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 1934For
      the Quarterly Period Ended March 31, 2009ORo
            
            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 o





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 oNo 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. (Check
one):





Large
      accelerated filer o
            
            Accelerated
      filer oNon-accelerated
      filer o
            
            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 17,455,000 as of June 12, 2009.









ZST
DIGITAL NETWORKS, INC.





FORM 10-Q





For
the Quarterly Period Ended March 31, 2009





INDEX





Part I
            Financial
      Information
            3Item
      1.
            Financial
      Statements
            3Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            4Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            12Item
      4.
            Controls
      and Procedures
            12Part II
            Other
      Information
            13Item
      1.
            Legal
      Proceedings
            13Item
      1A.
            Risk
      Factors
            13Item
      2.
            Unregistered
      Sale of Equity Securities and Use of Proceeds
            13Item
      3.
            Default
      Upon Senior Securities
            14Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            14Item
      5.
            Other
      Information
            14Item
      6.
            Exhibits
            14Signatures
            15


2




PART I.  FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS





The
accompanying unaudited 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 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 financial statements should be read in
conjunction with the audited financial statements of ZST Digital Networks, Inc.
as contained in its Annual Report for the fiscal year ended December 31, 2008 on
Form 10-K as filed with the Securities and Exchange Commission on March 31,
2009.








3









ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES





FINANCIAL
STATEMENTS





MARCH
31, 2009
















ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES





INDEX





PAGECONSOLIDATED
      BALANCE SHEETS
              F-2CONSOLIATED
      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-6
      - F-25





F-1




ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Consolidated
Balance Sheets


(In U.S.
Dollars)





March
      31,
                            
                            
                            December
      31,2009
                            
                            
                            2008(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                            
                            $
                            1,881,304
                            
                            
                            $
                            1,134,954Trade
      receivables, net (Note 3)
                            
                            
                            22,846,271
                            
                            
                            
                            12,322,099Employee
      advances (Note 5)
                            
                            
                            6,065
                            
                            
                            
                            6,307Inventories,
      net (Note 4)
                            
                            
                            469,785
                            
                            
                            
                            775,185Advances
      to suppliers (Note 10)
                            
                            
                            798,410
                            
                            
                            
                            3,024,668Prepaid
      expenses and other receivables
                            
                            
                            1,374
                            
                            
                            
                            6,968Total
      current assets
                            
                            
                            26,003,209
                            
                            
                            
                            17,270,181Property
      and equipment, net (Note 6)
                            
                            
                            29,021
                            
                            
                            
                            34,148Total
      assets
                            
                            $
                            26,032,230
                            
                            
                            $
                            17,304,329Liabilities
      & Stockholders' EquityCurrent
      liabilitiesAccounts
      payable - trade
                            
                            $
                            6,968,449
                            
                            
                            $
                            1,270,096Customer
      deposit
                            
                            
                            1,466
                            
                            
                            
                            1,467Accrued
      liabilities and other payable
                            
                            
                            806,762
                            
                            
                            
                            501,176Various
      taxes payable
                            
                            
                            400,802
                            
                            
                            
                            188,539Short-term
      loans (Note 7)
                            
                            
                            3,712,025
                            
                            
                            
                            3,931,991Employee
      security deposit payable
                            
                            
                            7,508
                            
                            
                            
                            8,911Wages
      payable
                            
                            
                            65,442
                            
                            
                            
                            59,501Corporate
      tax payable (Note 12)
                            
                            
                            250,440
                            
                            
                            
                            -Due
      to related parties (Note 9)
                            
                            
                            -
                            
                            
                            
                            2,359,728Total
      current liabilities
                            
                            
                            12,212,894
                            
                            
                            
                            8,321,409Commitments
      and contingencies (Note 11)
                            
                            
                            -
                            
                            
                            
                            -Preferred Stock Series A
      Convertible, $0.0001 par value, 3,750,000 sharesauthorized,
      2,242,523 and 0 shares issued and outstanding at March 31,
      2009and
      December 31, 2008, respectively. Liquidation preference and
      redemptionvalue
      of $3,585,902 at March 31, 2009 (Note 16)
                            
                            
                            2,946,440
                            
                            
                            
                            -Stockholders'
      EquityCommon
      stock $0.0001 par value, 100,000,000 shares authorized, 17,455,000
      and14,515,000
      shares issued and outstanding at March 31, 2009and
      December 31, 2008, respectively (Note 15)
                            
                            
                            1,746
                            
                            
                            
                            1,452Additional
      paid-in capital
                            
                            
                            4,294,426
                            
                            
                            
                            1,488,062Accumulated
      other comprehensive income
                            
                            
                            168,175
                            
                            
                            
                            590,839Statutory
      surplus reserve fund (Note 8)
                            
                            
                            1,491,963
                            
                            
                            
                            1,491,963Retained
      earnings (unrestricted)
                            
                            
                            6,656,962
                            
                            
                            
                            5,410,604Subscription
      receivable (Note 9)
                            
                            
                            (1,740,376
                            )
                            
                            
                            -Total
      stockholders' equity
                            
                            
                            10,872,896
                            
                            
                            
                            8,982,920Total
      Liabilities & Stockholders' Equity
                            
                            $
                            26,032,230
                            
                            
                            $
                            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)





For
      the Three Months EndedMarch
      31,2009
                
                
                2008(unaudited)
                
                
                (unaudited)Revenue
                
                $
                17,760,628
                
                
                $
                13,515,031Cost
      of goods sold
                
                
                14,844,279
                
                
                
                10,816,256Gross
      Profit
                
                
                2,916,349
                
                
                
                2,698,775Operating
      Costs and ExpensesSelling
      expenses
                
                
                -
                
                
                
                52,929Depreciation
                
                
                5,085
                
                
                
                4,439General
      and administrative
                
                
                369,266
                
                
                
                247,902Merger
      cost
                
                
                566,654
                
                
                
                -Total
      operating costs and expenses
                
                
                941,005
                
                
                
                305,270Income
      from operations
                
                
                1,975,344
                
                
                
                2,393,505Other
      income (expenses)Interest
      income
                
                
                106
                
                
                
                8,526Interest
      expense
                
                
                (50,087
                )
                
                
                (104,434
                )Imputed
      interest
                
                
                (31,400
                )
                
                
                (17,728
                )Sundry
      income (expense), net
                
                
                3,004
                
                
                
                335Total
      other income (expenses)
                
                
                (78,377
                )
                
                
                (113,301
                )Income
      before income taxes
                
                
                1,896,967
                
                
                
                2,280,204Income
      taxes  (Note 12)
                
                
                (650,609
                )
                
                
                (557,582
                )Net
      income
                
                $
                1,246,358
                
                
                $
                1,722,622Basic
      earnings per share
                
                $
                0.07
                
                
                $
                0.12Weighted
      average shares outstanding, basic
                
                
                17,193,667
                
                
                
