
                                                      -Total
      operating costs and expenses
                                                      
                                                      
                                                      350,622
                                                      
                                                      
                                                      
                                                      212,195
                                                      
                                                      
                                                      
                                                      1,463,751
                                                      
                                                      
                                                      
                                                      754,935Income
      from operations
                                                      
                                                      
                                                      4,454,009
                                                      
                                                      
                                                      
                                                      2,430,611
                                                      
                                                      
                                                      
                                                      9,829,813
                                                      
                                                      
                                                      
                                                      6,669,265Other
      income (expenses)Interest
      income
                                                      
                                                      
                                                      26
                                                      
                                                      
                                                      
                                                      185
                                                      
                                                      
                                                      
                                                      43,819
                                                      
                                                      
                                                      
                                                      14,777Interest
      expense
                                                      
                                                      
                                                      (55,799
                                                      )
                                                      
                                                      
                                                      (147,190
                                                      )
                                                      
                                                      
                                                      (140,693
                                                      )
                                                      
                                                      
                                                      (261,154
                                                      )Imputed
      interest
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (22,518
                                                      )
                                                      
                                                      
                                                      (31,417
                                                      )
                                                      
                                                      
                                                      (49,005
                                                      )Sundry
      income (expense), net
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      32
                                                      
                                                      
                                                      
                                                      (7,682
                                                      )
                                                      
                                                      
                                                      (1,018
                                                      )Total
      other income (expenses)
                                                      
                                                      
                                                      (55,773
                                                      )
                                                      
                                                      
                                                      (169,491
                                                      )
                                                      
                                                      
                                                      (135,973
                                                      )
                                                      
                                                      
                                                      (296,400
                                                      )Income
      before income taxes
                                                      
                                                      
                                                      4,398,236
                                                      
                                                      
                                                      
                                                      2,261,120
                                                      
                                                      
                                                      
                                                      9,693,840
                                                      
                                                      
                                                      
                                                      6,372,865Income
      taxes  (Note 12)
                                                      
                                                      
                                                      (1,106,409
                                                      )
                                                      
                                                      
                                                      (579,554
                                                      )
                                                      
                                                      
                                                      (2,593,724
                                                      )
                                                      
                                                      
                                                      (1,565,994
                                                      )Net
      income
                                                      
                                                      $
                                                      3,291,827
                                                      
                                                      
                                                      $
                                                      1,681,566
                                                      
                                                      
                                                      $
                                                      7,100,116
                                                      
                                                      
                                                      $
                                                      4,806,871Basic
      earnings per share
                                                      
                                                      $
                                                      0.46
                                                      
                                                      
                                                      $
                                                      0.29
                                                      
                                                      
                                                      $
                                                      1.01
                                                      
                                                      
                                                      $
                                                      0.82Weighted
      average shares outstanding, basic
                                                      
                                                      
                                                      7,091,103
                                                      
                                                      
                                                      
                                                      5,896,723
                                                      
                                                      
                                                      
                                                      7,056,103
                                                      
                                                      
                                                      
                                                      5,896,723Diluted
      earnings per share
                                                      
                                                      $
                                                      0.39
                                                      
                                                      
                                                      $
                                                      0.29
                                                      
                                                      
                                                      $
                                                      0.86
                                                      
                                                      
                                                      $
                                                      0.82Weighted
      average shares outstanding, diluted
                                                      
                                                      
                                                      8,525,455
                                                      
                                                      
                                                      
                                                      5,896,723
                                                      
                                                      
                                                      
                                                      8,265,403
                                                      
                                                      
                                                      
                                                      5,896,723
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
  ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive
Income
 For the
nine months ended September 30, 2009
 (In U.S.
Dollars)
 (Unaudited)
 
 AccumulatedPreferred
      Stock
                      
                      
                      
                      
                      
                      
                      
                      
                      Additional
                      
                      
                      Other
                      
                      
                      Statutory
                      
                      
                      Retained
                      
                      
                      TotalSeries
      A
                      
                      
                      Common
      Stock
                      
                      
                      Paid-in
                      
                      
                      Comprehensive
                      
                      
                      Reserve
                      
                      
                      Earnings
                      
                      
                      Stockholders'
                      
                      
                      ComprehensiveShares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Income
      (Loss)
                      
                      
                      Fund
                      
                      
                      (Unrestricted)
                      
                      
                      Equity
                      
                      
                      IncomeBalance
      at December 31, 2008
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      5,896,723
                      
                      
                      $
                      590
                      
                      
                      $
                      1,488,924
                      
                      
                      $
                      590,839
                      
                      
                      $
                      1,491,963
                      
                      
                      $
                      5,410,604
                      
                      
                      $
                      8,982,920Reverse
      merger adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,194,380
                      
                      
                      
                      119
                      
                      
                      
                      3,216,305
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,216,424Sale
      of 1,263,723 shares of Series A Preferred Stock at
    $3.94/share
                      
                      
                      1,263,723
                      
                      
                      
                      126
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,533,829
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,533,955Imputed
      interest allocated
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,417
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,417Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (551,056
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (551,056
                      )
                      
                      $
                      (551,056
                      )Net
      income for the nine months ended ended September 30, 2009
      (Unaudited)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,100,116
                      
                      
                      
                      7,100,116
                      
                      
                      
                      7,100,116Comprehensive
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      6,549,060Balance
      at September 30, 2009
                      
                      
                      1,263,723
                      
                      
                      $
                      126
                      
                      
                      $
                      7,091,103
                      
                      
                      $
                      709
                      
                      
                      $
                      8,270,475
                      
                      
                      $
                      39,783
                      
                      
                      $
                      1,491,963
                      
                      
                      $
                      12,510,720
                      
                      
                      $
                      22,313,776
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
  ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Statements
of Cash Flows
 (In U.S.
Dollars)
 (Unaudited)
 
 For The Nine Months EndedSeptember 30,2009
                    
                    
                    2008Cash
      Flows From Operating ActivitiesNet
      Income
                    
                    $
                    7,100,116
                    
                    
                    $
                    4,806,871Adjustments
      to reconcile net income to net cash provided (used) by operating
      activities:Imputed
      interest
                    
                    
                    31,417
                    
                    
                    
                    49,005Depreciation
                    
                    
                    27,641
                    
                    
                    
                    33,637Amortization
                    
                    
                    32,250
                    
                    
                    
                    -Changes
      in operating assets and liabilities:Account
      receivable-trade
                    
                    
                    (13,312,163
                    )
                    
                    
                    (8,794,444
                    )Contract
      receivable
                    
                    
                    -
                    
                    
                    
                    (6,816
                    )Prepaid
      expenses and other receivables
                    
                    
                    (49,577
                    )
                    
                    
                    (141,598
                    )Inventories,
      net
                    
                    
                    (719,414
                    )
                    
                    
                    5,097,700Advances
                    
                    
                    (418,140
                    )
                    
                    
                    -Accounts
      payable and accrued liabilities
                    
                    
                    6,600,168
                    
                    
                    
                    4,445,730Deposits
      and other payables
                    
                    
                    (66
                    )
                    
                    
                    (28,717
                    )Billings
      in excess of costs on uncompleted projects
                    
                    
                    -
                    
                    
                    
                    12,915Various
      taxes payable and taxes recoverable
                    
                    
                    143,210
                    
                    
                    
                    (386,947
                    )Wages
      payable
                    
                    
                    4,249
                    
                    
                    
                    27,020Corporate
      tax payable
                    
                    
                    434,388
                    
                    
                    
                    269,223Net
      cash provided by (used in) operating activities
                    
                    
                    (125,921
                    )
                    
                    
                    5,383,579Cash
      Flows From Investing ActivitiesPurchases
      of property and equipment
                    
                    
                    (324,726
                    )
                    
                    
                    -Purchases
      of intangible assets
                    
                    
                    (644,966
                    )
                    
                    
                    -Net
      cash used in investing activities
                    
                    
                    (969,692
                    )
                    
                    
                    -Cash
      Flows From Financing ActivitiesProceeds
      from (Repayment of) short-term demand loans receivable
                    
                    
                    1,027
                    
                    
                    
                    761,911(Proceeds
      from) Repayment of short-term demand loans payable
                    
                    
                    (2,477,747
                    )
                    
                    
                    (4,016,643
                    )Net
      proceeds from sale of preferred stocks
                    
                    
                    3,533,955
                    
                    
                    
                    -Due
      from related parties and affiliated companies
                    
                    
                    -
                    
                    
                    
                    61,233Due
      to related parties and affiliated companies
                    
                    
                    -
                    
                    
                    
                    (3,520
                    )Dividend
      paid
                    
                    
                    -
                    
                    
                    
                    (2,624,266
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    1,057,235
                    
                    
                    
                    (5,821,285
                    )Effect
      of exchange rate changes on cash
                    
                    
                    297,882
                    
                    
                    
                    158,766Net
      increase in cash and cash equivalents
                    
                    
                    259,504
                    
                    
                    
                    (278,940
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    1,134,954
                    
                    
                    
                    1,125,804Cash
      and cash equivalents, end of period
                    
                    $
                    1,394,458
                    
                    
                    $
                    846,864Supplemental
      disclosure information:Interest
      expense paid
                    
                    $
                    140,693
                    
                    
                    $
                    261,154Income
      taxes paid
                    
                    $
                    2,159,336
                    
                    
                    $
                    1,296,771Non
      cash investing and financing activities:Shares
      issued for related parties' debt
                    
                    $
                    2,359,728
                    
                    
                    $
                    -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
 
 ZST
Digital Networks, Inc. (“ZST Digital”, formerly SRKP 18, Inc.) was incorporated
in the State of Delaware on December 7, 2006. ZST Digital was originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On January 9, 2009, ZST Digital closed a share exchange transaction
(the “Share Exchange”) pursuant to which ZST Digital (i) issued 806,408 shares
of its common stock to acquire 100% equity ownership of World Orient Universal
Limited (“World Orient”), which is the 100% parent of Global Asia Universal
Limited (“Global Asia”), which is the 100% parent of Everfair Technologies
Limited (“Everfair”), which is the 100% parent of Zhengzhou Shenyang Technology
Company Limited (“ZST PRC”), (ii) assumed the operations of World Orient and its
subsidiaries, and (iii) changed its name from SRKP 18, Inc. to ZST Digital
Networks, Inc.  Subsequent to the closing of the Share Exchange, on
January 14, 2009, Zhong Bo, Chief Executive Officer and Chairman of the Board of
ZST Digital, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the "ZST
Management"), each entered into a Common Stock Purchase Agreement pursuant to
which ZST Digital issued and the ZST Management agreed to purchase an aggregate
of 5,090,315 shares of our common stock at a per share purchase price of $0.6907
(the "Purchase Right") and obtained control of ZST Digital.  The
purchase price for the shares was paid in full on May 25, 2009.  The
restructuring of ZST Digital is further discussed below.
 
 World
Orient was incorporated in British Virgin Islands (“BVI”) on August 12, 2008. As
at December 31, 2008, World Orient had 50,000 capital shares authorized with
$1.00 par value and 50,000 shares issued and outstanding. In November 2008,
World Orient acquired 100% ownership of Global Asia.
 
 Global
Asia was incorporated in BVI on August 12, 2008. As at December 31, 2008, Global
Asia had 50,000 capital shares authorized with $1.00 par value and 50,000 shares
issued and outstanding. In October 2008, Global Asia acquired 100% ownership of
Everfair.
 
 Everfair
is a holding company incorporated in November 26, 2007 in Hong Kong, PRC with
the original sole shareholder Kuk Kok Sun. As at December 31, 2008, Everfair had
10,000 capital shares authorized with HKD 1.00 par value and 10,000 shares
issued and outstanding. Pursuant to a share transfer agreement, Global Asia
agreed to paid Kuk Kok Sun HKD 10,000 for the ownership transfer.
 
 In
October 2008, Everfair entered an ownership transfer agreement with the original
owners of ZST PRC. Pursuant to the ownership transfer agreement, Everfair agreed
to pay the original owners RMB 12,000,000 for the ownership transfer within
three months of the approval of a new business license. This transfer was
completed in January 2009 after the closing of the Share Exchange and exercise
of the Purchase Right by the shareholders of ZST PRC.
 
