##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 001-33667
 DIGITALFX INTERNATIONAL, INC.
  Florida
    
    65-0358792(State or Other Jurisdiction
    
    (I.R.S. Employerof Incorporation or Organization)
    
    Identification No.)
 3035 East Patrick Lane, Suite 9
Las Vegas, Nevada 89120
 (702) 938-9300
(Registrants Telephone Number, Including Area Code)
      Yes o No þ
 Yes o No þ
 þ o
 o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated Filer o
    
    Smaller Reporting Company þ(Do not check if smaller reporting company)
 o þ




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##### 



DIGITALFX INTERNATIONAL, INC.
 2008 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
 PART I
    
    
    3ITEM 1. Business
    
    
    3ITEM 1A. Risk Factors
    
    
    14ITEM 1B. Unresolved Staff Comments
    
    
    24ITEM 2. Properties
    
    
    25ITEM 3. Legal Proceedings
    
    
    25ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART II
    
    
    27ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    27ITEM 6. Selected Financial Data
    
    
    28ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36ITEM 8. Financial Statements and Supplementary Data
    
    
    37ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    75ITEM 9A. Controls and Procedures
    
    
    75ITEM 9B. Other Information
    
    
    76PART III
    
    
    77ITEM 10. Directors, Executive Officers and Corporate Governance
    
    
    77ITEM 11. Executive Compensation
    
    
    80ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    84ITEM 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    88ITEM 14. Principal Accounting Fees and Services
    
    
    91PART IV
    
    
    92ITEM 15. Exhibits
    
    
    92Exhibit 10.31Exhibit 10.32Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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PART I
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   
    
    our failure to implement our business plan within the time period we originally
planned to accomplish; and
 
    
    other factors discussed under the headings Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Business.
  
 ITEM 1. Business.
 Overview
  www.helloWorld.com
  3




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www.vmdirect.com
  History of the Company
     4




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Principal Market
  Business of DigitalFX International, Inc.
 General Overview
   hello
  5




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
    
    Narrow focus on market niches where operations will generate positive cash flow
and be economically feasible by setting attainable profitability targets;
    
    Increase shareholder value;
    
    Strengthen Affiliate compensation;
    
    Provide unique and complete business tools to our Affiliates; and
    
    Provide world class products.
  Market Opportunity
  Streaming Media Industry
  Email Marketing Industry
   Direct Selling Industry
   6




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Our Revenue and Distribution Model
  www.vmdirect.com www.helloWorld.com
  Our Products
 DigitalFX
Studio (Studio) (to be replaced by F5 in March 2009)
 hello
      7




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New F5 Product (expected March 2009)
    
    
    Integrated video and audio creation, playlists, picture galleries, media storage
and media publishing;
    
    Full email client with video, audio, and template integration for individual
follow up;
    
    Contact list manager;
    
    Lead capture;
    
    Auto-responder;
    
    Customized template creation; and
    
    Email delivery reporting and analytics.
  
    
    Selling the opportunity (i.e., signing up new Affiliates);
    
    Selling the F5 commercial product directly to businesses, non-profit
organizations and all types of associations (expected in March 2009); and
    
    Selling the F5 consumer product (i.e., helloWorld).
 Customers
    8




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hello
 Competition
 www.helloWorld.com
 www.helloWorld.com
  hello
    9




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Trademarks, Domain Names and other Intellectual Property
       10




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® ® hello www.vmdirect.com www.firststream.com www.helloWorld.com www.digitalfxsolutions.com
  hello
 Product Development
  Seasonality
  Employees
   11




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Government Regulation
  Nevada Law
    CAN  SPAM Act
   12




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
    
    Prohibiting false or misleading email header information;
 
    
    Prohibiting the use of deceptive subject lines;
 
    
    Ensuring that recipients may, for at least 30 days after an email is sent, opt
out of receiving future commercial email messages from the sender, with the opt-out
effective within 10 days of the request;
 
    
    Ensuring that recipients may, for at least 30 days after an email is sent, opt
out of receiving future commercial email messages from the sender, with the opt-out
effective within 10 days of the request;
 
    
    Requiring that commercial email be identified as a solicitation or advertisement
unless the recipient affirmatively permitted the message;
 
    
    Requiring that the sender include a valid postal address in the email message;
and
 
    
    Prohibiting unlawful acquisition of email addresses.
     