                14,515,000Diluted
      earnings per share
                
                $
                0.07
                
                
                $
                0.12Weighted
      average shares outstanding, diluted
                
                
                17,576,333
                
                
                
                14,515,000





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
three months ended March 31, 2009 (unaudited)


(In U.S.
Dollars)





AccumulatedAdditional
                      
                      
                      Statutory
                      
                      
                      Other
                      
                      
                      Retained
                      
                      
                      
                      
                      
                      TotalCapital
                      
                      
                      Paid-in
                      
                      
                      Reserve
                      
                      
                      Comprehensive
                      
                      
                      Earnings
                      
                      
                      Subscription
                      
                      
                      Stockholders'
                      
                      
                      ComprehensiveShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Fund
                      
                      
                      Income
                      
                      
                      (Unrestricted)
                      
                      
                      Receivable
                      
                      
                      Equity
                      
                      
                      IncomeBalance
      at December 31, 2008
                      
                      
                      14,515,000
                      
                      
                      $
                      1,452
                      
                      
                      $
                      1,488,062
                      
                      
                      $
                      1,491,963
                      
                      
                      $
                      590,839
                      
                      
                      $
                      5,410,604
                      
                      
                      $
                      -
                      
                      
                      $
                      8,982,920Reverse
      merger adjustment
                      
                      
                      2,940,000
                      
                      
                      
                      294
                      
                      
                      
                      2,774,964
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,775,258Imputed
      interest allocated
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,400
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,400Subscription
      receivable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,740,376
                      )
                      
                      
                      (1,740,376
                      )Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (422,664
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (422,664
                      )
                      
                      $
                      (422,664
                      )Net
      income for the three monthsended March 31,
      2009
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,246,358
                      
                      
                      
                      -
                      
                      
                      
                      1,246,358
                      
                      
                      
                      1,246,358Comprehensive
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      823,694Balance
      at March 31, 2009
                      
                      
                      17,455,000
                      
                      
                      $
                      1,746
                      
                      
                      $
                      4,294,426
                      
                      
                      
                      1,491,963
                      
                      
                      $
                      168,175
                      
                      
                      $
                      6,656,962
                      
                      
                      $
                      (1,740,376
                      )
                      
                      $
                      10,872,896




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)





For
      the Three Months EndedMarch
      31,2009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)Cash
      Flows From Operating ActivitiesNet
      income
                  
                  $
                  1,246,358
                  
                  
                  $
                  1,722,622Adjustments
      to reconcile net income to net cash provided(used)
      by operating activities:Depreciation
                  
                  
                  5,085
                  
                  
                  
                  4,439Imputed
      interest
                  
                  
                  31,400
                  
                  
                  
                  17,728Changes
      in operating assets and liabilities:Account
      receivable-trade, net
                  
                  
                  (10,524,172
                  )
                  
                  
                  (66,631
                  )Contract
      receivable
                  
                  
                  -
                  
                  
                  
                  (4,231
                  )Prepaid
      expenses and other receivables
                  
                  
                  5,594
                  
                  
                  
                  4,459Inventories,
      net
                  
                  
                  305,400
                  
                  
                  
                  4,355,811Advances
                  
                  
                  2,226,258
                  
                  
                  
                  (340,532
                  )Accounts
      payable and accrued liabilities
                  
                  
                  6,003,939
                  
                  
                  
                  5,255,776Deposits
      and other payables
                  
                  
                  (1,404
                  )
                  
                  
                  -Billings
      in excess of costs on uncompleted projects
                  
                  
                  -
                  
                  
                  
                  776Various
      taxes payable and taxes recoverable
                  
                  
                  212,263
                  
                  
                  
                  (233,847
                  )Wages
      payable
                  
                  
                  5,941
                  
                  
                  
                  9,234Corporate
      tax payable
                  
                  
                  250,440
                  
                  
                  
                  -Net
      cash provided (used) by operating activities
                  
                  
                  (232,898
                  )
                  
                  
                  10,725,604Cash
      Flows From Investing ActivitiesPayment
      to ZST PRC shareholders
                  
                  
                  (1,740,376
                  )
                  
                  
                  -Net
      cash used by investing activities
                  
                  
                  (1,740,376
                  )
                  
                  
                  -Cash
      Flows From Financing ActivitiesProceeds
      from short-term demand loans receivable
                  
                  
                  242
                  
                  
                  
                  190,608Repayment
      of short-term demand loans payable
                  
                  
                  (219,966
                  )
                  
                  
                  (406,676
                  )Sale
      of preferred stock
                  
                  
                  2,946,440
                  
                  
                  
                  -Due
      from related parties
                  
                  
                  -
                  
                  
                  
                  68,548Due
      to related parties
                  
                  
                  -
                  
                  
                  
                  (23,405
                  )Net
      cash provided (used) by financing activities
                  
                  
                  2,726,716
                  
                  
                  
                  (170,925
                  )Effect
      of exchange rate changes on cash
                  
                  
                  (7,092
                  )
                  
                  
                  254,665Net
      increase in cash and cash equivalents
                  
                  
                  746,350
                  
                  
                  
                  10,809,344Cash
      and cash equivalents, beginning of period
                  
                  
                  1,134,954
                  
                  
                  
                  1,125,804Cash
      and cash equivalents, end of period
                  
                  $
                  1,881,304
                  
                  
                  $
                  11,935,148Supplemental
      disclosure information:Interest
      expense paid
                  
                  $
                  50,087
                  
                  
                  $
                  104,434Income
      taxes paid
                  
                  $
                  400,164
                  
                  
                  $
                  557,582Non
      cash investing and financing activities:Shares
      issued for related parties' debt
                  
                  $
                  2,359,728
                  
                  
                  $
                  -Shares
      issued for subscription receivable
                  
                  $
                  1,740,376
                  
                  
                  $
                  -





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 months ended March 31, 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, we closed a share exchange transaction (the
“Share Exchange”) pursuant to which ZST Digital (i) issued 1,985,000 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 ZST Digital’s name from SRKP 18, Inc. to its
current name.  Subsequent to the closing of the Share Exchange, 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
12,530,000 shares of our common stock at a per share purchase price of $0.2806
(the "Purchase Right") and obtained control of the Company.  The
purchase price for the shares was paid in full on May 25, 2009.  The
restructuring of the Company 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. Everfair had 10,000 capital
shares authorized with 1.00 HKD par value and 10,000 shares issued and
outstanding. Pursuant to a share transfer agreement, Global Asia agreed to paid
Kuk Kok Sun 10,000 HKD 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 12,000,000 RMB 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 rights 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, the Company increased its authorized capital from RMB 1.5 million to RMB 8
million. On July 27, 2004, the Company further increased its authorized capital
to RMB 18 million. On March 15, 2007, the Company 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,
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 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 months ended March 31, 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 12,000,000 RMB 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 12,000,000 RMB to ZST Management pursuant to the ownership
transfer agreement.