 ZST PRC
was established on May 20, 1996 as a private domestic corporation in Zhengzhou,
Henan Province, PRC with an authorized capital of RMB 1.5 million. On April 8,
1999, ZST PRC increased its authorized capital from RMB 1.5 million to RMB 8
million. On July 27, 2004, ZST PRC further increased its authorized capital to
RMB 18 million. On March 15, 2007, ZST PRC decreased its authorized and invested
capital to RMB 11.5 million. In February 2009, ZST PRC increased its authorized
capital to RMB 17 million.
 
 ZST PRC’s
primary revenues were from sales of broadcasting equipment, hi-tech optical
transmission devices, and telecommunication products. ZST PRC is principally
engaged in supplying digital and optical network equipment to cable system
operators in the Henan Province of China. It has developed a line of internet
protocol television (“IPTV”) set-top boxes that are used to provide bundled
cable television, Internet and telephone services to residential and commercial
customers. At present, ZST PRC’s main clients are broadcasting TV bureaus and
cable network operators serving various cities and counties. In the near future,
ZST PRC plans to joint venture with cable network operators to provide bundled
television programming, Internet and telephone services to residential customers
in cities and counties located in the Henan Province of China.
 
 ZST
Digital and its subsidiaries, World Orient, Global Asia, Everfair, and ZST PRC
shall be collectively referred throughout as the “Company”.
  F-6
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)
 
 Pursuant
to PRC rules and regulations relating to mergers of PRC companies with foreign
entities, an offshore company controlled by PRC citizens that intends to merge
with a PRC company will be subject to strict examination by the relevant PRC
foreign exchange authorities. To enable ZST PRC to go public, ZST management
made the following restructuring arrangements: (i) established Everfair as a
Hong Kong holding company owned by a non-PRC citizen and indirectly controlled
the operations of Everfair, (ii) had Everfair enter into an equity transfer
agreement with ZST PRC by paying RMB 12,000,000 to ZST Management, (iii)
established World Orient as a BVI holding company owned by a non PRC-citizen,
(iv) had World Orient and its wholly owned subsidiary Global Asia, its
subsidiary Everfair, and its subsidiary ZST PRC enter into a share exchange
agreement with ZST Digital, (v) concurrently conducted a private investment in a
public company (“PIPE”) financing, and (vi) used proceeds from the PIPE
transaction to pay RMB 12,000,000 to ZST Management pursuant to the ownership
transfer agreement.
 
 Upon
consummation of the Share Exchange and the Purchase Right, ZST Management owned
a majority of the issued and outstanding shares of common stock of the Company
and Zhong Bo was appointed as Chairman of the Board and Chief Executive Officer
of ZST Digital.
  For
accounting purposes, this transaction is being accounted for as a reverse
merger. The transaction has been treated as a recapitalization of World Orient
and its subsidiaries, with ZST Digital (the legal acquirer of World Orient and
its subsidiaries including ZST PRC) considered the accounting acquiree and ZST
PRC, the only operating company, and whose management took control of ZST
Digital (the legal acquiree of ZST Digital) is considered the accounting
acquirer.  The Company did not recognize goodwill or any intangible
assets in connection with the transaction.
 
 On
October 6, 2009, the Company effected a 1-for-2.461538462 reverse stock split of
the Company’s issued and outstanding shares of common stock (the “Reverse Stock
Split”). The par value and number of authorized shares of the common stock
remained unchanged. All references to number of shares and per share amounts
included in these consolidated financial statements and the accompanying notes
have been adjusted to reflect the Reverse Stock Split
retroactively.
 
 To
summarize the paragraphs above, the organization and ownership structure of the
Company is currently as follows:
 
 
  F-7
  ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
consolidated financial statements have been prepared in accordance with U.S.
GAAP for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation SX. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These consolidated financial statements
should be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 2008 and notes thereto contained in the
Report on Form S-1 of the Company as filed with the United States Securities and
Exchange Commission (the “SEC”). Interim results are not necessarily indicative
of the results for the full year.
 
 In the
opinion of the management, the consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30, 2009
and December 31, 2008; and the results of operations and cash flows for the
three and nine months ended September 30, 2009 and 2008,
respectively.
 
 The
Company has evaluated subsequent events through the date that the financial
statements were issued, which was November 15, 2009, the date immediately
preceding the date of the Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2009.
 
 Basis of
Consolidation
  The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company transactions have been eliminated in
consolidation.
 
 Use of
Estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting year. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
 
 Fair Value of Financial
Instruments
 
 The
standard for “Disclosures About Fair Value of Financial Instruments,” defines
financial instruments and requires fair value disclosures of those financial
instruments. On January 1, 2008, the Company adopted the standard “Fair Value
Measurements,” which defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosures
requirements for fair value measures. Current assets and current liabilities
qualified as financial instruments and management believes their carrying
amounts are a reasonable estimate of fair value because of the short period of
time between the origination of such instruments and their expected realization
and if applicable, their current interest rate is equivalent to interest rates
currently available.  The three levels are defined as
follow:
 
 ·
              Level
      1 — inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 ·
              Level
      2 — inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 ·
              Level
      3 — inputs to the valuation methodology are unobservable and significant
      to the fair value.
 
 As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
  F-8
 
 ZST DIGITAL NETWORKS, INC. AND
SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Cash and Cash
Equivalents
  Cash and
cash equivalents include cash on hand, cash on deposit with various financial
institutions in PRC, Hong Kong, and all highly-liquid investments with original
maturities of three months or less at the time of purchase.  Banks and
other financial institutions in PRC do not provide insurance for funds held on
deposit.
 
 Accounts
Receivable
  Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful accounts based on a review of all outstanding amounts on a monthly
basis. The Company analyzes the aging of accounts receivable balances,
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms. Significant
changes in customer concentration or payment terms, deterioration of customer
credit-worthiness or weakening in economic trends could have a significant
impact on the collectability of receivables and our operating results. The
Company has not provided a bad debt allowance based upon its historical
collection experience. There were no bad debts written off during the three and
nine months September 30, 2009 and 2008, respectively.
 
 According
to the sales contract terms, customers are able to hold back 10% of the total
contract balance payable to the Company for one year. The hold back is carried
at 10% of original invoice as accounts receivable.
 
 Inventories
  Inventories,
which are primarily comprised of raw materials and finished goods, are stated at
the lower of cost or net realizable value, using the first-in first-out (FIFO)
method. Cost is determined on the basis of a moving average. The Company
evaluates the need for reserves associated with obsolete, slow-moving and
non-salable inventory by reviewing net realizable values on a periodic
basis.
 
 Property and
Equipment
  Property
and equipment are recorded at cost and depreciated using the straight-line
method, with an estimated 5% salvage value of original cost, over the estimated
useful lives of the assets as follows:
 
 Machinery
      and equipment
                
                5
      yearsElectronic
      equipment
                
                5
      yearsOffice
      equipment
                
                5
      yearsAutomobile
                
                5
      yearsOther
      equipment
                
                10
      years
 
 Expenditures
for repairs and maintenance, which do not improve or extend the expected useful
lives of the assets, are expensed as incurred while major replacements and
improvements are capitalized.
  When
property or equipment is retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, with any resulting gains or losses
being included in net income or loss in the year of disposition.
 
 Impairment of Long-Lived
Assets
  The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with the standard of “Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires
the Company to evaluate a long-lived asset for recoverability when there is
event or circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
  F-9
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Intangible
Assets
  Intangible
assets are recorded at cost and amortized using the straight-line method over
the estimated useful lives of the assets as follows:
 
 Software
                
                5
      years
 
 Revenue
Recognition
  The
Company recognizes product sales revenue when the significant risks and rewards
of ownership have been transferred pursuant to PRC law, including such factors
as when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, sales and value-added tax laws have been
complied with, and collectability is reasonably assured. The Company generally
recognizes revenue when its products are shipped.
 
 The IPTV
device sales contracts include a one-year quality assurance warranty for
defects.  According to the sales contract terms, customers are able to
hold back 10% of the total contract balance payable to the Company for one year.
In accordance with the standard of "Revenue Recognition When Right of Return
Exists", the Company records the holdback as revenue at the time of sale when
its products are shipped to customers because:
 
 (a)
              The
      contract price to the customer is predetermined and fixed at the date of
      sale.
 (b)
                The
      customer is obligated to pay the Company the 10% holdback after one year
      and the obligation is not contingent on resale of the
    product.
 (c)
                The
      customer’s obligation to the Company would not be changed in the event of
      theft or physical destruction or damage of the product because the Company
      entrust the suppliers to ship the products to the customers, therefore the
      suppliers bear the liability for products lost or damaged when in transit
      to the customers.
 (d)
              The
      customer acquiring the product for resale has economic substance apart
      from that provided by the Company.
 (e)
                The
      Company does not have significant obligations for future performance to
      directly bring about resale of the product by the customer other than
      replacement of defective product due to hardware defects in materials and
      workmanship.
 (f)
                The
      amount of future returnscan be reasonably
      estimated based on the historical returns
  experience.
 
 The
Company determined that the costs associated with such assurance were immaterial
in monetary terms based on the historical returns experience. The Company has a
return policy where the customers must make a request within 30 days of receipt
to return the products when the products delivered have more than 40% defects or
the products are not delivered on time. As of September 30, 2009, the Company
has not received any returns.
 
 In the
event of defective product returns, the Company has the right to seek
replacement of such returned units from its supplier. Based on the agreement,
the supplier will replace the defective product when the defects are caused by
hardware defects in materials and workmanship during manufacturing process for a
period of one year. The Company incurred quality assurance costs of $0 for the
three and nine months ended September 30, 2009 and 2008,
respectively.
 
 Based on
the facts above, the Company recognizes costs related to the quality assurance
when incurred.
 
 Revenues
from fixed-price construction contracts are recognized on the completed-contract
method. This method is used because most of the construction and engineering
contracts are completed within six months or less and financial position and
results of operations do not vary significantly from those which would result
from using the percentage-of-completion method. A contract is considered
complete when all costs have been incurred and the installation is operating
according to specifications or has been accepted by the customer.
 
 Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, suppliers, tools,
repairs, and depreciation costs. General and administrative costs are charged to
expenses as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Claims are included
in revenues when received.
  F-10
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Comprehensive
Income
  The
Company has adopted the standard of“Reporting
Comprehensive Income”, which establishes standards for reporting and displaying
comprehensive income, its components, and accumulated balances in a full-set of
general-purpose financial statements. Accumulated other comprehensive income
represents the accumulated balance of foreign currency translation
adjustments.
 
 Related
Parties
 
 A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
 
 Income
Taxes
 
 The
Company accounts for income taxes in accordance with the standard of “Accounting
for Income Taxes”, which requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
 
 The
Company adopted standard of “Accounting for Uncertainty in Income Taxes,” which
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
the Company has taken or expects to take on a tax return (including a decision
whether to file or not to file a return in a particular
jurisdiction).
 
 Research and
Development
  Research
and development costs are expensed to operations as incurred. The Company spent
$109,068, $0, $109,068, and $0 on direct research and development (“R&D”)
efforts for the three and nine months ended September 30, 2009 and 2008,
respectively.
 
 The
Company received reimbursement from the local government therefore research and
development expenses net of reimbursement was $0 for the three and nine months
ended September 30, 2008.
 
 Advertising
Costs
 
 The
Company expenses advertising costs as incurred. The Company did not incur any
advertising expenses for the three and nine months ended September 30, 2009 and
2008, respectively.
 
 Foreign Currency
Translation
 
 The
functional currency of ZST PRC is RMB, the functional currencies of World
Orient, Global Asia, and Everfair are HKD, and the functional currency of ZST
Digital is the local currency, RMB. The Company used the RMB as the functional
currency of ZST Digital since RMB is the currency of primary economic
environment. The Company maintains its financial statements using the functional
currency. Monetary assets and liabilities denominated in currencies other than
the functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
  F-11
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Foreign Currency Translation
(Continued)
 
 For
financial reporting purposes, the financial statements of each subsidiary, which
are prepared in either RMB or HKD, are translated into the Company’s reporting
currency, USD. Balance sheet accounts are translated using the closing exchange
rate in effect at the balance sheet date and income and expense accounts are
translated using the average exchange rate prevailing during the reporting
period. Adjustments resulting from the translation, if any, are included in
accumulated other comprehensive income (loss) in the owners’
equity.
 