    
    new customers signing up for our services must agree that they will send email
through our service only to persons who have given their permission;
 
    
    when an email contact list is uploaded, the customer must certify that it has
permission to email each of the addressees;
 
    
    when an individual indicates that they want to be added to a mailing list, they
may receive a confirmation email and may be required to confirm their intent to be
added to the contact list, through a process called double opt-in; and
 
    
    for customers with large email address lists, we conduct list review interviews
to verify that the list is properly acquired and permission-based and that the
proposed messages meet our content standards. Initial campaigns using such lists
are conducted in stages, so
that we can terminate the campaign early if the list generates an unusually high
number of complaints.
  13




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Other
  
 ITEM 1A. Risk Factors.
  Risks Related to Our Business
 We will need additional funding to support our operations and capital expenditures. Such funds may
not be available to us, which lack of availability could reduce our operating income, product
development and enhancement efforts and future business prospects.
   14




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We may be unable to continue as a going concern if we do not successfully raise additional capital
or if our sales decrease substantially.
  Our operating results may fluctuate significantly based on customer and Affiliate acceptance of our
products.
    If we do not successfully generate additional products and services, or if such products and
services are developed but not successfully commercialized, we could lose revenue opportunities.
    15




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While we previously achieved an operating profit, we have a history of operating losses and there
can be no assurance that we can achieve, maintain or increase profitability.
  We may not be able to effectively manage our growth.
  
    
    sufficiently and timely improve our technology to handle increasing volume on
our websites;
 
    
    expand our administrative and marketing systems effectively, efficiently or in a
timely manner to accommodate increasing numbers of our Affiliates; or
 
    
    allocate our human resources optimally.
  If we continue to experience technological difficulties with our products our Affiliate base could
shrink, customer growth could decrease and our business could suffer.
   16




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Eighty-three percent of our revenues for the year ended December 31, 2008 have been derived from
sales of our products and services to our Affiliates, and our future success depends on our ability
to grow our Affiliate base, as well as to expand our retail subscriptions and initiate advertising
revenue.
    
    
    on-going motivation of our Affiliates;
 
    
    general economic conditions;
 
    
    significant changes in the amount of commissions paid;
 
    
    public perception and acceptance of direct selling;
 
    
    public perception and acceptance of us and our products;
  17




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
    
    the limited number of people interested in pursuing direct selling as a
business;
 
    
    our ability to provide proprietary quality-driven products that the market
demands; and
 
    
    competition in recruiting and retaining active Affiliates.
 Our ability to conduct business, particularly in international markets, may be affected by
political, economic, legal and regulatory risks, which could adversely affect the expansion of our
business in those markets.
  
    
    the possibility that a foreign government might ban or severely restrict our
business method of selling through our Affiliates, or that local civil unrest,
political instability or changes in diplomatic or trade relationships might disrupt
our operations in an international market;
 
    
    the possibility that a government authority might impose legal, tax or other
financial burdens on Affiliates, as direct sellers, or on our company due, for
example, to the structure of our operations in various markets;
 
    
    the possibility that a government authority might challenge the status of our
Affiliates as independent contractors or impose employment or social taxes on our
Affiliates;
 
    
    our ability to staff and manage international operations;
 
    
    handling the various accounting, tax and legal complexities arising from our
international operations; and
 
    
    understanding cultural differences affecting non-U.S. customers.
     18




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We also face legal and regulatory risks in the United States, the affect of which could reduce our
sales and revenues.
   If we incur substantial liability from litigation, complaints, or enforcement actions resulting
from misconduct by our multi-level Affiliates, our financial condition could suffer.
   We may be unable to compete successfully against existing and future competitors, which could
decrease our revenue and margins and harm our business.
   19




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We may not be able to adequately protect our intellectual property rights which would affect our
ability to compete in our industry.
     We may become subject to litigation for infringing the intellectual property rights of others the
affect of which could cause us to cease marketing and exploiting our products.
  We may have to expend significant resources developing alternative technologies in the event that
third party licenses for intellectual property upon which our business depends are not available or
are not available on terms acceptable to us.
   20