Upon
consummation of the Share Exchange and the Purchase Right, ZST Management owns a
majority of the issued and outstanding shares of common stock of ZST Digital 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.





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 months ended March 31, 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 10-K 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 March 31, 2009 and
December 31, 2008, and the results of operations and cash flows for the three
months ended March 31, 2009 and 2008, respectively.





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





Statement
of Financial Accounting Standards (“SFAS”) No. 107, “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 SFAS No. 157, “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.





Cash and Cash
Equivalents




Cash and
cash equivalents include cash on hand, cash on deposit with various financial
institutions in PRC, 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.


F-8


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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 periods
ended March 31, 2009 and 2008.





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
      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 SFAS No. 144, “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 fair value of the asset or asset
group.


F-9


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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 SFAS FASB No. 48, "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 $0 and
$0 for the period ended March 31, 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.





Comprehensive
Income




The
Company has adopted SFAS No. 130, “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 SFAS No. 109, "Accounting
for Income Taxes". SFAS No. 109 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.


F-10


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Research and
Development




Research
and development costs are expensed to operations as incurred. The Company spent
$0 and $0, on direct research and development (“R&D”) efforts in the three
months ended March 31, 2009 and 2008, respectively.





Advertising
Costs





The
Company expenses advertising costs as incurred. The Company did not incur any
advertising expenses for the years ended March 31, 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 USD. 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.





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.





Foreign Currency Translation
(Continued)





The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):





Period
      Covered
                  
                  Balance
      Sheet Date Rates
                  
                  
                  Average
      RatesThree
      Months Ended March 31, 2009
                  
                  
                  6.82560
                  
                  
                  
                  6.82547Three
      Months Ended March 31, 2008
                  
                  
                  7.00220
                  
                  
                  
                  7.15461





The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):





Period
      Covered
                  
                  Balance
      Sheet Date Rates
                  
                  
                  Average
      RatesThree
      Months Ended March 31, 2009
                  
                  
                  7.74999
                  
                  
                  
                  7.75374Three
      Months Ended March 31, 2008
                  
                  
                  7.77965
                  
                  
                  
                  7.79423


F-11


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Recently Adopted Accounting
Pronouncements





In the
first quarter of 2009, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141 (revised 2007), “Business Combinations” (SFAS No.
141(R) as mended by FASB staff position FSP 141(R)-1, “Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination.” SFAS No. 141(R)
generally requires an entity to recognize the assets acquired, liabilities
assumed, contingencies, and contingent consideration at their fair value on the
acquisition date. In circumstances where the acquisition-date fair value for a
contingency cannot be determined during the measurement period and it is
concluded that it is probable that an asset or liability exists as of the
acquisition date and the amount can be reasonably estimated, a contingency is
recognized as of the acquisition date based on the estimated amount. It further
requires that acquisition related costs be recognized separately from the
acquisition and expensed as incurred, restructuring costs generally be expensed
in periods subsequent to the acquisition date, and changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties
after the measurement period impact income tax expenses. In addition, acquired
in-process research and development is capitalized as an intangibles asset and
amortized over its estimated useful life. SFAS No. 141(R) is applicable to
business combinations on a prospective basis beginning in the first quarter of
2009. The Company adopted SFAS No. 141(R) for its business combination during
the quarter ended March 31, 2009.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. In February 2008, the FASB issued FASB Staff
Position 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”)
and FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” (“FSP
157-2”). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from
its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until fiscal years beginning after November 15, 2008. SFAS 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
adopted SFAS 157 effective January 1, 2008 for all financial assets and
liabilities as required. The adoption of SFAS 157 was not material to the
Company’s financial statements or results of operations.




Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,"Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”). EITF 07-5 applies to any freestanding financial instruments or embedded
features that have the characteristics of a derivative, as defined by SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
and to any freestanding financial instruments that are potentially settled in an
entity’s own common stock. The adoption of EITF 07-5 was not material to the
Company's financial statements or results of operations.





In July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “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). The accounting provisions of FIN No. 48 are
effective for fiscal years beginning after December 15, 2006. The adoption of
this Interpretation had no impact on the Company’s financial position or results
of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning
after November 15, 2007. SFAS 159 is an elective standard which permits an
entity to choose to measure many financial instruments and certain other items
at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings. The Company has not elected the fair value option for any
assets or liabilities under SFAS 159.


F-12


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Recent Issued Accounting
Pronouncements




In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally,
if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB
28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this
FSP. The Company is currently evaluating this new FSP but do not believe that it
will have a significant impact on the determination or reporting of the
Company’s financial results.




In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends
the requirements for the recognition and measurement of other-than-temporary
impairment for debt securities by modifying the pre-existing “intent and
ability” indicator. Under FSP 115-2/124-2, an other-than-temporary
impairment is triggered when there is an intent to sell the security, it is more
likely then not that the security will be required to be sold before recovery,
or the security is not expected to recover the entire amortized cost basis of
the security. Additionally, FSP 115-2/124-2 changes the presentation of an
other-than-temporary impairment in the income statement for those impairments
involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other
comprehensive income. FSP 115-2/124-2 is effective for the Company beginning in
the second quarter of fiscal year 2009. Upon implementation at the beginning of
the second quarter of 2009, FSP 115-2/124-2 is not expected to have a
significant impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (“FSP 107-1/APB 28-1”). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments,” Additionally, FSP 107-1/APB 28-1 requires disclosures of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes in the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial instruments and is effective for
the Company beginning in the second quarter of fiscal year
2009.


F-13


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
3 – TRADE RECEIVABLES, NET





Trade
receivables consist of the following:





March 31, 2009
                    
                    
                    December 31, 2008Trade
      receivables
                    
                    $
                    22,846,271
                    
                    
                    $
                    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 months
ended March 31, 2009 and 2008.





NOTE
4 – INVENTORIES, NET





Inventory
consists of the following:





March 31, 2009
                  
                  
                  December 31, 2008Products
      for sale
                  
                  $
                  469,785
                  
                  
                  $
                  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.





Since
2008, the Company focuses on sales of IPTV devices and ordered products
according to sales contracts. Thus, the ending balance of inventory
decreased.