 The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):
 
 Period Covered
                        
                        Balance Sheet Date Rates
                        
                        Average RatesNine
      Months Ended September 30, 2009
                        
                        6.81756
                        
                        6.82174Nine
      Months Ended September 30, 2008
                        
                        6.83527
                        
                        6.97496Year
      Ended December 31, 2008
                        
                        6.81731
                        
                        6.93730
  The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
 
 Period Covered
                          
                          Balance Sheet Date Rates
                          
                          Average RatesNine
      Months Ended September 30, 2009
                          
                          7.75013
                          
                          7.75193Nine
      Months Ended September 30, 2008
                          
                          7.76908
                          
                          7.79838Year
      Ended December 31, 2008
                          
                          7.74960
                          
                          7.74960
  Recently Adopted Accounting
Pronouncements
 
 In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification(ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to
various former authoritative U.S. GAAP pronouncements have been changed to
coincide with the appropriate section of the ASC.
 
 In
September 2006, the FASB issued an accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements, and
required disclosures of assets and liabilities measured at fair value based on
their level in the hierarchy. This standard applies under other accounting
standards that require or permit fair value measurements. One of the amendments
deferred the effective date for one year relative to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at
fair value on a nonrecurring basis. This deferral applied to such items as
nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment.  The adoption of the fair value measurement standard did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
  F-12
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Recently Adopted Accounting
Pronouncements (continued)
 
 In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended March 31,
2009.
  In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
  In
April 2009, the FASB issued an accounting standard which modifies the
requirements for recognizing other-than-temporarily impaired debt securities and
changes the existing impairment model for such securities. The standard also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the standard, impairment of debt
securities will be considered other-than-temporary if an entity (1) intends
to sell the security, (2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The standard further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. The standard requires entities to initially apply its
provisions to previously other-than-temporarily impaired debt securities
existing as of the date of initial adoption by making a cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously other-than-temporarily impaired debt security
held as of the date of initial adoption from retained earnings to accumulated
other comprehensive income. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
 
 In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
 
 In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. This standard added an additional
required disclosure relative to the date through which subsequent events have
been evaluated and whether that is the date on which the financial statements
were issued. For the Company,this standard was effective beginning April 1, 2009.
  F-13
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Recently Adopted Accounting
Pronouncements (continued)
 
 In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing guidance on transfers of
financial assets to, among other things, eliminate the qualifying
special-purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated results of operations or financial
condition.
  In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.
  In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.
  In
September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC
820 to provide guidance on measuring the fair value of certain alternative
investments such as hedge funds, private equity funds and venture capital funds.
The ASU indicates that, under certain circumstance, the fair value of such
investments may be determined using net asset value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other
than NAV. In those situations, the practical expedient cannot be used and
disclosure of the remaining actions necessary to complete the sale is required.
The ASU also requires additional disclosures of the attributes of all
investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 1, 2009. The Company is
currently evaluating the impact of this standard, but would not expect it to
have a material impact on the Company’s consolidated results of operations or
financial condition.
 
 In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions.  The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
  F-14
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Recently Adopted Accounting
Pronouncements (continued)
 
 In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements—a consensus of the FASB Emerging Issues Task
Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance:  the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). The ASU is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on the
Company’s consolidated results of operations and financial
condition.
 
 NOTE
3 – TRADE RECEIVABLES, NET
 
 Trade
receivables consist of the following:
  September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008Trade
      receivables
                      
                      $
                      20,622,671
                      
                      
                      $
                      9,518,706Trade
      receivables-10% hold back
                      
                      
                      5,011,591
                      
                      
                      
                      2,803,393Total
                      
                      $
                      25,634,262
                      
                      
                      $
                      12,322,099
 
 The
Company has not provided a bad debt allowance based upon its historical
collection experience. There were no bad debts written off for the three and
nine months ended September 30, 2009 and 2008, respectively and no accounts
receivable outstanding in excess of 90 days at September 30, 2009 and 2008. The
aging of the accounts receivable are as follows:
 
 September 30,2009
                    
                    
                    20081-30
      days
                    
                    $
                    12,682,542
                    
                    
                    $
                    7,241,31031-60
      days
                    
                    
                    7,940,129
                    
                    
                    
                    5,472,04961-90
      days
                    
                    
                    -
                    
                    
                    
                    972,135Total
                    
                    $
                    20,622,671
                    
                    
                    $
                    13,685,494
 
 The trade
receivables above are collateral for short-term bank loans in the amount of
$1,454,244 and $3,931,991 as of September 30, 2009 and December 31,
2008.
 
 The trade
receivables – 10% hold back are held back by customers that are due one year
from the date of delivery. As of September 30, 2009, there are no delinquent
receivables.
  F-15
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
4 – INVENTORIES, NET
 
 Inventory
consists of the following:
 September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Products
      for sale
                    
                    $
                    1,494,599
                    
                    
                    $
                    775,185
 
 The
Company sold its production lines in 2006 and has operated as a distributor
since that time. There was no reserve for obsolete inventory for all the periods
as the Company has purchased inventory based on customers’ orders.
  NOTE
5 – EMPLOYEE ADVANCES
 
 Employee
advances consist of the following:
 September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Employee
      advances
                    
                    $
                    5,280
                    
                    
                    $
                    6,307
 
 Employee
advances for business operating expenses and were deducted from their monthly
wages.
 
 NOTE
6 –PROPERTY AND EQUIPMENT, NET
 
 Property
and equipment consist of the following:
 September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Machinery
      and equipment
                    
                    $
                    89,460
                    
                    
                    $
                    89,463Electronic
      equipment
                    
                    
                    324,926
                    
                    
                    
                    -Office
      equipment
                    
                    
                    39,617
                    
                    
                    
                    32,447Automobiles
                    
                    
                    101,823
                    
                    
                    
                    101,827Accumulated
      depreciation
                    
                    
                    (217,241
                    )
                    
                    
                    (189,589
                    )Property
      and equipment, net
                    
                    $
                    338,585
                    
                    
                    $
                    34,148
 
 The
depreciation expenses were $17,954, 15,937, 27,641, and 33,637 for the three and
nine months ended September 30, 2009 and 2008, respectively.
 
 NOTE
7 – INTANGIBLE ASSETS, NET
 
 Intangible
assets consist of the following:
 September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Software
                    
                    $
                    645,392
                    
                    
                    $
                    -Accumulated
      amortization
                    
                    
                    (32,270
                    )
                    
                    
                    -Total
                    
                    $
                    613,122
                    
                    
                    $
                    -
 
 The
amortization expenses were $32,250, $0, $32,250 and $0 for three and nine months
ended September 30, 2009 and 2008, respectively.
  F-16
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
8 – SHORT-TERM DEMAND LOANS PAYABLE
 
 Since
2005, the Company had several outstanding short-term demand corporation loans
which were used primarily for general working capital purposes. These short-term
unsecured loans were borrowed from long-term relationship customers bearing no
interest. The imputed interests are assessed as an expense to the business
operation and addition to the paid-in capital. The calculation is performed
monthly by annual rate in the rage from 5.58 to 7.30% with the reference to the
one-year loan rate from The People’s Bank of China. All the loans have been paid
off as of June 30, 2008.
 
 The
imputed interests were $0, $0, $0, and $26,487 for the three and nine months
ended September 30, 2009 and 2008, respectively.
 
 The
Company secured one-year bank loans from Bank of Communication and Austria
Central Cooperation Bank. These loans carried at an annual interest rate of
6.7275% for loans from Bank of Communication and 6.6975% for loans from Austria
Central Cooperation Bank Beijing Branch. Both loans are secured by accounts
receivable of the Company.
 
 The
outstanding loan is as follows:
 September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Austria
      Central Cooperation Bank
                    
                    $
                    1,454,244
                    
                    
                    $
                    3,931,991
 
 Interest
expense incurred for the above short-term bank loan were $55,799, $147,190,
$140,693 and $261,154 for the three and nine months ended September 30, 2009 and
2008, respectively.
 
 NOTE
9 – STATUTORY RESERVES
 
 As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% their profits after taxes, as determined in
accordance with the PRC accounting standards applicable to the subsidiaries of
the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company.
 
 NOTE
10 – RELATED PARTIES TRANSACTIONS
 
 Due to related
parties
 
 For the
year then ended December 31, 2008, the Company had an outstanding payable to Mr.
Zhong, Ms. Sen, Mr. Huang, Ms. Wu, and Ms. Li totaling $2,102,178, $13,759,
$21,152, $211,814 and $10,825, respectively. These amounts are non-secured,
non-interest bearing, and are considered to be short-term within 5 months
starting from October 6, 2008 to March 5, 2009. The notes were converted into
approximately 2,929,097 shares of common stock during the quarter ended March
31, 2009 in accordance with the Purchase Right at $0.6907 per share. The shares
are reflected as issued and outstanding on the statement of stockholders’ equity
since inception.
 
 Due to
related parties consist of the following:
 September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Sen,
      Hui (shareholder)
                    
                    $
                    -
                    
                    
                    $
                    13,759Zhong,
      Bo (CEO)
                    
                    
                    -
                    
                    
                    
                    2,102,178Huang,
      Jenkang (Vice President)
                    
                    
                    -
                    
                    
                    
                    21,152Wu,
      Dexiu (Warehousing, CEO's Spouse)
                    
                    
                    -
                    
                    
                    
                    211,814Li,
      Yuting (Executive Secretary to CEO)
                    
                    
                    -
                    
                    
                    
                    10,825Total
                    
                    $
                    -
                    
                    
                    $
                    2,359,728
 
 The
imputed interests were $0, $22,518, $31,417 and $22,518 for the three and nine
months ended September 30, 2009 and 2008, respectively.
  F-17
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
10 – RELATED PARTIES TRANSACTIONS (continued)
 
 Exchange of related parties
debt for common stock
 
 Pursuant
to relevant laws and regulations of China and the ownership transfer agreement
with the original owners of ZST PRC, the Company, through its Everfair
subsidiary, agreed to pay approximately $1.7 million (RMB 12,000,000) to acquire
the assets of ZST PRC. As part of the purchase right agreement, the original
owners agreed to use these proceeds to complete the exercise of the Purchase
Right to purchase the Company’s shares and obtain control of the Company. The
payables were converted into approximately 2,161,218 shares of common stock
during the quarter ended March 31, 2009 in accordance with the Purchase Rights
at $0.6907 per share. The shares are reflected as issued and outstanding on the
statement of stockholders’ equity since inception.
 
 NOTE
11 – ADVANCES
 
 In
accordance with the purchase contracts, the Company is required to make an
advance to its suppliers to purchase the IPTV materials and add on process work.
The advance is applied to the total invoice balance upon satisfaction of the
delivered goods.
 
 NOTE
12 – INCOME TAXES
 
 The
Company is registered in PRC and has no tax advantages granted by local
government for corporate income taxes and sales taxes because it is a domestic
corporation.
 
 Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The new standard EIT rate of 25% replaces the 33% rate applicable to both DES
and FIEs, except for High Tech companies that pay a reduced rate of 15%, subject
to government verification for Hi-Tech company status in every three years. For
companies established before March 16, 2007 continue to enjoy tax holiday
treatment approved by local government for a grace period of either for the next
5 years or until the tax holiday term is completed, whichever is
sooner.
 
 The
provision for taxes on earnings consisted of:
 Three months ended September 30,
                    
                    
                    Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008PRC
      Corporate Income Tax
                    
                    $
                    1,106,409
                    
                    
                    $
                    579,554
                    
                    
                    $
                    2,593,724
                    
                    
                    $
                    1,565,994
 
 A
reconciliation between the income tax computed at the PRC statutory rate and the
Company’s provision for income taxes is as follows:
 Three months ended September 30,
                    
                    
                    Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008PRC
      corporate income tax rate
                    
                    $
                    25
                    %
                    
                    $
                    25
                    %
                    
                    $
                    25
                    %
                    
                    $
                    25
                    %
 
 The PRC
tax authority conducts periodic and ad hoc tax filing reviews on business
enterprises operating in the PRC after those enterprises have completed their
relevant tax filings, hence the Company’s tax filings may not be
finalized.  It is therefore uncertain as to whether the PRC tax authority
may take different views about the Company’s tax filings which may lead to
additional tax liabilities.
  F-18
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
13 – COMMITMENTS AND CONTINGENCIES
 
 Office lease
commitments
 
 The
Company has entered into new office lease agreements in 2009.  It starts
from May 2009 to April 2011. The company paid a deposit of $7,334. The company’s
commitment for lease will be approximately $58,000 per year. The lessor delayed
the first year lease payment and the Company will start to pay from May
2010.
 