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We may be unable to attract and retain qualified, experienced, highly skilled personnel, which
could adversely affect the implementation of our business plan.
  Our senior management had limited experience managing a publicly traded company prior to serving as
our executive officers. This limited experience may divert our managements attention from
operations and harm our business.
  If we are not able to respond to the adoption of technological innovation in our industry and
changes in consumer demand, our products will cease to be competitive, which could result in a
decrease in revenue and harm our business.
   21




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Other Risks Related to an Investment in Our Common Stock
 There is limited trading, and consequently limited liquidity, of our common stock.
   The market price of our common stock is likely to be highly volatile and subject to wide
fluctuations, and you may be unable to resell your shares at or above the price at which you
purchased such shares.
  
    
    quarterly variations in our revenues and operating expenses;
 
    
    developments in the financial markets, and the worldwide or regional economies;
 
    
    announcements of innovations or new products or services by us or our
competitors;
 
    
    fluctuations in merchant credit card interest rates;
 
    
    significant sales of our common stock or other securities in the open market;
and
 
    
    changes in accounting principles.
   22




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Substantial future sales of our common stock in the public market could cause our stock price to
fall.
     The sale of securities by us in any equity or debt financing could result in dilution to our
existing shareholders and have a material adverse effect on our earnings.
  We have not paid dividends in the past and do not expect to pay dividends on our common stock for
the foreseeable future, and any return on investment may be limited to potential future
appreciation on the value of our common stock.
   23




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Our officers, directors and principal shareholders, controlling approximately 53% of our
outstanding common stock, and 100% of our Series A 12% Cumulative Convertible Preferred Stock, can
exert significant influence over us and may make decisions that are not in the best interests of
all shareholders.
  Anti-takeover provisions may limit the ability of another party to acquire us, which could cause
our stock price to decline.
  
 ITEM 1B. Unresolved Staff Comments.
   24




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ITEM 2. Properties.
  
 ITEM 3. Legal Proceedings.
     25




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ITEM 4. Submission of Matters to a Vote of Security Holders.
   26




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PART II
 
 ITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Common Stock
  High
    
    
    LowYear Ended December 31, 2008First Quarter
    
    $
    1.84
    
    
    $
    0.50Second Quarter
    
    $
    1.04
    
    
    $
    0.31Third Quarter
    
    $
    0.70
    
    
    $
    0.12Fourth Quarter
    
    $
    0.43
    
    
    $
    0.07Year Ended December 31, 2007First Quarter
    
    $
    5.50
    
    
    $
    2.50Second Quarter
    
    $
    6.25
    
    
    $
    2.69Third Quarter
    
    $
    5.10
    
    
    $
    2.75Fourth Quarter
    
    $
    3.60
    
    
    $
    1.20
  Dividend Rights
    27




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ITEM 6. Selected Financial Data.
  
 ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
   hello
    
    
    Narrow focus on market niches where operations will generate positive cash flow
and be economically feasible by setting attainable profitability targets;
    
    Increase shareholder value;
    
    Strengthen Affiliate compensation;
    
    Provide unique and complete business tools to our Affiliates; and
    
    Provide world class products.
   28




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General
     Results of Operations
 Year Ended December 31, 2008 Compared with Year Ended December 31, 2007 (in thousands, except for
customer base data)
    29




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December 31,
    
    
    December 31,2008
    
    
    2007Revenue:Subscription fees for access plans and administrative tools
    
    $
    10,810
    
    
    $
    17,620Affiliate business packages
    
    
    1,897
    
    
    
    4,128Upgrades to business packages
    
    
    330
    
    
    
    1,074Merchandise and shipping fees
    
    
    409
    
    
    
    419Event and conference revenue
    
    
    
    
    
    
    270Total Revenue
    
    $
    13,446
    
    
    $
    23,511
   December 31,
    
    
    December 31,2008
    
    
    2007Affiliates
    
    
    5,266
    
    
    
    13,270Retail subscribers
    
    
    8,151
    
    
    
    15,074Total active customers
    
    
    13,417
    
    
    
    28,344
  Gross Profit
  Commission Expenses
   30




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Other Operating Expenses
  2008
    
    
    2007Salaries, benefits and other compensation
    
    $
    3,946
    
    
    $
    4,182Stock based compensation
    
    
    1,061
    
    
    
    563Corporate expenses
    
    
    993
    
    
    
    1,422Product development
    
    
    647
    
    
    
    1,356International deployment and administration
    
    
    432
    
    
    