NOTE
5 – EMPLOYEE ADVANCES





Employee
advances consist of the following:





March 31, 2009
                  
                  
                  December 31, 2008Employee
      advances
                  
                  $
                  6,065
                  
                  
                  $
                  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:





March 31, 2009
                  
                  
                  December 31, 2008Machinery
      and equipment
                  
                  $
                  89,354
                  
                  
                  $
                  89,463Office
      equipment
                  
                  
                  32,408
                  
                  
                  
                  32,447Automobiles
                  
                  
                  101,703
                  
                  
                  
                  101,827Accumulated
      depreciation
                  
                  
                  (194,444
                  )
                  
                  
                  (189,589
                  )Total
                  
                  $
                  29,021
                  
                  
                  $
                  34,148





The
depreciation expenses are $5,085 and $4,439 in the three months ended March 31,
2009 and 2008, respectively.


F-14





ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
7 – SHORT-TERM DEMAND LOANS PAYABLE





Since
2005, the Company had several outstanding short-term demand 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 balances of such short-term demand loans as of March 31, 2009 and December
31, 2008, were $0 and $0, respectively. 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 to7.30%
with the reference to the one-year loan rate from The People’s Bank of China.
The imputed interests for the three months ended March 31, 2009 and 2008 were $0
and $17,728, respectively.





In 2006
and 2007,  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 balances of such short-term
demand loans as of March 31, 2009 and December 31, 2008 were $3,712,025 and
$3,931,991, respectively.





The
outstanding loans are as follows:





Bank
      Loan:
                  
                  March 31, 2009
                  
                  
                  December 31, 2008Austria
      Central Cooperation Bank
                  
                  $
                  3,712,025
                  
                  
                  $
                  3,931,991





Interest
expense incurred for the above short-term bank loans for the three months ended
March 31, 2009 and 2008 was $50,087 and $104,434, respectively.





NOTE
8 – 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
9 – 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 five months
starting from October 6, 2008 to March 5, 2009. These payables were exchanged
for common stock during the quarter ended March 31, 2009 as part of the Purchase
Rights Agreement with the management of ZST PRC.





Due to
related parties consist of the following:





March 31, 2009
                  
                  
                  December 31, 2008Sen,
      Hui (shareholder)
                  
                  $
                  -
                  
                  
                  $
                  13,759Zhong,
      Bo (CEO)
                  
                  
                  -
                  
                  
                  
                  2,102,178Huang,
      Jenkang (VP)
                  
                  
                  -
                  
                  
                  
                  21,152Wu,
      Dexio (Warehousing, CEO's Wife)
                  
                  
                  -
                  
                  
                  
                  211,814Li,
      Yuting (Executive Secretary to CEO)
                  
                  
                  -
                  
                  
                  
                  10,825Total
                  
                  $
                  -
                  
                  
                  $
                  2,359,728





The
imputed interest for the three months ended March 31, 2009 and 2008 was $31,400
and $0, respectively.


F-15


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
9 – RELATED PARTIES TRANSACTIONS (continued)





Subscription
receivable




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 Rights Agreement the
original owners agreed to use these proceeds to complete the exercise of the
Purchase Rights to purchase the Company’s shares and obtain control of the
Company. As of March 31, 2009, the Company had an outstanding subscription
receivable from Mr. Zhong, Ms. Sen, Mr. Huang, Ms. Wu, and Ms. Li in the amount
of $1,740,376. The subscription receivable was paid on May 25,
2009.




Subscription
receivable consists of the following:


March 31, 2009
                  
                  
                  December 31, 2008Sen, Hui
      (shareholder)
                  
                  $
                  3,860
                  
                  
                  $
                  -Zhong,
      Bo (CEO)
                  
                  
                  1,571,381
                  
                  
                  
                  -Huang,
      Jenkang (VP)
                  
                  
                  14,488
                  
                  
                  
                  -Wu,
      Dexio (Warehousing, CEO's Wife)
                  
                  
                  144,589
                  
                  
                  
                  -Li,
      Yuting (Executive Secretary to CEO)
                  
                  
                  6,058
                  
                  
                  
                  -Total
                  
                  $
                  1,740,376
                  
                  
                  $
                  -





NOTE
10 – 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
11 – COMMITMENTS AND CONTINGENCIES





Office lease
commitments





The
Company has entered into two office lease agreements.  The Company’s
commitments for minimum lease payments under these leases for the next five
years and thereafter are as follows as follows:





Year Ending December 31,2010
                  
                  $
                  8,2512011
                  
                  
                  -Thereafter
                  
                  
                  -$
                  8,251





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. Any purchasers of the Company’s common stock could
lose their entire investment should uninsured losses occur.





F-16


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





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:





March 31, 2009
                  
                  
                  March 31, 2008PRC
      Corporate Income Tax
                  
                  $
                  650,609
                  
                  
                  $
                  557,582





A
reconciliation between the income tax computed at the PRC statutory rate and the
Company’s provision for income taxes for the period ended March 31, 2009 and
2008 is as follows:





March 31, 2009
                  
                  
                  March 31, 2008PRC
      Corporate Income Tax Rate
                  
                  
                  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-17


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
13 – SEGMENT INFORMATION





SFAS No.
131, “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:





Product
Sales:





March 31, 2009
                                        
                                        
                                        March 31, 2008Sales
      revenues
                                        
                                        $
                                        17,760,628
                                        
                                        
                                        $
                                        12,920,736Cost
      of sales
                                        
                                        
                                        14,844,279
                                        
                                        
                                        
                                        10,783,570Gross
      Profit
                                        
                                        $
                                        2,916,349
                                        
                                        
                                        $
                                        2,173,166Gross
      Margin
                                        
                                        
                                        16.42
                                        %
                                        
                                        
                                        16.54
                                        %Technical
      Support Revenues:March 31, 2009
                                        
                                        
                                        March 31, 2008Sales
      revenues
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        594,295Service
      cost
                                        
                                        
                                        -
                                        
                                        
                                        
                                        32,686Gross
      Profit
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        561,609Gross
      Margin
                                        
                                        
                                        -
                                        
                                        
                                        
                                        94.50
                                        %Total
      Revenues:March 31, 2009
                                        
                                        
                                        March 31, 2008Total
      revenues
                                        
                                        $
                                        17,760,628
                                        
                                        
                                        $
                                        13,515,031Total
      costs
                                        
                                        
                                        14,844,279
                                        
                                        
                                        
                                        10,816,256Gross
      Profit
                                        
                                        $
                                        2,916,349
                                        
                                        
                                        $
                                        2,698,775Gross
      Margin
                                        
                                        
                                        16.42
                                        %
                                        
                                        
                                        19.97
                                        %


F-18





ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
14 – 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
15 – COMMON STOCK





On
January 9, 2009, ZST Digital closed a share exchange transaction (the “Share
Exchange”) pursuant to which ZST Digital (i) issued 1,985,000 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 ZST Digital’s name from SRKP 18, Inc. to its
current name.