 Rent
expense for the three and nine months ended September 30, 2009 and 2008 were $0,
1,832, $5,497 and $5,548, respectively.
 
 Lack of
insurance
 
 The
Company could be exposed to liabilities or other claims for which the Company
would have no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy except for property insurance policies with
limited coverage. For example, because the Company does not carry products
liability insurance, a failure of any of the products marketed by the Company
may subject it to the risk of product liability claims and litigation arising
from injuries allegedly caused by the improper functioning or design of its
products. The Company cannot assure that it will have enough funds to defend or
pay for liabilities arising out of a products liability claim. To the extent the
Company incurs any product liability or other litigation losses, its expenses
could materially increase substantially. There can be no assurance that the
Company will have sufficient funds to pay for such expenses, which could end its
operations.  There can be no guarantee that the Company will be able to
obtain additional insurance coverage in the future, and even if it can obtain
additional coverage, the Company may not carry sufficient insurance coverage to
satisfy potential claims. All investors of the Company could lose their entire
investment should uninsured losses occur.
  F-19
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
14 – SEGMENT INFORMATION
 
 The
standard of “Disclosures about Segments of an Enterprise and Related
Information” requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable segment of an
enterprise. The Company believes that it operates in one business segment
(research, development, production, marketing and sales of electronic products)
and in one geographical segment (China), as all of the Company’s current
operations are carried out in China.
 
 The
Company’s revenues, costs and gross profits were broken into the following
categories:
 
 Three months ended September 30,
                        
                        
                        Nine months ended September 30,Product Sales:
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Sales
      revenues
                        
                        $
                        28,627,644
                        
                        
                        $
                        15,202,520
                        
                        
                        $
                        70,067,184
                        
                        
                        $
                        40,377,727Cost
      of sales
                        
                        
                        23,823,013
                        
                        
                        
                        12,565,862
                        
                        
                        
                        58,773,620
                        
                        
                        
                        33,529,601Gross
      Profit
                        
                        $
                        4,804,631
                        
                        
                        $
                        2,636,658
                        
                        
                        $
                        11,293,564
                        
                        
                        $
                        6,848,126Gross
      Margin
                        
                        
                        16.78
                        %
                        
                        
                        17.34
                        %
                        
                        
                        16.12
                        %
                        
                        
                        16.96
                        %
 
 Three months ended September 30,
                    
                    
                    Nine months ended September 30,Technical Support Revenues:
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Sales
      revenues
                    
                    $
                    -
                    
                    
                    $
                    6,506
                    
                    
                    
                    -
                    
                    
                    $
                    609,602Cost
      of sales
                    
                    
                    -
                    
                    
                    
                    358
                    
                    
                    
                    -
                    
                    
                    
                    33,528Gross
      Profit
                    
                    $
                    -
                    
                    
                    $
                    6,148
                    
                    
                    
                    -
                    
                    
                    $
                    576,074Gross
      Margin
                    
                    
                    -
                    
                    
                    
                    94.50
                    %
                    
                    
                    -
                    
                    
                    
                    94.50
                    %
 
 Three months ended September 30,
                    
                    
                    Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Total
      revenues
                    
                    $
                    28,627,644
                    
                    
                    $
                    15,209,026
                    
                    
                    $
                    70,067,184
                    
                    
                    $
                    40,987,329Total
      Cost of sales
                    
                    
                    23,823,013
                    
                    
                    
                    12,566,220
                    
                    
                    
                    58,773,620
                    
                    
                    
                    33,563,129Total
      Gross Profit
                    
                    $
                    4,804,631
                    
                    
                    $
                    2,642,806
                    
                    
                    $
                    11,293,564
                    
                    
                    $
                    7,424,200Total
      Gross Margin
                    
                    
                    16.78
                    %
                    
                    
                    17.38
                    %
                    
                    
                    16.12
                    %
                    
                    
                    18.11
                    %
  F-20
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
15 – OPERATING RISK
 
 Concentration of credit
risk
 
 The
Company maintains cash balances at various financial institutions in the PRC
that do not provide insurance for amounts on deposit. The Company operates
principally in the PRC and grants credit to its customers. Although the PRC is
economically stable, it is always possible that unanticipated events both
domestically and in foreign countries could disrupt the operations of the
Company or its customers.
 
 Country
risk
  The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion,
international remittances and rates and methods of taxation, among other things.
The Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
 
 NOTE
16 – COMMON STOCK
 
 On
January 9, 2009, ZST Digital closed a share exchange transaction (the “Share
Exchange”) pursuant to which ZST Digital (i) issued 806,408 shares of its common
stock to acquire 100% equity ownership of World Orient Universal Limited (“World
Orient”), which is the 100% parent of Global Asia Universal Limited (“Global
Asia”), which is the 100% parent of Everfair Technologies Limited (“Everfair”),
which is a 100% parent of Zhengzhou Shenyang Technology Company Limited (“ZST
PRC”), (ii) assumed the operations of World Orient and its subsidiaries, and
(iii) changed its name from SRKP 18, Inc. to ZST Digital Networks,
Inc.
 
 Immediately
after the closing of the Share Exchange but prior to the Private Placement, ZST
Digital had outstanding 2,000,788 shares of common stock, no shares of preferred
stock, no options, and warrants to purchase 176,629 shares of common stock at an
exercise price of $0.00024621 per share.
 
 On
January 14, 2009, Zhong Bo, the Company’s Chief Executive Officer and Chairman
of the Board, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the “ZST
Management”), each entered into a Common Stock Purchase Agreement pursuant to
which the Company issued and the ZST Management purchased an aggregate of
5,090,315 shares of our common stock at a per share purchase price of $0.6907
(the “Purchase Right”). The purchase price for the shares was paid in full on
May 25, 2009.
 
 Prior to
the closing of the Share Exchange, each of the shareholders and warrantholders
of the Company canceled 0.3317 shares of common stock and warrants to purchase
0.5328 shares of common stock held by each of them for each one (1) share of
common stock purchased by the ZST Management pursuant to the Purchase Right (the
“Share and Warrant Cancellation”). Pursuant to the Share and Warrant
Cancellation, an aggregate of 1,688,533 shares of common stock and warrants to
purchase 2,712,283 shares of common stock held by certain of our stockholders
and warrantholders prior to the Share Exchange were cancelled.
  F-21
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
17 – SERIES A CONVERTIBLE PREFERRED STOCK
 
 The
Company is authorized to issue 10,000,000 shares of preferred
stock.
 
 On
January 5, 2009, the Company filed a Certificate of Designations, Preferences
and Rights (the “Certificate”) whereby it designated 3,750,000 shares of its
preferred stock, $0.0001 par value per share, as Series A Convertible Preferred
Stock, (the “Preferred Stock”).  Each share of Preferred Stock has a stated
value of $3.94.  Each share of Preferred Stock is convertible, at the
option of the holder at any time and from time to time after the original issue
date of the Preferred Stock, into one share of Common Stock, at a conversion
price equal to the per share purchase price, subject to adjustment as more fully
described in the Certificate.  Each share of Preferred Stock has the right
to one vote per share of Common Stock issuable upon conversion of the shares of
Preferred Stock.
  In 2009,
the Company conducted five closings of a private placement transaction (the
“Private Placement”). As of September 30, 2009, pursuant to subscription
agreements entered into with the investors, the Company sold an aggregate of
1,263,723 shares of Series A Convertible Preferred Stock at $3.94 per share for
gross proceeds of $4,976,953. Each share of Preferred Stock shall be convertible
at the option of the holder thereof, at any time and from time to time from and
after the Original Issue Date into that number of shares of Common Stock
determined by dividing the Stated Value of $3.94 of such share of Preferred
Stock by the Conversion Price of $3.94.
  On
January 9, 2009, the Company conducted an initial closing of the Private
Placement. Pursuant to subscription agreements entered into with investors, the
Company sold an aggregate of 445,874 shares of Series A Convertible Preferred
Stock at $3.94 per share. As a result, the Company received gross proceeds in
the amount of $1,750,902. In connection with the initial closing of the Private
Placement, the Company issued a promissory note in the principal amount of
$170,000, bearing no interest, to WestPark Capital Financial Services, LLC, the
parent company of WestPark, the placement agent for the Private Placement (the
“Note”).
 
 On
January 23, 2009, the Company conducted a second closing of the Private
Placement. Pursuant to subscription agreements entered into with investors, the
Company sold an aggregate of 132,264 shares of Series A Convertible Preferred
Stock at $3.94 per share. As a result, the Company received gross proceeds in
the amount of $525,000, of which $170,000 was used to repay the Note in
full.
 
 On
February 13, 2009, the Company conducted a third closing of the Private
Placement. Pursuant to subscription agreements entered into with investors, the
Company sold an aggregate of 332,917 shares of Series A Convertible Preferred
Stock at $3.94 per share. As a result, the Company received gross proceeds in
the amount of $1,310,000.
  On April
15, 2009, the Company conducted a fourth closing of the Private Placement.
Pursuant to subscription agreements entered into with investors, the Company
sold an aggregate of 203,924 shares of Series A Convertible Preferred Stock at
$3.94 per share. As a result, the Company received gross proceeds in the amount
of $804,000.
 
 On May 5,
2009, the Company conducted a fifth closing of the Private Placement. Pursuant
to subscription agreements entered into with investors, the Company sold an
aggregate of 148,744 shares of Series A Convertible Preferred Stock at $3.94 per
share. As a result, the Company received gross proceeds in the amount of
$587,051.
 
 In
accordance with the standard of “Beneficial Conversion Feature” codified within
ASC 470, the Series A Convertible Preferred Stock does not have an embedded
beneficial conversion feature (BCF) because the effective conversion price of
such shares equals the fair value of the Company’s common stock. The Company
determined that the fair value of the common stock at $3.94 per share based on
the fact that (1) the common stock is not readily tradable in an open market at
the time of issuance, and (2) the Company has recently sold the convertible
preferred stock that is convertible into common stock at 1:1 ratio for $3.94 per
share in a private placement, therefore the market price of the common stock is
$3.94 per share. However, if in the future the Company has a dilutive issuance
of securities, as defined in the Preferred Stock Certificate of Designation, the
Company must recognize a beneficial conversion if and when a reset of the
conversion price occurs.
  F-22
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
17 – SERIES A CONVERTIBLE PREFERRED STOCK (continued)
 
 Value
      Allocated to Preferred Stocks:Proceeds
      from issuance
                    
                    $
                    4,976,953Less
      value allocated to warrants
                    
                    
                    -Value
      allocated to preferred stocks
                    
                    $
                    4,976,953Market
      Value of Shares Issuable Upon Conversion:Shares
      issuable upon conversion of the preferred stocks
                    
                    
                    1,263,723Market
      value of stock on preferred stock issuance date
                    
                    $
                    3.94Market
      value of shares issuable upon conversion
                    
                    $
                    4,976,953Beneficial
      Conversion Feature:Market
      value of shares issuable upon conversion
                    
                    $
                    4,976,953Less
      value allocated to preferred stocks
                    
                    
                    4,976,953Value
      of beneficial conversion feature
                    
                    $
                    -
 
 The
Company evaluated whether or not the Series A Convertible Preferred Stock
contained any embedded conversion features that meet the definition of
derivatives under the “Embedded Derivative” standard codified within ASC 815,
and related interpretations.  The standard states that an embedded
derivative instrument shall be separated from the host contract and accounted
for as a derivative instrument pursuant to the statement if and only if all the
following criteria are met:
 
 a.
              The economic characteristics and
      risks of the embedded derivative instrument are not clearly and closely
      related to the economic characteristic and the risks to the host contact.
      (Additional guidance on applying this criterion to various contracts
      containing embedded derivative instrument s is included in Appendix A of
      this statement.)
 b.
              The contract that embodies both
      the embedded derivative instrument and the host contract are not measured
      at fair value under otherwise applicable generally accepted accounting
      principles with changes in fair value reported in earnings as they
      occur.
 c.
              A separate instrument with the
      same terms as the embedded derivative instrument would, pursuant to
      subtopic 10 of the standard codified within ASC 815, be a derivative
      instrument subject to the requirements of this statement. However, this
      criterion is not met if the separate instrument with the same terms as the
      embedded derivative instrument would be classified as a liability (or an
      asset in some circumstance) under the provisions of the standard codified
      within ASC 480 but would be classified in stockholders’ equity absent the
      provisions in the standard codified within ASC
  480.
  The
Series A Convertible Preferred Stock has a fixed conversion provision of 1
preferred share for 1 common share and is convertible at the option of the
holder and automatically based upon certain events happening. Based upon the
above requirement of subtopic 15 of ASC 815, it is clear that any potential
embedded derivatives in the Series A Convertible Preferred Stock are clearly and
closely related and do not require bifurcation from the host.
 