Immediately
after the closing of the Share Exchange but prior to the Private Placement
(described below), ZST Digital had outstanding 9,081,390 shares of common stock,
no shares of preferred stock, no options, and warrants to purchase 7,096,390
shares of common stock at an exercise price of $0.0001 per share. Pursuant to
the terms of the Share Exchange, ZST Digital agreed to register a total of
2,940,000 shares of common stock and 420,000 shares of common stock issuable
upon the exercise of outstanding warrants held by stockholders of ZST Digital
immediately prior to the Share Exchange. Of the shares, 600,055 shares of common
stock and 85,723 shares of common stock underlying the warrants would be covered
by the registration statement filed in connection with the Private Placement and
2,339,945 shares of common stock and 334,277 shares of common stock underlying
the warrants will be included in a subsequent registration statement filed by us
within 10 days after the end of the 6-month period that immediately follows the
date on which ZST Digital files the registration statement to register the
shares issued in the Private Placement. Also in connection with the Share
Exchange, we paid $350,000 to WestPark Capital, Inc., the placement agent for
the Private Placement (“WestPark”), and $125,000 to a third party unaffiliated
with ZST Digital, SRKP 18 or WestPark. Immediately after the closing of the
Share Exchange, on January 9, 2009, the Company changed its corporate name from
“SRKP 18, Inc.” to
“ZST Digital Networks, Inc.





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
12,530,000 shares of our common stock at a per share purchase price of $0.2806
(the “Purchase Right”). The purchase price for the shares was paid in full on
May 25, 2009.  Each of the shareholders 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 4,156,390 shares of
common stock and warrants to purchase 6,676,390 shares of common stock held by
certain of our stockholders and warrantholders prior to the Share Exchange were
cancelled.


F-19




ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
16 – SERIES A 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 $1.60.  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”) of which three closings occurred in the three months ended
March 31, 2009. As of March 31, 2009, pursuant to subscription agreements
entered into with the investors, the Company sold an aggregate of 2,242,523
shares of Series A Convertible Preferred Stock at $1.60 per share for gross
proceeds of $3,585,902. 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 $1.60 of such share of Preferred
Stock by the Conversion Price of $1.60.




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 1,097,500 shares of Series A Convertible Preferred
Stock at $1.60 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 325,563 shares of Series A Convertible Preferred
Stock at $1.60 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 819,460 shares of Series A Convertible Preferred
Stock at $1.60 per share. As a result, the Company received gross proceeds in
the amount of $1,310,000.




In
accordance with Emerging Issues Task Force (‘‘EITF’’) 98-5 and EITF 00-27, 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 $1.60 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 $1.60 per share in a
private placement, therefore the market price of the common stock is $1.60 per
share.




Value
      Allocated to Preferred Stocks:Proceeds
      from issuance
                  
                  $
                  3,585,902Less
      value allocated to warrants
                  
                  
                  -Value
      allocated to preferred stocks
                  
                  $
                  3,585,902Market
      Value of Shares Issuable Upon Conversion:Shares
      issuable upon conversion of the preferred stocks
                  
                  
                  2,242,523Market
      value of stock on preferred stock issuance date
                  
                  $
                  1.60Market
      value of shares issuable upon conversion
                  
                  $
                  3,585,902Beneficial
      Conversion Feature:Market
      value of shares issuable upon conversion
                  
                  $
                  3,585,902Less
      value allocated to preferred stocks
                  
                  
                  3,585,902Value
      of beneficial conversion feature
                  
                  $
                  -




F-20


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
16 – SERIES A PREFERRED STOCK (continued)





The
Company evaluated whether or not the Series A convertible preferred stock
contained any embedded conversion features that meet the definition of
derivatives under SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and related interpretations.  Paragraph 12 of SFAS 133
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 paragraph 6-11, 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 Statement 150 but would be
      classified in stockholders’ equity absent the provisions in Statement
      150.




The
Series A 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 paragraph 12 of SFAS 133, it is clear that any potential embedded
derivatives in the Series A 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 SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity” and
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 Preferred Stock
outside of permanent equity based on the rights of the Series A Preferred Stock
in a deemed liquidation.





NOTE
17 – 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:





March 31,2009
                              
                              
                              2008Net
      income
                              
                              $
                              1,246,358
                              
                              
                              $
                              1,722,622Denominator:Basic
      weighted-average shares outstanding
                              
                              
                              17,193,667
                              
                              
                              
                              14,515,000Effect
      of dilutive warrants
                              
                              
                              382,666
                              
                              
                              
                              -Basic
      weighted-average shares outstanding
                              
                              
                              17,576,333
                              
                              
                              
                              14,515,000Net
      income per share:Basic
                              
                              $
                              0.07
                              
                              
                              $
                              0.12Diluted
                              
                              $
                              0.07
                              
                              
                              $
                              0.12




F-21


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
18 – COMMON STOCK WARRANTS





In
January 2007, the Company sold to its original shareholders warrants to purchase
7,096,390 shares of common stock at an exercise price of $0.0001. On January 14,
2009, these shareholders canceled an aggregate of 6,676,390 warrants such that
the shareholders held an aggregate of 420,000 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
following is a summary of outstanding warrants at March 31, 2009:




Warrants
                
                Average
                  Exercise Price420,000
                
                $
                0.0001





NOTE
19 – SUBSEQUENT EVENTS





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 501,949 shares of Series A Convertible Preferred Stock at
$1.60 per share. As a result, the Company received gross proceeds in the amount
of $693,200 and subscription receivables of $110,800, which were subsequently
received.





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 366,128 shares of Series A Convertible Preferred Stock at $1.60 per
share. As a result, the Company received gross proceeds in the amount of
$587,051.





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 12,530,000
shares of our common stock at a per share purchase price of $0.2806 (the
"Purchase Right").  The purchase price for the shares was paid in full
on May 25, 2009.





NOTE
20 - 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 Networks, Inc. exceed 25% of the consolidated
net assets of ZST Digital Networks, Inc. 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-22


ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
20 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)




ZST
Digital Networks, Inc.


(Formerly
SRKP 18, Inc.)





CONDENSED PARENT COMPANY
BALANCE SHEETS


(Dollars
in Thousands)





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)ASSETSInvestment
      in subsidiaries, at equity in net assets
                      
                      $
                      14,200
                      
                      
                      $
                      8,983Total
      Assets
                      
                      
                      14,200
                      
                      
                      
                      8,983LIABILITIES AND STOCKHOLDERS’ EQUITY
      (DEFICIT)CURRENT
      LIABILITIESAccrued
      liabilities and other payable
                      
                      
                      381
                      
                      
                      
                      -Total
      Current Liabilities
                      
                      
                      381
                      
                      
                      
                      -COMMITMENTS
      AND CONTINGENCIESPreferred Stock Series A
      Convertible, $0.0001 par value, 3,750,000 shares authorized,
      2,242,523 and 0 shares issued and outstanding at March 31, 2009 and
      December 31, 2008, respectively. Liquidation preference and redemption
      value of $3,591,000 at March 31, 2009
                      
                      
                      2,946
                      
                      
                      
                      -STOCKHOLDERS’
      EQUITY (DEFICIT):Common
      stock, $0.0001 par value, 100,000,000 shares authorized,17,455,000 and
      14,515,000 shares issued and outstanding at March 31, 2009 and December
      31, 2008, respectively
                      
                      
                      2
                      
                      
                      
                      1Additional
      paid in capital
                      
                      
                      4,294
                      
                      
                      
                      1,488Accumulated
      other comprehensive income
                      
                      
                      168
                      
                      
                      
                      591Statutory
      surplus reserve fund
                      
                      
                      1,492
                      
                      
                      
                      1,492Retained
      earnings (unrestricted)
                      
                      
                      6,657
                      
                      
                      
                      5,411Subscription
      receivable
                      
                      
                      (1,740
                      )
                      
                      
                      -Total
      Stockholders’ Equity (Deficit)
                      
                      
                      10,873
                      
                      
                      
                      8,983Total
      Liabilities & Shareholders' Equity
                      
                      $
                      14,200
                      
                      
                      $
                      8,983




F-23





ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
20 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)




ZST
Digital Networks, Inc.


(Formerly
SRKP 18, Inc.)





CONDENSED PARENT COMPANY
STATEMENTS OF OPERATIONS


(Dollars
in Thousands)




For
      the
                        
                        
                        For
      theThree
      Months
                          Ended
                        
                        
                        Three
      Months
                          EndedMarch
      31,
                        
                        
                        March
      31,2009
                        
                        
                        2008Unaudited
                        
                        
                        UnauditedRevenue
                        
                        $
                        -
                        
                        
                        $
                        -Merger
      cost
                        
                        
                        555
                        
                        
                        
                        -Other
      general and administrative
                        
                        
                        50
                        
                        
                        
                        -Total
      Expenses
                        
                        
                        605
                        
                        
                        
                        -Equity
      in undistributed income of subsidiaries
                        
                        
                        1,851
                        
                        
                        
                        1,723Income
      before income taxes
                        
                        
                        1,246
                        
                        
                        
                        1,723Provision
      for income tax
                        
                        
                        -
                        
                        
                        
                        -Net
      income
                        
                        $
                        1,246
                        
                        
                        $
                        1,723




F-24




ZST
DIGITAL NETWORKS, INC. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


(Amounts
and disclosures for the three months ended March 31, 2009 and 2008 are
unaudited)





NOTE
20 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)




ZST
Digital Networks, Inc.


(Formerly
SRKP 18, Inc.)





CONSDENSED
PARENT COMPANY STATEMENTS OF CASH FLOWS


(Dollars
in Thousands)




For
      the
                        
                        
                        For
      theThree
      Months
                          Ended
                        
                        
                        Three
      Months
                          EndedMarch
      31,
                        
                        
                        March
      31,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Unaudited)Cash
      Flows from Operating Activities:Net
      income
                        
                        $
                        1,246
                        
                        
                        $
                        1,723Increase
      in accrued liabilities and other payable
                        
                        
                        381Equity
      in undistributed income of subsidiaries
                        
                        
                        (1,851
                        )
                        
                        
                        (1,723
                        )Net
      Cash (Used) by Operating Activities
                        
                        
                        (224
                        )
                        
                        
                        -Cash
      Flows from Investing Activities:Capital
      contribution to subsidiaries
                        
                        
                        (982
                        )
                        
                        
                        -Payment
      to ZST PRC shareholders
                        
                        
                        (1,740
                        )
                        
                        
                        -Net
      Cash (Used) by Investing Activities
                        
                        
                        (2,722
                        )
                        
                        
                        -Cash Flows from Financing
      Activities:Proceeds
      from sale of preferred stocks
                        
                        
                        2,946
                        
                        
                        
                        -Net
      Cash Provided by Financing Activities
                        
                        
                        2,946
                        
                        
                        
                        -Net
      increase/(decrease) in cash and cash equivalents
                        
                        
                        -
                        
                        
                        
                        -Cash
      and cash equivalents, beginning of period
                        
                        
                        -
                        
                        
                        
                        -Cash
      and cash equivalents, end of period
                        
                        $
                        -
                        
                        
                        $
                        -




F-25


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.




4





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.





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





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
1,985,000 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 1,985,000 shares were issued to the
former stockholders of World Orient.





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
12,530,000 shares of our common stock at a per share purchase price of $0.2806
(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 4,156,390 shares of common stock and warrants to purchase 6,676,390
shares of common stock held by certain of our stockholders and warrantholders
prior to the Share Exchange were cancelled.





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 3,110,600 shares of Series A Convertible
Preferred Stock at $1.60 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.





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 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.





Upon the
consummation of the Purchase Right and Share and Warrant Cancellation, our Chief
Executive Officer and Chairman of the Board, Zhong Bo, beneficially owns
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).




5





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 SFAS FASB No. 48, "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 $0 and
$0 for the period ended March 31, 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.





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.




6





Recently
Issued Accounting Pronouncements




In April 2009, the FASB issued FSP FAS
157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and
Identifying Transactions That Are Not Orderly”(FSP FAS 157-4). FSP FAS 157-4 amends
SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset
orliability have significantly decreased
and also includes guidance on identifying circumstances that indicate a
transaction is not orderly for fair value measurements. This FSP shall be
applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim
and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March15, 2009. An entity early adopting this
FSP must also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”(FSP FAS 115-2
and FAS 124-2). Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments”(FSP
FAS 107-1 and APB 28-1) or FSP FAS 115-2 and FAS 124-2, it
must also elect to early adopt this FSP.The Company iscurrently evaluating this new FSP but do
not believe that it will have a significant impact on the determination or
reporting ofthe
Company’sfinancial results.




In April 2009, the FASB issued FSP FAS
115-2 and FAS 124-2,
“Recognition and
Presentation of Other-Than-Temporary Impairment”(FSP 115-2/124-2).FSP 115-2/124-2 amends the requirements
for the recognition and measurement of other-than-temporary
impairmentfor debt
securities by modifying the pre-existing “intent and ability”indicator. Under FSP 115-2/124-2, an
other-than-temporary
impairmentis triggered
when there is an intent to sell the security, it is more likely then not that
the security will be required to be sold before recovery, or the
security is not expected to recover the entire amortized cost basis of the
security. Additionally,FSP115-2/124-2 changes the
presentation of an other-than-temporary impairment in the income statement for
those impairments involving
credit losses. The credit loss component will be recognized in earnings and the
remainder of the impairment will be recorded in other comprehensive income. FSP
115-2/124-2 is effective for the Company beginning in the second quarter offiscal year 2009. Upon implementation at
the beginning of the second quarter of 2009, FSP 115-2/124-2 is not expected to
have a significant impact on the Company’s consolidated financial
statements.