 The
Company evaluated whether or not the convertible preferred stock should be
classified as a liability or equity under the standard codified within ASC 480,
“Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity” and EITF Topic D-98 “Classification and Measurement of
Redeemable Securities”. The Company concluded that under EITF Topic D-98,
preferred securities that are redeemable for cash or other assets are to be
classified outside of permanent equity if they are redeemable (i) at a
fixed or determinable price on a fixed or determinable date, (ii) at the
option of the holder, or (iii) upon the occurrence of an event that is not
solely within the control of the issuer. Accordingly, the Company classified the
Series A Convertible Preferred Stock as permanent equity since there was no
deemed liquidation events that require one or more class or type of equity
security to be redeemed.
  F-23
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
18 – EARNINGS PER SHARE
 
 Basic net
income per share is computed by dividing net income by the weighted-average
number of shares outstanding during the period.
 
 Diluted
net income per share is computed by using the weighted-average number of shares
of common stock outstanding and, when dilutive, potential shares from options
and warrants to purchase common stock, using the treasury stock
method.
 
 The
following table illustrates the computation of basic and dilutive net income per
share and provides a reconciliation of the number of weighted-average basic and
diluted shares outstanding:
 
 Three months ended September 30,
                    
                    
                    Nine months ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      income
                    
                    
                    3,291,827
                    
                    
                    
                    1,681,566
                    
                    
                    
                    7,100,116
                    
                    
                    
                    4,806,871Denominator:Basic
      weighted-average shares outstanding
                    
                    
                    7,091,103
                    
                    
                    
                    5,896,723
                    
                    
                    
                    7,091,103
                    
                    
                    
                    5,896,723Effect
      of convertible preferred stock
                    
                    
                    1,263,723
                    
                    
                    
                    -
                    
                    
                    
                    1,046,796
                    
                    
                    
                    -Effect
      of dilutive warrants
                    
                    
                    170,629
                    
                    
                    
                    -
                    
                    
                    
                    162,504
                    
                    
                    
                    -Diluted
      weighted-average shares outstanding
                    
                    
                    8,525,455
                    
                    
                    
                    5,896,723
                    
                    
                    
                    8,265,403
                    
                    
                    
                    5,896,723Net
      income per share:Basic
                    
                    $
                    0.46
                    
                    
                    $
                    0.29
                    
                    
                    $
                    1.01
                    
                    
                    $
                    0.82Diluted
                    
                    $
                    0.39
                    
                    
                    $
                    0.29
                    
                    
                    $
                    0.86
                    
                    
                    $
                    0.82
 
 NOTE
19 – COMMON STOCK WARRANTS
 
 In
January 2007, the Company sold to its original shareholders warrants to purchase
2,882,912 shares of common stock at an exercise price of $0.0002462. On January
14, 2009, these shareholders canceled an aggregate of 2,712,283 warrants such
that the shareholders held an aggregate of 170,629 warrants immediately after
the Share Exchange. The warrant has a 5 year term and is not exercisable until
at least one year from the date of Share Exchange.
 
 The
summary of the status of the Company’s outstanding warrant activity for the nine
months ended September 30, 2009 is as follows:
 
 Warrants
                    
                    Average
                      Exercise Price170,629
                    
                    $
                    0.0002462
 
 NOTE
20 – SUBSEQUENT EVENTS
 
 On
October 8, 2009, the Company entered into an employment agreement with John
Chen, M.D., regarding his employment by the Company as its new Chief Financial
Officer (the “Employment Agreement”).  Dr. Chen’s appointment as Chief
Financial Officer was effective on October 20, 2009 (the “Effective Date”).
Pursuant to the Employment Agreement, Dr. Chen will be entitled to a base salary
at an annual rate of $150,000, as well as reimbursement for the cost of standard
corporate-style healthcare insurance coverage and for home-office and business
travel expenses.  Dr. Chen was also granted a signing bonus which is
calculated as follows: $410.96 per day multiplied by the number of days between
September 25, 2009 and the Effective Date. Dr. Chen was granted options to
purchase 25,000 shares of the common stock of the Company at an exercise price
of $8.00 per share and exercisable until October 20, 2014.  The options
will be immediately exercisable but, to the extent they are exercised, will be
subject to a repurchase right of the Company which will lapse as follows: 50% of
the options and shares will vest six (6) months after the Effective Date and the
remaining 50% will vest twelve (12) months after the Effective
Date.
  F-24
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
20 – SUBSEQUENT EVENTS (continued)
 
 On
October 20, 2009, the Company completed a public offering and sold 3,125,000
shares of its common stock at $8.00 per share. The Company granted the
representative of the underwriters a 45-day option to purchase up to an
additional 468,750 shares of common stock at $8.00 per share. The shares of the
Company’s common stock were sold to the public for gross proceeds of
approximately $25 million. The Company also issued warrants to the underwriters
to purchase 312,500 shares of the Company’s common stock at an exercise price of
$10 per share.
 
 On
October 25, 2009, the Company entered into a GPS Device Supply and Terminal
Service Agreement (the “GPS Agreement”) with Xing Yang Security Service Co.,
Ltd. (“Xing Yang”), a provider of personal, logistics, and technology safety
services. Pursuant to the GPS Agreement, the Company will provide GPS hardware
installation and monthly call center services to Xing Yang.  Specifically,
the Company will supply and install GPS tracking units in Xing Yang’s armored
trucks and Xing Yang’s trucks will have access to the Company’s call center,
which provides direction, information and emergency support for
subscribers.  Pursuant to the GPS Agreement, Xing Yang will pay the Company
RMB 4,000,000 (approximately $590,000) upon entering into the GPS Agreement and
an additional annual service fee up to approximately RMB 500,000 (approximately
$74,000) each year.
 
 NOTE
21 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
 
 Basis of
Presentation
 
 The
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of
the subsidiaries of ZST Digital  exceed 25% of the consolidated net assets
of ZST Digital. The ability of our Chinese operating subsidiaries to pay
dividends may be restricted due to the foreign exchange control policies and
availability of cash balances of the Chinese operating subsidiaries. Because
substantially all of our operations are conducted in China and a substantial
majority of our revenues are generated in China, a majority of our revenue being
earned and currency received are denominated in Renminbi (RMB). RMB is subject
to the exchange control regulation in China, and, as a result, we may be unable
to distribute any dividends outside of China due to PRC exchange control
regulations that restrict our ability to convert RMB into US
Dollars.
 
 The
condensed parent company financial statements have been prepared using the same
accounting principles and policies described in the notes to the consolidated
financial statements, with the only exception being that the parent company
accounts for its subsidiaries using the equity method. Refer to the consolidated
financial statements and notes presented above for additional information and
disclosures with respect to these financial statements.
  F-25
  ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
21 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
  ZST
Digital Networks, Inc.
 (Formerly
SRKP 18, Inc.)
 
 Condensed Parent Company
Balance Sheets
 (Dollars
In Thousands)
 
 September 30,,
                      
                      
                      December 31,2009
                      
                      
                      2008(Unaudited)ASSETSInvestment
      in subsidiaries, at equity in net assets
                      
                      $
                      22,367
                      
                      
                      $
                      8,983Total
      Assets
                      
                      
                      22,367
                      
                      
                      
                      8,983LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccrued
      liabilities and other payable
                      
                      
                      52
                      
                      
                      
                      -Total
      Current Liabilities
                      
                      
                      52
                      
                      
                      
                      -COMMITMENTS
      AND CONTINGENCIES
                      
                      
                      -
                      
                      
                      
                      -STOCKHOLDERS’
      EQUITYPreferred
      stock, $0.0001 par value, 10,000,000 shares authorized, 6,250,000 sharesundesignated,
      0  and 0 shares issued and outstanding at September 30, 2009and
      December 31, 2008, respectively.
                      
                      
                      -
                      
                      
                      
                      -Preferred
      stock Series A Convertible, $0.0001 par value, 3,750,000shares
      authorized, 1,263,723 and 0 shares issued and outstanding at September 30,
      2009and
      December 31, 2008,  respectively. Liquidation preference and
      redemption valueof
      $4,976,953 at September 30, 2009.
                      
                      
                      1Common
      stock, $0.0001 par value, 100,000,000 shares authorized, 7,091,103 and5,896,723
      shares issued and outstanding at September 30, 2009 andDecember
      31, 2008, respectively.
                      
                      
                      1
                      
                      
                      
                      1Additional
      paid-in capital
                      
                      
                      8,270
                      
                      
                      
                      1,488Accumulated
      other comprehensive income
                      
                      
                      40
                      
                      
                      
                      591Statutory
      surplus reserve fund
                      
                      
                      1,492
                      
                      
                      
                      1,492Retained
      earnings (unrestricted)
                      
                      
                      12,511
                      
                      
                      
                      5,411Total
      Stockholders' Equity
                      
                      
                      22,315
                      
                      
                      
                      8,983Total
      Liabilities and Stockholders' Equity
                      
                      $
                      22,367
                      
                      
                      $
                      8,983
  F-26
 
 ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
21 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
  ZST
Digital Networks, Inc.
 (Formerly
SRKP 18, Inc.)
 
 Condensed Parent Company
Statements of Operations
 (Dollars
In Thousands)
 (unaudited)
 
 For The Three Months Ended
                    
                    
                    For the Nine Months EndedSeptember 30,
                    
                    
                    September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Merger
      cost
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    555
                    
                    
                    
                    -Other
      general and administrative
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    106
                    
                    
                    
                    -Total
      Expenses
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    661
                    
                    
                    
                    -Equity
      in undistributed income of subsidiaries
                    
                    
                    3,297
                    
                    
                    
                    1,682
                    
                    
                    
                    7,761
                    
                    
                    
                    4,807Income
      before income taxes
                    
                    
                    3,292
                    
                    
                    
                    1,682
                    
                    
                    
                    7,100
                    
                    
                    
                    4,807Provision
      for income tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    $
                    3,292
                    
                    
                    $
                    1,682
                    
                    
                    $
                    7,100
                    
                    
                    $
                    4,807
  F-27
  ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 (Amounts
and disclosures for the three and nine months ended September 30, 2009 and 2008
are unaudited)
 
 NOTE
21 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
  ZST
Digital Networks, Inc.
 (Formerly
SRKP 18, Inc.)
 
 Condensed Parent Company
Statements of Cash Flows
 (Dollars
In Thousands)
 (unaudited)
 
 For The Nine Months EndedSeptember 30,2009
                  
                  
                  2008Cash
      Flows from Operating ActivitiesNet
      income
                  
                  $
                  7,100
                  
                  
                  $
                  4,807Adjustments
      to reconcile net income to net cash provided (used) by operating
      activities:Increase
      in accrued liabilities and other payable
                  
                  
                  51
                  
                  
                  
                  -Equity
      in undistributed income of subsidiaries
                  
                  
                  (7,761
                  )
                  
                  
                  (4,807
                  )Net
      Cash Provided (Used) by Operating Activities
                  
                  
                  (610)
                  
                  
                  
                  -Cash
      Flows from Investing ActivitiesCapital
      contribution to subsidiaries
                  
                  
                  (2,924
                  )
                  
                  
                  -Net
      Cash Provided (Used) by Investing Activities
                  
                  
                  (2,924
                  )
                  
                  
                  -Cash
      Flows from Financing ActivitiesSale
      of preferred stocks
                  
                  
                  3,534
                  
                  
                  
                  -Net
      Cash Provided (Used) by Investing Activities
                  
                  
                  3,534
                  
                  
                  
                  -Net
      Increase in Cash and Cash Equivalents
                  
                  
                  -
                  
                  
                  
                  -Cash
      and Cash Equivalents, beginning of period
                  
                  
                  -
                  
                  
                  
                  -Cash
      and Cash Equivalents, end of period
                  
                  $
                  -
                  
                  
                  $
                  -Supplemental
      disclosure information:Non-cash
      Investing and Financing activities:Shares
      issued for related parties' debt
                  
                  $
                  2,360
                  
                  
                  $
                  -
  F-28




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





The
following discussion relates to the financial condition and results of
operations of ZST Digital Networks, Inc. (the “Company”) and its wholly-owned
subsidiary World Orient Universal Limited, a company organized under the laws of
the British Virgin Islands (“World Orient”), its wholly-owned subsidiary, Global
Asia Universal Limited, a company organized under the laws of the British Virgin
Islands (“Global Asia”), its wholly-owned subsidiary Everfair Technologies,
Ltd., a company organized under the laws of Hong Kong (“Everfair”), and its
wholly-owned subsidiary Zhengzhou Shenyang Technology Company Limited, a company
organized under the laws of the People’s Republic of China (“Zhengzhou ZST”).
This management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company’s financial statements
and the related notes included in this report.