In April 2009, the FASB issued FSP FAS
107-1 and APB 28-1,
“Interim Disclosure about
Fair Value of Financial Instruments”(“FSP 107-1/APB 28-1”).FSP 107-1/APB 28-1requires interimdisclosuresregarding thefair valuesof financial instrumentsthat are within the scope of FAS 107,
“Disclosures about the Fair
Value of Financial
Instruments,”Additionally,
FSP 107-1/APB 28-1 requires disclosures of the methods and significant
assumptions used to estimate the fair value of financial instruments on an
interim basis as well as changes in the methods and significantassumptions from prior periods. FSP
107-1/APB 28-1 does not change the accounting treatment for these financial
instruments and is effective for the Company beginning in the second quarter of
fiscal year 2009.





Recently
Adopted Accounting Pronouncements





In July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “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).  The accounting provisions of FIN No. 48
are effective for fiscal years beginning after December 15, 2006.  The
adoption of this Interpretation had no impact on our financial position or
results of operations.





In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157").  SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements.  In February 2008, the FASB
issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date of FASB
Statement No. 157" ("FSP 157-2").  FSP 157-1 amends SFAS 157 to remove
certain leasing transactions from its scope.  FSP 157-2 delays the
effective date of SFAS 157 for all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008.  SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years.  The Company adopted
SFAS 157 effective January 1, 2008 for all financial assets and liabilities as
required.  The adoption of SFAS 157 was not material to our financial
statements or results of operations.




7





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning
after November 15, 2007.  SFAS 159 is an elective standard which
permits an entity to choose to measure many financial instruments and certain
other items at fair value at specified election dates.  Subsequent
unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings.  The Company has not elected the
fair value option for any assets or liabilities under SFAS 159.





In April
2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life
of Intangible Assets (“FSP FAS 142-3”) which amends the factors an entity should
consider in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FAS No. 142, Goodwill and
Other Intangible Assets (“FAS No. 142”). FSP FAS 142-3 applies to intangible
assets that are acquired individually or with a group of assets and intangible
assets acquired in both business combinations and asset acquisitions. It removes
a provision under FAS No. 142, requiring an entity to consider whether a
contractual renewal or extension clause can be accomplished without substantial
cost or material modifications of the existing terms and conditions associated
with the asset. Instead, FSP FAS 142-3 requires that an entity consider its own
experience in renewing similar arrangements. An entity would consider market
participant assumptions regarding renewal if no such relevant experience exists.
FSP FAS 142-3 is effective for year ends beginning after December 15, 2008 with
early adoption prohibited. The adoption of this statement is not expected to
have a material effect on the Company’s financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The adoption of this statement is not expected to have a material
effect on the Company’s financial statements.





In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (“FSP
EITF 03-6-1”). FSP EITF 03-6-1 concludes that unvested share-based payment
awards that contain rights to receive non-forfeitable dividends or dividend
equivalents are participating securities, and thus, should be included in the
two-class method of computing earnings per share (“EPS”). FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years. Early application of EITF 03-6-1 is prohibited. It
also requires that all prior-period EPS data be adjusted retrospectively. The
adoption of this statement is not expected to have a material effect on the
Company’s financial statements.





Effective January 1, 2009, the
Company adopted the provisions of EITF 07-5,"Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock”(“EITF 07-5”). EITF 07-5 applies to any freestanding
financial instruments or embedded features that have the characteristics of a
derivative, as defined by SFAS No.133, “Accounting for Derivative Instruments
and Hedging Activities,”and to any freestanding financial instruments that are
potentially settled in an entity’s own common stock.The adoption
of EITF 07-5 was not material to the Company's financial statements or results
of operations.





In the first quarter of 2009, the
Company adopted Statement
of Financial Accounting Standards (SFAS) No. 141 (revised 2007), “Business Combinations”(SFAS No. 141(R) as mended by FASB
staff position FSP 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination.”SFAS No. 141(R)generally requires an entity to
recognize the assets acquired, liabilities assumed, contingencies, and
contingent consideration at their fair value on the acquisition date. In
circumstances where the acquisition-date fair value for a contingency cannot
bedetermined during the measurement period
and it is concluded that it is probable that an asset or liability exists as of
the acquisition date and the amount can be reasonably estimated, a contingency
is recognized as of the acquisition date based on the estimated amount. It further requires that
acquisition related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period
impact income tax expenses. In addition, acquired in-process research and
development is capitalized as an intangibles asset and amortized over
itsestimated useful life. SFAS No. 141(R)
is applicable to business combinations on a prospective basis beginning in the
first quarter of 2009. The Company adopted SFAS No. 141(R) for its business
combination during the quarter ended March 31, 2009.


8


Results
of Operations





Three
Months Ended March 31, 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 $17,760,628 for the three months ended March 31, 2009, an increase of
$4,245,597, or 31.41%, compared to $13,515,031 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.





Cost of
goods sold, which include raw material, labor and amounts due to contract
manufacturers, was $14,844,279 for the three months ended March 31, 2009, an
increase of $4,028,023, or 37.24%, compared to $10,816,256 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 March 31, 2009
and 2008 were 83.58% and 80.03%, respectively.





Gross
profit for three months ended March 31, 2009 was $2,916,349, or 16.42% of
revenues, compared to $2,698,775, or 19.97% 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 March 31, 2009, a decrease of
$52,929, or 100%, compared to $52,929 for the same period in
2008.  The decrease was due to the changes in sales contract terms and
arrangement of delivery.





Other
general and administrative expenses, which include wage, benefit, bad debts,
utility, consulting, turnover taxes, professional fees and other expenses, were
$369,266 for the three months ended March 31, 2009, an increase of $121,364, or
48.96%, compared to $247,902 for the same period in 2008.  The
increase was due to the increase of professional fees for the Share Exchange and
related transactions.  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 March 31, 2009
was $50,087, a decrease of $54,347, or 52.04%, compared to $104,434 in
2008.  The decrease is mainly the result of reduced bank
debt.





For the
three months ended March 31, 2009, we recorded a provision for income taxes of
$650,609, compared to $557,582 for the same period in 2008.  The tax
rate for the year ended December 31, 2007 was 33%.  Our income tax
rate for the year ended December 31, 2008 was 25%.





Liquidity
and Capital Resources





We had
cash and cash equivalents of $1,881,304 as of March 31, 2009, as compared to
$11,935,148 as of March 31, 2008.





We had
working capital of approximately $13,790,315, $4,341,178, $8,948,772 and
$2,505,155 as at March 31, 2009 and 2008 and as of December 31, 2008 and 2007,
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 $22,846,271, $9,495,660, $12,322,099 and $9,419,029, or 87.86%,
40.21%, 71.35%, 55.67% of current assets, as of March 31, 2009 and 2008 and as
of December 31, 2008 and 2007, 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.




9





As of
March 31, 2009, inventories amounted to $469,785, compared to $1,132,983 as of
March 31, 2008.  As of December 31, 2008, inventories amounted to
$775,185, compared to $5,488,794 as of December 31, 2007.  The
decrease is primarily due to the fact that we no longer manufacture our products
and instead outsource the manufacturing of our products.





As of
March 31, 2009, accounts payable and accrued liabilities amounted to $7,775,211,
compared to $8,503,929 as of March 31, 2008.  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 increase in accounts payable
and accrued liabilities is due to inventory purchases unpaid prior to the end of
the period.





As of
March 31, 2009, various taxes payable amounted to $400,802, compared to $76,568
as of March 31, 2008.  As of December 31, 2008, various taxes payable
amounted to $188,539, compared to $324,388 as of December 31,
2007.  The increase in various taxes payable is due to the rise of
sales.





As of
March 31, 2009, wages payable amounted to $65,442, compared to $33,124 as of
March 31, 2008.  As of December 31, 2008, wages payable amounted to
$59,901, compared to $23,890 as of December 31, 2007. The increase in wages
payable is due to increased personnel costs.





As of
March 31, 2009, corporate taxes payable amounted to $250,440, compared to
$180,562 at March 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.





As of May
5, 2009, we received gross proceeds of approximately $4.98 million in a private
placement transaction (the “Private Placement”).  Pursuant to
subscription agreements entered into with the investors, we sold an aggregate of
3,110,600 shares of Series A Convertible Preferred Stock at $1.60 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 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.





We agreed
to file a registration statement covering the common stock underlying the Series
A Convertible Preferred Stock sold in the Private Placement within 60 days of
the closing of the Share Exchange pursuant to the subscription agreement with
each investor.  For its services as placement agent, WestPark was paid
a commission of 12% of the gross proceeds from the Private Placement plus a 4%
non-accountable expense allowance.  No other consideration was paid to
WestPark or to SRKP 18 in connection with the Share Exchange or Private
Placement.





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 approximately $5,616 for the three months ended
March 31, 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 $232,898 for the three months ended March 31,
2009, compared to net cash provided by operating activities of $10,725,604 for
the three months ended March 31, 2008.  The change was primarily due
to a decrease in inventory and an increase in accounts receivable.




10





Net cash
used in investing activities amounted to approximately $1,740,376 for the three
months ended March 31, 2009, compared to net cash provided by investing
activities of nil for the three months ended March 31, 2008.  The
change was due to payments to the shareholders of Zhengzhou ZST.





Net cash
provided by financing activities amounted to $2,726,716 for the three months
ended March 31, 2009, compared to net cash used in financing activities of
$170,925 for the three months ended March 31, 2008.  The change was
primarily a result of sales of Series A Convertible Preferred Stock in the
Private Placement.





Based
upon our present plans, we believe that cash on hand, cash flow from operations
and funds available to use through low-cost domestic financing 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.


11




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 effective as of March 31, 2009.





Changes
in Internal Control Over Financial Reporting





On
January 9, 2009, we consummated a share exchange transaction (the “Share
Exchange”) pursuant to a share exchange agreement dated as of December 11, 2008,
as further amended on January 9, 2009 (the “Exchange Agreement”), with World
Orient Universal Limited, a company organized in the British Virgin Islands
(“World Orient”), and all of the shareholders of World Orient, pursuant to which
we (i) became the 100% parent of World Orient and its subsidiaries, including
Zhengzhou Shenyang Technology Company Limited, a company organized in the
People’s Republic of China (“Zhengzhou ZST”); (ii) assumed the operations of
World Orient and its subsidiaries; and (iii) changed our name from SRKP 18, Inc.
to ZST Digital Networks, Inc.  Upon the closing of the Share Exchange
on January 9, 2009, which occurred during the period covered by this report, the
internal control over financial reporting utilized by Zhengzhou ZST prior to the
Share Exchange became the internal control over financial reporting of our
company. Following the Share Exchange the sole business conducted by our company
became the business conducted by Zhengzhou ZST, and we appointed new officers
and directors.





Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 or
15d-15 of the Exchange Act, except for the changes in our internal control over
financial reporting as described above, there were no changes in our internal
control over financial reporting that occurred during the first quarter of the
fiscal year that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.


12




PART II.  OTHER
INFORMATION





ITEM 1.  LEGAL
PROCEEDINGS





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





ITEM 1A.  RISK FACTORS





Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described in our Annual Report on Form 10-K for the
year ended December 31, 2008 (the “2008 Form 10-K”) and all of the information
contained in this report and our public filings before deciding whether to
purchase our common stock. Except as set forth below, there have been no
material revisions to the “Risk Factors” as filed in our 2008 Form
10-K.





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 3,110,600 shares of Series A Convertible Preferred Stock at a price
of $1.60 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
12,530,000 shares of our common stock at a per share purchase price of $0.2806
(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 4,156,390 shares of common stock and warrants to purchase 6,676,390
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
1,985,000 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.




13





On
January 3, 2007, we issued 7,096,390 shares of common stock for an aggregate
cash consideration of $5,000 and warrants to purchase 7,096,390 shares of common
stock at an exercise price of $0.0001 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 5,971,390 shares of common stock and warrants to
purchase 6,431,299 shares of common stock held by them.





ITEM
3.  DEFAULT UPON SENIOR SECURITIES





None.





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





None.





ITEM
5.  OTHER INFORMATION
 
 On April
24, 2009, the Company entered into a House Lease Agreement for the property
located at Bo Ya Xi Cheng No. 206, Tong Bai Road, Zhongyuan District, Zhengzhou,
China, with a floor area of approximately 945 square meters (the “Lease”).  The
Lease has a term from May 21, 2009 to April 30, 2011 and the annual rent is RMB
400,000, which is approximately USD $58,485. The Company entered into the Lease
because it required additional space to conduct its business
operations.
 
 ITEM
6.  EXHIBITS
  (a)
              
              ExhibitsExhibit
                Number
              
              Description of Document10.1
              
              House
      Lease Agreement dated April 24, 2009.31.1
              
              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.
  14




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:
      June 12, 2009
            By:
            /s/
      Zhong BoZhong
      BoChief
      Executive Officer and Chairman of the BoardDate:
      June 12, 2009
            By:
            /s/
      Zeng Yun SuZeng
      Yun SuChief
      Financial Officer and Corporate
Secretary


15