Forward-Looking
Statements





This
report contains forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
similar expressions are intended to identify forward-looking statements. These
statements include, among others, information regarding future operations,
future capital expenditures, and future net cash flow. Such statements reflect
our management’s current views with respect to future events and financial
performance and involve risks and uncertainties, including, without limitation,
general economic and business conditions, changes in foreign, political, social,
and economic conditions, regulatory initiatives and compliance with governmental
regulations, the ability to achieve further market penetration and additional
customers, and various other matters, many of which are beyond our control.
Should one or more of these risks or uncertainties occur, or should underlying
assumptions prove to be incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
Consequently, all of the forward-looking statements made in this report are
qualified by these cautionary statements and there can be no assurance of the
actual results or developments.





Overview





Business
Summary





The
Company is principally engaged in supplying digital and optical network
equipment to cable system operators in the Henan Province of
China.  The Company has developed a line of internet protocol
television (“IPTV”) set-top boxes that are used to provide bundled cable
television, Internet and telephone services to residential and commercial
customers.  The Company has assisted in the installation and
construction of over 400 local cable networks covering more than 90 municipal
districts, counties, townships, and enterprises.  The Company’s
services and products have been recognized with various certifications,
including “integrated computer information system qualification class III”
issued by the Ministry of Industry Information, “communication user cable
construction enterprise qualification” issued by the Henan Province
Administration of Communication, “Henan Province Security Technology Prevention
Engineering Qualification Class III”, a certificate of “ISO9001:2000 Quality
System Authentication”, and “Double High” certification, high-tech product and
high-tech enterprise issued by the Henan Province government.





At
present, the Company’s main clients are broadcasting TV bureaus and cable
network operators serving various cities and counties.  The Company
has over 30 main customers, including the broadcasting TV bureaus and cable
network operators of the cities of Nanyang, Mengzhou, Xuchang, Pingdingshan,
Kaifeng, Zhoukou and Gongyi, and the counties of Yuanyang, Luoning, Neihuang,
Yinyang, Xixia, Kaifeng, Nanzhao, and Gushi.





In the
near future, the Company plans to joint venture with cable network operators to
provide bundled television programming, Internet and telephone services to
residential customers in cities and counties located in the Henan
Province.





General
Factors





We expect
that for the foreseeable future that the largest source of revenue for our
business will be the sale of set-top boxes sold to cable system operators.
Because the number of potential new customers for our set-top box and fixed
satellite services businesses is small, our current customer concentration is
likely to continue for the foreseeable future and our operating results will
consequently likely continue to depend on sales to a relatively small number of
customers and on the continued success of these customers relative to their
competitors.





Our
profitability will be affected by costs associated with our efforts to expand
our sales, marketing, product development and general and administrative
capabilities in all of our businesses, as well as expenses that we incur as a
publicly-traded company.  These costs include costs associated with,
among other things, financial reporting, information technology, complying with
federal securities laws (including compliance with the Sarbanes-Oxley Act of
2002), tax administration and human resources related functions.  If
in the future we expand internationally, we may also incur additional costs
to conform our set-top boxes to comply with local laws or local specifications
and to ship our set-top boxes to our international customers.





In order
to grow or even maintain our current level of revenue we will be required to
attract new customers and to increase sales to existing customers, which may
require us to design, market and sell new set-top boxes.  If we do not
develop relationships with new customers, we may not be able to expand our
customer base and our ability to increase or even maintain our revenue will be
impacted.


5





We
believe that substantial opportunities for developing potential new customers
lie in international markets and if we were to expand our operations overseas,
we expect our performance in international markets would be a significant
factor in determining whether we would be able to generate revenue and income
growth in future periods.  However, we do not currently intend to
expand our operations overseas and if we decide to do so in the future, there
can be no assurance we will be able to successfully commence or grow an
international business.





In
addition, unfavorable events in the economy, including a continuation or further
deterioration in the current downturn in real estate mortgage and credit
markets, could cause consumer demand for subscription TV services and
consequently sales of our set-top boxes to materially decline because consumers
may delay purchasing decisions or change or reduce their discretionary
spending.





Our
ability to sustain or increase profitability will also depend in large part on
our ability to control or reduce our costs of producing our set-top
boxes.  The market for our set-top boxes, like other electronic
products, has been characterized by regular reductions in selling prices and
production costs.  Therefore, we will likely be required to reduce
production costs in order to maintain the margins we earn on set-top boxes and
the profitability of our set-top box business.





Recent
Events





Reverse
Stock Split





On
October 6, 2009, we effected a 1-for-2.461538462 reverse stock split of all of
our issued and outstanding shares of common stock and Series A Convertible
Preferred Stock (the “Reverse Stock Split”) by filing an amendment to our
Certificate of Incorporation with the Secretary of State of Delaware. The par
value and number of authorized shares of our common stock and Series A
Convertible Preferred Stock remained unchanged. The number of shares and per
share amounts included in the consolidated financial statements and the
accompanying notes included in the F- section have been adjusted to reflect the
Reverse Stock Split retroactively. Unless otherwise indicated, all references to
number of shares, per share amounts and earnings per share information contained
in this report give effect to the Reverse Stock Split.





Share
Exchange





On
December 11, 2008, we entered into a share exchange agreement, as amended on
January 9, 2009 (the “Exchange Agreement”), with World Orient and its
stockholders, pursuant to which the stockholders would transfer all of the
issued and outstanding shares of World Orient to the Company in exchange for
806,408 shares of our common stock (the “Share Exchange”).  On January
9, 2009, the Share Exchange closed and World Orient became our wholly-owned
subsidiary and we immediately changed our name from “SRKP 18, Inc.” to “ZST
Digital Networks, Inc.” A total of 806,408 shares were issued to the former
stockholders of World Orient.





Purchase
Right





On
January 14, 2009, Zhong Bo, our Chief Executive Officer and Chairman of the
Board, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the “ZST Management”)
each entered into a Common Stock Purchase Agreement pursuant to which the
Company issued and the ZST Management agreed to purchase an aggregate of
5,090,315 shares of our common stock at a per share purchase price of $0.6907
(the “Purchase Right”).  The purchase price for the shares was paid in
full on May 25, 2009.  Each of the stockholders and warrantholders of
the Company prior to the Share Exchange agreed to cancel 0.3317 shares of common
stock and warrants to purchase 0.5328 shares of common stock held by each of
them for each one (1) share of common stock purchased by the ZST Management
pursuant to the Purchase Right (the “Share and Warrant
Cancellation”).  Pursuant to the Share and Warrant Cancellation, an
aggregate of 1,688,532 shares of common stock and warrants to purchase 2,712,283
shares of common stock held by certain of our stockholders and warrant holders
prior to the Share Exchange were cancelled.





Private
Placement





On May 5,
2009, we completed the final closing in a series of five closings beginning
January 9, 2009 of a private placement transaction (the “Private
Placement”).  Pursuant to subscription agreements entered into with
the investors, we sold an aggregate of 1,263,723 shares of Series A Convertible
Preferred Stock at $3.94 per share.  As a result, we received gross
proceeds in the amount of approximately $4.98 million.  In connection
with the initial closing of the Private Placement, the Company issued a
promissory note in the principal amount of $170,000, bearing no interest (the
“Note”), to WestPark Capital Financial Services, LLC, the parent company of the
placement agent, WestPark Capital, Inc. (“WestPark”). The principal was due
and payable by the Company on or before the earlier of (a) thirty (30) days from
the date of issuance of the Note or (b) upon the receipt by the Company of at
least $4 million in the Private Placement.  The Company repaid the
Note in full on January 23, 2009 using the proceeds from the second closing of
the Private Placement.





Restructuring





Our BVI
subsidiary, World Orient, its wholly-owned BVI subsidiary, Global Asia, and
Global Asia’s wholly-owned Hong Kong subsidiary, Everfair, were owned by non-PRC
individuals.  Everfair obtained all the equity interests of Zhengzhou
ZST further to an Equity Purchase Agreement dated October 10, 2008 (the “Equity
Purchase Agreement”) by and among Everfair, Zhong Bo, our Chief Executive
Officer and Chairman of the Board, Wu Dexiu, Huang Jiankang, Sun Hui and Li
Yuting (the “ZST Management”).  The Equity Purchase Agreement received
approval by the Zhengzhou Municipal Bureau of Commerce on November 10, 2008 and
Zhengzhou ZST filed all required applications and received all appropriate SAFE
approvals from the Henan branch of SAFE.


6





Upon the
consummation of the Purchase Right and Share and Warrant Cancellation, our Chief
Executive Officer and Chairman of the Board, Zhong Bo, beneficially owned
approximately 59.87% of our outstanding common stock (assuming the full
conversion of the maximum number of shares of Series A Convertible Preferred
Stock issued and outstanding as of the date of this report).





Public
Offering





On
October 20, 2009, we completed a public offering of shares of our common stock
in which we sold 3,125,000 shares of common stock. Rodman & Renshaw, LLC
acted as lead manager and WestPark Capital, Inc. acted as co-manager for the
offering (together the “Underwriters”).  We have granted the Underwriters a
45-day option to purchase up to an additional 468,750 shares of common stock.
Our shares of common stock were sold to the public at a price of $8.00 per
share, for gross proceeds of approximately $25 million.





Compensation
for the Underwriters’ services included discounts and commissions of $1,875,000,
a $2,500,000 non-accountable expense allowance, roadshow expenses of
approximately of $10,000, and legal counsel fees (excluding blue sky fees) of
$40,000.  The Underwriters also received warrants to purchase an
aggregate of 312,500 shares of our common stock at an exercise price of $10.00
per share.  The warrants, which have a term of five years, are not
exercisable until at least one-year from the date of
issuance.   The warrants also carries registration
rights.





Critical Accounting
Policies and Estimates





The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States.  The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and
liabilities.  On an on-going basis, we evaluate our estimates
including the allowance for doubtful accounts, the salability and recoverability
of inventory, income taxes and contingencies.  We base our estimates
on historical experience and on other assumptions that we believes to be
reasonable under the circumstances, the results of which form our basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.  Actual results may differ
from these estimates under different assumptions or conditions.





We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations.  We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.





Revenue
recognition. The Company recognizes product sales revenue
when the significant risks and rewards of ownership have been transferred
pursuant to PRC law, including such factors as when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, sales and value-added tax laws have been complied with, and
collectability is reasonably assured. The Company generally recognizes revenue
when its products are shipped.





The IPTV
device sales contracts include a one-year quality assurance warranty for
defects.  According to the sales contract terms, customers are able to
hold back 10% of the total contract balance payable to the Company for one
year.  This deferred payment obligation is not contingent on resale of
the product.  In accordance with the standard, "Revenue Recognition
When Right of Return Exists", the Company records the holdback as revenue at the
time of sale when its products are shipped to customers.  Costs
related to quality assurance fulfillment are mainly the costs of materials used
for repair or replacement of damaged or defective products and are expensed as
incurred.  As the costs associated with such assurance were immaterial
in monetary terms, no assurance liability is accrued for all periods. The
Company incurred quality assurance costs of nil and nil for the nine months
ended September 30, 2009 and 2008, respectively.  These costs incurred
represent 0% and 0% of 2009 and 2008 IPTV box sales, respectively.  In
the event of defective product returns, the Company has the right to seek
replacement of such returned units from its supplier.





Revenues
from fixed-price construction contracts are recognized on the completed-contract
method. This method is used because most of the construction and engineering
contracts are completed within six months or less and financial position and
results of operations do not vary significantly from those which would result
from using the percentage-of-completion method. A contract is considered
complete when all costs have been incurred and the installation is operating
according to specifications or has been accepted by the customer.





Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, suppliers, tools,
repairs, and depreciation costs. General and administrative costs are charged to
expenses as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Claims are included
in revenues when received.





Allowance for
doubtful accounts. In estimating the collectability of
accounts receivable we analyze historical write-offs, changes in our internal
credit policies and customer concentrations when evaluating the adequacy of our
allowance for doubtful accounts periodically.  Differences may result
in the amount and timing of expenses for any period if we make different
judgments or uses difference estimates.  Our accounts receivable
represent a significant portion of our current assets and total
assets.  Our realization on accounts receivable, expressed in terms of
United States dollars may be affected by fluctuations in currency rates since
the customer’s currency is frequently a currency other than United States
dollars.


7





Inventories.
Inventories comprise raw materials and finished goods are stated at the lower of
cost or net realizable value, using the first-in first-out (“FIFO”)
method.  Substantially all inventory costs are determined using the
weighted average basis.  Costs of finished goods include direct labor,
direct materials, and production overhead before the goods are ready for
sale.  We evaluate the need for reserves associated with obsolete,
slow-moving and non-salable inventory by reviewing net realizable values on a
periodic basis. Inventory costs do not exceed net realizable value.





Taxation.
Under the tax laws of PRC, Zhengzhou ZST has had tax advantages granted by local
government for corporate income taxes and sales taxes commencing from the
establishment of the Company.  As a manufacturing enterprise
established in Zhengzhou, PRC, the Company was entitled to a preferential
Enterprise Income Tax (“EIT”) rate of 15%.  On March 16, 2007, the
National People’s Congress of China enacted a new PRC Enterprise Income Tax Law,
under which foreign invested enterprises and domestic companies will be subject
to enterprise income tax at a uniform rate of 25%.  The new law became
effective on January 1, 2008.  Since 2008, the local government has
increased the EIT rate from 15% to 18%.  During the transition period
for enterprises established before March 16, the tax rate will be gradually
increased starting in 2008 and be equal to the new tax rate in
2012.  We believe that our profitability will be negatively affected
in the near future as a result of the new EIT Law.





Recently
Adopted Accounting Pronouncements





In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification(ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to
various former authoritative U.S. GAAP pronouncements have been changed to
coincide with the appropriate section of the ASC.





In
September 2006, the FASB issued an accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements, and
required disclosures of assets and liabilities measured at fair value based on
their level in the hierarchy. This standard applies under other accounting
standards that require or permit fair value measurements. One of the amendments
deferred the effective date for one year relative to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at
fair value on a nonrecurring basis. This deferral applied to such items as
nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment.  The adoption of the fair value measurement standard did not
have a material impact on the Company’s consolidated results of operations or
financial condition.





In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended March 31,
2009.




In
April 2009, the FASB issued an accounting standard, which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.




In
April 2009, the FASB issued an accounting standard which modifies the
requirements for recognizing other-than-temporarily impaired debt securities and
changes the existing impairment model for such securities. The standard also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the standard, impairment of debt
securities will be considered other-than-temporary if an entity (1) intends
to sell the security, (2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The standard further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. The standard requires entities to initially apply its
provisions to previously other-than-temporarily impaired debt securities
existing as of the date of initial adoption by making a cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously other-than-temporarily impaired debt security
held as of the date of initial adoption from retained earnings to accumulated
other comprehensive income. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.


8


In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.





In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. This standard added an additional
required disclosure relative to the date through which subsequent events have
been evaluated and whether that is the date on which the financial statements
were issued. For the Company,this standard was effective beginning April 1, 2009.




In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing guidance on transfers of
financial assets to, among other things, eliminate the qualifying
special-purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated results of operations or financial
condition.




In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.




In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.




In
September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC
820 to provide guidance on measuring the fair value of certain alternative
investments such as hedge funds, private equity funds and venture capital funds.
The ASU indicates that, under certain circumstance, the fair value of such
investments may be determined using net asset value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other
than NAV. In those situations, the practical expedient cannot be used and
disclosure of the remaining actions necessary to complete the sale is required.
The ASU also requires additional disclosures of the attributes of all
investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 1, 2009. The Company is
currently evaluating the impact of this standard, but would not expect it to
have a material impact on the Company’s consolidated results of operations or
financial condition.





In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions.  The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.


9





In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements—a consensus of the FASB Emerging Issues Task
Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance:  the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). The ASU is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on the
Company’s consolidated results of operations and financial
condition.





Results
of Operations





Three Months
Ended September 30, 2009 and 2008





Revenues
consist of sales of our set-top and digital networking products and revenues
recorded under network installation projects.  Revenues from product
sales were $28,627,644 for the three months ended September 30, 2009, an
increase of $13,418,618, or 88%, compared to $15,209,026 for the same period in
2008.  The increase in revenues is primarily a result of the increase in
sales of our digital networking products as we experienced an exceptional
concentration of orders in relations to network platform upgrade.





Cost of
goods sold, which include raw material, labor and amounts due to contract
manufacturers, was $23,823,013 for the three months ended September 30, 2009, an
increase of $11,256,793, or 90%, compared to $12,566,220 for the same period in
2008.  This increase in cost of sales was caused by an increase in
sales and was consistent with the increase in revenues.  As a
percentage of revenues, cost of sales for the three months ended September 30,
2009 and 2008 were 83% and 83%, respectively.





Gross
profit for three months ended September 30, 2009 was $4,804,631, or 17% of
revenues, compared to $2,642,806, or 17% of revenues, for the comparable period
in 2008.  Management considers gross profit to be a key performance
indicator in managing our business.  Gross profit margins are a factor
of cost of sales, product mix and product demand.





Selling
expenses, which mainly include marketing, shipping, insurance, wage and other
expenses, were nil for the three months ended September 30, 2009, compared to
$1,165 for the same period in 2008.  The decrease was due to the
changes in sales contract terms and arrangement of delivery, which provided that
finished goods are shipped directly from the manufacturer to the
customers.





Research
and development expenses were approximately $109,068 for the three months ended
September 30, 2009 compared to nil for the same period in
2008.  The increase was due to the Company’s increased research and
development efforts in connection with its GPS product
line.  Furthermore, the Company no longer receives reimbursement for
its research and development expenses from the local government.





Other
general and administrative expenses, which include wages, benefits, utilities,
consulting, turnover taxes, professional fees and other expenses, were $223,600
for the three months ended September 30, 2009, an increase of $28,507, or 15%,
compared to $195,093 for the same period in 2008.  The increase was
due to the Company’s expanded operations and revenue base.  On the
going forward basis, we expect our general and administrative expenses to
increase as a result of professional fees incurred as a result of being a
publicly reporting company in the United States.





Interest expenses for interest-bearing
debts for the three months ended September 30, 2009 was $55,799, a decrease of $91,391, or 62%, compared to $147,190in 2008.  The decrease is
mainly the result of the continued paid down of our loan.





For the
three months ended September 30, 2009, we recorded a provision for income taxes
of $1,106,409, compared to $579,554 for the same period in 2008.  The
tax rate for the year ended December 31, 2009 was 25%.  Our income tax
rate for the year ended December 31, 2008 was 25%.


10





Nine
Months Ended September 30, 2009 and 2008





Revenues
consist of sales of our set-top and digital networking products and revenues
recorded under network installation projects.  Revenues from product
sales were $70,067,184 for the nine months ended September 30, 2009, an increase
of $29,079,855, or 71%, compared to $40,987,329 for the same period in
2008.  The increase in revenues is primarily a result of the increase in
sales of our IPTV set-top boxes, as well as continued demand for our digital
networking products.





Cost of
goods sold, which include raw material, labor and amounts due to contract
manufacturers, was $58,773,620 for the nine months ended September 30, 2009, an
increase of $25,210,491, or 75%, compared to $33,563,129 for the same period in
2008.  This increase in cost of sales was caused by an increase in
sales and was consistent with the increase in revenues.  As a
percentage of revenues, cost of sales for the nine months ended September 30,
2009 and 2008 were 84% and 82%, respectively.





Gross
profit for nine months ended September 30, 2009 was $11,293,564, or 16% of
revenues, compared to $7,424,200, or 18% of revenues, for the comparable period
in 2008.  Management considers gross profit to be a key performance
indicator in managing our business.  Gross profit margins are a factor
of cost of sales, product mix and product demand.





Selling
expenses, which mainly include marketing, shipping, insurance, wage and other
expenses, were $35,334 for the nine months ended September 30, 2009, a decrease
of $71,901, or 67%, compared to $107,235 for the same period in
2008.  The decrease was due to the changes in sales contract terms and
arrangement of delivery, which provided that finished goods are shipped directly
from the manufacturer to the customers.





Research
and development expenses were approximately $109,068 for the nine months ended
September 30, 2009 compared to nil for the same period in
2008.  The increase was due to the Company’s increased research and
development efforts in connection with its GPS product
line.  Furthermore, the Company no longer receives reimbursement for
its research and development expenses from the local government.





Other
general and administrative expenses, which include wages, benefits, utilities,
consulting, turnover taxes, professional fees and other expenses, were $725,054
for the nine months ended September 30, 2009, an increase of $110,991, or 18%,
compared to $614,063 for the same period in 2008.  The increase was
due to the Company’s expanded operations and revenue base.  On the
going forward basis, we expect our general and administrative expenses to
increase as a result of professional fees incurred as a result of being a
publicly reporting company in the United States.





Interest
expenses for interest-bearing debts for the nine months ended September 30, 2009
was $140,693, decrease of $120,461, or 46%, compared to $261,154 in
2008.  The decrease is mainly the result of lower outstanding
debt.





For the
nine months ended September 30, 2009, we recorded a provision for income taxes
of $2,593,724, compared to $1,565,994 for the same period in
2008.  The tax rate for the year ended December 31, 2009 was
25%.  Our income tax rate for the year ended December 31, 2008 was
25%.




Liquidity
and Capital Resources





We had
cash and cash equivalents of $1,394,458 as of September 30, 2009, as compared to
$1,134,954 as of December 31, 2008.





We had
working capital of approximately $21,362,069 and $8,948,772 as at September 30,
2009 and December 31, 2008, respectively. The increase of working capital was
largely caused by the increase in accounts receivable.





Our trade
receivables has been an increasingly significant portion of our current assets,
representing $25,634,262 and $12,322,099, or 80% and 71% of current assets, as
of September 30, 2009 and December 31, 2008, respectively.  As our
sales volume increases, trade receivables increase accordingly. If customers
responsible for a significant amount of accounts receivable were to become
insolvent or otherwise unable to pay for our products, or to make payments in a
timely manner, our liquidity and results of operations could be materially
adversely affected.  An economic or industry downturn could materially
adversely affect the servicing of these accounts receivable, which could result
in longer payment cycles, increased collections costs and defaults in excess of
management’s expectations.  A significant deterioration in our ability
to collect on accounts receivable could affect our cash flow and working capital
position and could also impact the cost or availability of financing available
to us.





We
provide our major customers with payment terms ranging from 30 to 90
days.   We typically offer certain of our customers 30 to 90 days
credit terms for payment. Allowance for doubtful accounts is based on our
assessment of the collectability of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry.  If a major customer’s credit worthiness deteriorates, or
our customers’ actual defaults exceed historical experience, our estimates could
change and impact our reported results.  We have not experienced any
significant amount of bad debt since the inception of our
operation.





As of
September 30, 2009, inventories amounted to $1,494,599, compared to $775,185 as
of December 31, 2008.  The increase is due to the increase of sales,
the increase of inventory turnover, and the increase in the Company’s inventory
of GPS products.  As of December 31, 2008, inventories amounted to
$775,185, compared to $5,488,794 as of December 31, 2007.  The
decrease is due to the fact that we no longer manufacture our products and
instead outsource the manufacturing of our products.


11





As of
September 30, 2009, accounts payable and accrued liabilities amounted to
$8,371,440, compared to $1,771,272 as of December 31, 2008.  The
increase in accounts payable and accrued liabilities is due to inventory
purchases unpaid prior to the end of the period.  As of December 31,
2008, accounts payable and accrued liabilities amounted to $1,771,272, compared
to $3,249,012 as of December 31, 2007.  The decrease is due to a shortened
payment duration.





As of
September 30, 2009, various taxes payable amounted to $331,749, compared to
$188,539 as of December 31, 2008.  As of December 31, 2008, various
taxes payable amounted to $188,539, compared to $490,977 as of December 31,
2007.  The increase in various taxes payable is due to the rise of
sales.





As of
September 30, 2009, wages payable amounted to $63,750, compared to $59,501 as of
December 31, 2008.  As of December 31, 2008, wages payable amounted to
$59,501, compared to $23,890 as of December 31, 2007. The increase in wages
payable is due to increased personnel costs.





As of
September 30, 2009, corporate taxes payable amounted to $434,388, compared to
nil at December 31, 2008.  As of December 31, 2008, corporate taxes
payable amounted to nil, compared to nil as of December 31, 2007.  The
increase in corporate taxes payable is due to an increase of unpaid corporate
taxes.





On May 5,
2009, we completed the final closing in a series of five closings beginning
January 9, 2009 of a private placement transaction in which we received
gross proceeds of approximately $4.98 million (the “Private Placement”).
Pursuant to subscription agreements entered into with the investors, we sold an
aggregate of 1,263,723 shares of Series A Convertible Preferred Stock at a price
of $3.94 per share. In connection with the initial closing of the Private
Placement, the Company issued a promissory note in the principal amount of
$170,000, bearing no interest (the “Note”), to WestPark Capital Financial
Services, LLC, the parent company of WestPark. The principal was due and
payable by the Company on or before the earlier of (a) thirty (30) days from the
date of issuance of this Note or (b) upon the receipt by the Company of at least
$4 million in the Private Placement.  The Company repaid the Note in
full using the proceeds from the second closing of the Private
Placement.





The
placement agent, WestPark, earned a placement fee equal to 12% of the funds
placed in the Private Placement plus a 4% non-accountable expense
allowance.  No other consideration was paid to WestPark or SRKP 18 in
connection with the Share Exchange or Private Placement.  We agreed to
file a registration statement covering the common stock sold in the Private
Placement and to pay for all costs related to the registration of the shares.
The registration statement covering such shares was declared effective by the
Securities and Exchange Commission in October 2009.  We have used the
proceeds from the Private Placement to provide working capital for general
corporate purpose.





On
October 20, 2009, we completed a public offering of shares of our common stock
in which we sold 3,125,000 shares of common stock. Rodman & Renshaw, LLC
acted as lead manager and WestPark Capital, Inc. acted as co-manager for the
offering (together the “Underwriters”).  We have granted the Underwriters a
45-day option to purchase up to an additional 468,750 shares of common stock.
Our shares of common stock were sold to the public at a price of $8.00 per
share, for gross proceeds of approximately $25 million.





Compensation
for the Underwriters’ services included discounts and commissions of $1,875,000,
a $2,500,000 non-accountable expense allowance, roadshow expenses of
approximately of $10,000, and legal counsel fees (excluding blue sky fees) of
$40,000.  The Underwriters also received warrants to purchase an
aggregate of 312,500 shares of our common stock at an exercise price of $10.00
per share.  The warrants, which have a term of five years, are not
exercisable until at least one-year from the date of
issuance.   The warrants also carries registration
rights.





We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations.  Total
contributions to the funds are $14,767 for the nine months ended September
30, 2009 and $6,487, $130,549 and $396 for the years ended December 31, 2008,
2007 and 2006, respectively.  We expect that the amount of our
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations and commence contributions to
an employee housing fund.





The
ability of Zhengzhou ZST to pay dividends may be restricted due to the foreign
exchange control policies and availability of cash balance.  A
majority of our revenue being earned and currency received are denominated in
RMB, which is subject to the exchange control regulation in China, and, as a
result, we may be unable to distribute any dividends outside of China due to PRC
exchange control regulations that restrict our ability to convert RMB into US
Dollars.  Accordingly, Zhengzhou ZST’s funds may not be readily
available to us to satisfy obligations which have been incurred outside the PRC,
which could adversely affect our business and prospects or our ability to meet
our cash obligations.





Net cash
used in operating activities was $125,921 for the nine months ended September
30, 2009, compared to net cash provided by operating activities of $5,383,579
for the nine months ended September 30, 2008.  The change was due to a
decrease in inventory and an increase in accounts receivable.





Net cash
used in investing activities amounted to approximately $969,692 for the nine
months ended September 30, 2009, compared to net cash provided by investing
activities of nil for the nine months ended September 30, 2008.  The
change was due to the purchase of property and equipment and intangible
assets.


12





Net cash
provided by financing activities amounted to $1,057,235 for the nine months
ended September 30, 2009, compared to net cash used in financing activities of
$5,821,285 for the nine months ended September 30, 2008.  The change
was a result of sales of Series A Convertible Preferred Stock in the Private
Placement in 2009.





Based
upon our present plans, we believe that cash on hand, cash flow from operations,
funds available to use through low-cost domestic financing as well as cash
through our recent public offering financing, we will be sufficient to fund our
capital needs for the next 12 months.  Our ability to maintain
sufficient liquidity depends partially on our ability to achieve anticipated
levels of revenue, while continuing to control costs.  If we did not
have sufficient available cash, we would have to seek additional debt or equity
financing through other external sources, which may not be available on
acceptable terms, or at all.  Failure to maintain financing
arrangements on acceptable terms would have a material adverse effect on our
business, results of operations and financial condition.





Our
ability to maintain sufficient liquidity depends partially on our ability to
achieve anticipated levels of revenue, while continuing to control
costs.  If we did not have sufficient available cash, we would have to
seek additional debt or equity financing through other external sources, which
may not be available on acceptable terms, or at all.  Failure to
maintain financing arrangements on acceptable terms would have a material
adverse effect on our business, results of operations and financial
condition.





Off-Balance
Sheet Arrangements





We have
no material off-balance sheet transactions.


13




ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable.





ITEM
4.  CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures, which are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, as appropriate to allow timely decisions
regarding required disclosure.





Based on
an evaluation carried out as of the end of the period covered by this quarterly
report, under the supervision and with the participation of our management,
including our CEO and CFO, our CEO and CFO have concluded that, as of the end of
such period, our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) were not effective as of September 30, 2009.  Factors which led
our management to conclude that our disclosure controls and procedures were not
effective include, but are not limited to:





·
            the
      late filing of our Quarterly Report on Form 10-Q for the quarter ended
      March 31, 2009.




Changes
in Internal Control Over Financial Reporting





Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 or
15d-15 of the Exchange Act, there were no changes in our internal control over
financial reporting that occurred during the second quarter of our fiscal year
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  However, we recognize
certain weaknesses in our control procedures and are in the process of
implementing remediation measures to correct them.


14


PART
II.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





We are
not currently a party to any material legal proceedings.





ITEM
1A.  RISK FACTORS





Not
applicable for a smaller reporting company.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





On May 5,
2009, we completed the final closing in a series of five closings beginning
January 9, 2009 of a private placement transaction in which we received
gross proceeds of approximately $4.98 million (the “Private Placement”).
Pursuant to subscription agreements entered into with the investors, we sold an
aggregate of 1,263,723 shares of Series A Convertible Preferred Stock at a price
of $3.94 per share. In connection with the initial closing of the Private
Placement, the Company issued a promissory note in the principal amount of
$170,000, bearing no interest (the “Note”), to WestPark Capital Financial
Services, LLC, the parent company of WestPark. The principal was due and
payable by the Company on or before the earlier of (a) thirty (30) days from the
date of issuance of this Note or (b) upon the receipt by the Company of at least
$4 million in the Private Placement.  The Company repaid the Note in
full using the proceeds from the second closing of the Private
Placement.  The securities were offered and sold to investors in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act and Rule 506 promulgated thereunder.  Each of the
persons and/or entities receiving our securities qualified as an accredited
investor (as defined by Rule 501 under the Securities Act).





The
placement agent, WestPark, earned a placement fee equal to 12% of the funds
placed in the Private Placement plus a 4% non-accountable expense
allowance.  No other consideration was paid to WestPark or SRKP 18 in
connection with the Share Exchange or Private Placement.





On
January 14, 2009, Zhong Bo, our Chief Executive Officer and Chairman of the
Board, Wu Dexiu, Huang Jiankang, Sun Hui and Li Yuting (the “ZST Management”)
each entered into a Common Stock Purchase Agreement pursuant to which the
Company issued and the ZST Management agreed to purchase an aggregate of
5,090,315 shares of our common stock at a per share purchase price of $0.6907
(the “Purchase Right”).  The purchase price for the shares was paid in
full on May 25, 2009.  Each of the stockholders and warrantholders of
the Company prior to the Share Exchange agreed to cancel 0.3317 shares of common
stock and warrants to purchase 0.5328 shares of common stock held by each of
them for each one (1) share of common stock purchased by the ZST Management
pursuant to the Purchase Right (the “Share and Warrant
Cancellation”).  Pursuant to the Share and Warrant Cancellation, an
aggregate of 1,688,532 shares of common stock and warrants to purchase 2,712,283
shares of common stock held by certain of our stockholders and warrantholders
prior to the Share Exchange were cancelled.  The shares of common
stock were offered and issued in reliance upon an exemption from registration
pursuant to Regulation S of the Securities Act. We complied with the conditions
of Rule 903 as promulgated under the Securities Act including, but not limited
to, the following: (i) each recipient of the shares is a non-U.S. resident and
has not offered or sold their shares in accordance with the provisions of
Regulation S; (ii) an appropriate legend was affixed to the securities issued in
accordance with Regulation S; (iii) each recipient of the shares has represented
that it was not acquiring the securities for the account or benefit of a U.S.
person; and (iv) each recipient of the shares agreed to resell the securities
only in accordance with the provisions of Regulation S, pursuant to a
registration statement under the Securities Act, or pursuant to an available
exemption from registration. We will refuse to register any transfer of the
shares not made in accordance with Regulation S, after registration, or under an
exemption.





On
January 9, 2009, pursuant to the terms of the Share Exchange, we issued 806,408
shares of common stock to the stockholders of World Orient in exchange for all
of the issued and outstanding shares of World Orient.   The securities
were offered and issued in reliance upon an exemption from registration pursuant
to Regulation S of the Securities Act. We complied with the conditions of Rule
903 as promulgated under the Securities Act including, but not limited to, the
following: (i) each recipient of the shares is a non-U.S. resident and has not
offered or sold their shares in accordance with the provisions of Regulation S;
(ii) an appropriate legend was affixed to the securities issued in accordance
with Regulation S; (iii) each recipient of the shares has represented that it
was not acquiring the securities for the account or benefit of a U.S. person;
and (iv) each recipient of the shares agreed to resell the securities only in
accordance with the provisions of Regulation S, pursuant to a registration
statement under the Securities Act, or pursuant to an available exemption from
registration. We will refuse to register any transfer of the shares not made in
accordance with Regulation S, after registration, or under an
exemption.





On
January 3, 2007, we issued 2,882,912 shares of common stock for an aggregate
cash consideration of $5,000 and warrants to purchase 2,882,912 shares of common
stock at an exercise price of $0.0002462 per share for an aggregate cash
consideration of $2,500.  We sold these shares of common stock and
warrants under the exemption from registration provided by Section 4(2) of the
Securities Act and/or Rule 506 of Regulation D promulgated
thereunder.  Upon the full exercise of the Purchase Right, the
stockholders of the Company prior to the Share Exchange agreed to the
cancellation of an aggregate of 1,688,532 shares of common stock and warrants to
purchase 2,712,283 shares of common stock held by them.


15




ITEM
3.  DEFAULT UPON SENIOR SECURITIES





None.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM
5.  OTHER INFORMATION





None.





ITEM
6.  EXHIBITS




(a)
            Exhibits





Exhibit
                Number
              
              Description of Document31.1
              
              Certification
      of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              
              Certification
      of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
              
              Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.*





*
            This
      exhibit shall not be deemed “filed” for purposes of Section 18 of the
      Securities Exchange Act of 1934 or otherwise subject to the liabilities of
      that section, nor shall it be deemed incorporated by reference in any
      filing under the Securities Act of 1933 or the Securities Exchange Act of
      1934, whether made before or after the date hereof and irrespective of any
      general incorporation language in any
filings.




16





ZST
DIGITAL NETWORKS, INC.





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.




ZST
      DIGITAL NETWORKS, INC.Date:
      November 16, 2009
              By:
              /s/
      Zhong BoZhong
      BoChief
      Executive Officer and Chairman of the BoardDate:
      November 16, 2009
              By:
              /s/
      John ChenJohn
      Chen
                Chief
      Financial Officer
  17