    1,023Merchant fees
    
    
    487
    
    
    
    1,008Marketing expenses
    
    
    401
    
    
    
    559General and administrative
    
    
    1,897
    
    
    
    2,464Total Other Operating Expenses
    
    $
    9,874
    
    
    $
    12,577
   Liquidity and Capital Resources (in thousands, except for share data)
      31




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
    
    In November 2007, we received $7,000 from institutional investors in exchange
for senior secured convertible notes (Notes). In March 2008, the terms of the
Notes were restructured and we returned $4,000 of the funds. We also issued an
aggregate of 1,000,000 shares of our common to the investors in connection with the
March 2008 restructuring. In October 2008, Richard Kall, our Chief Executive
Officer and Chairman, purchased $350 of the Notes from the investors.
 
    
    In December 2008, the Notes were further restructured and the remaining
principal balance was reduced by $2,050 through a combination of 1) a $650 cash
payment; 2) transfer of our shares of common stock in WoozyFly, Inc. valued at $800
and 3) our issuance to the investors of shares of our common stock valued at $600.
 
    
    In December 2008, we designated and issued 2,000,000 shares of Series A
Preferred Stock to Mr. Kall in exchange for $2,000.
 
    
    In March 2009, Mr. Kall advanced the Company $200 for operating purposes. The
terms of this financial instrument are currently being negotiated.
  32




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Backlog
  Geographic Information
  December 31,
    
    
    December 31,2008
    
    
    2007United States, Canada & Mexico
    
    
    86
    %
    
    
    90
    %United Kingdom
    
    
    3
    %
    
    
    2
    %Australia/New Zealand
    
    
    6
    %
    
    
    6
    %Europe
    
    
    5
    %
    
    
    2
    %100
    %
    
    
    100
    %
 Critical Accounting Policies
  Revenue Recognition
   33




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Affiliate Business Packages
 Revenue Recognition
  Monthly Subscriptions
  Apparel and Merchandise
  Electronic Components
   34




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Conferences and Events
  Allowance for Doubtful Accounts
  Inventories
  Stock-Based Compensation
     35




---



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Recent Accounting Pronouncements
     Off-Balance Sheet Arrangements
  
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
   36




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ITEM 8. Financial Statements and Supplementary Data.
  PageReport of Independent Registered Public Accounting Firm
    
    
    38Consolidated Balance Sheets at December 31, 2008 and December 31, 2007
    
    
    39Consolidated Statements of Operations for the Years Ended December 31, 2008
and December 31, 2007
    
    
    40Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2008 and December 31, 2007
    
    
    41Consolidated Statements of Cash Flows for the Years Ended December 31, 2008
and December 31, 2007
    
    
    42Notes to Consolidated Financial Statements for the Years Ended
December 31, 2008 and December 31, 2007
    
    
    44
  37




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ Weinberg & Company, P.A.

Weinberg & Company, P.A.
 
  38




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DigitalFX International, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 (In thousands, except share data)
 December 31,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    664
    
    
    $
    5,319Accounts receivable
    
    
    52
    
    
    
    50Inventories, net
    
    
    295
    
    
    
    849Prepaid bandwidth charges, affiliate
    
    
    
    
    
    
    51Prepaid expenses and other assets
    
    
    243
    
    
    
    411Deferred income taxes, net
    
    
    
    
    
    
    45Total current assets
    
    
    1,254
    
    
    
    6,725Restricted cash
    
    
    
    
    
    
    2,000Investment in and convertible secured promissory note due from related party
    
    
    
    
    
    
    225Investments, net
    
    
    169
    
    
    
    1,102Assets held for exchange
    
    
    402
    
    
    
    Deferred financing costs
    
    
    100
    
    
    
    961Property and equipment, net of accumulated depreciation and amortization of
$940 and $576, respectively
    
    
    486
    
    
    
    628Deposits, merchant processors
    
    
    609
    
    
    
    789Other assets
    
    
    12
    
    
    
    12Deferred income taxes, net
    
    
    
    
    
    
    1,995Total assets
    
    $
    3,032
    
    
    $
    14,437Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    99
    
    
    $
    383Accrued expenses
    
    
    629
    
    
    
    1,114Accrued commissions
    
    
    1,243
    
    
    
    1,619Convertible notes payable, current
    
    
    50
    
    
    
    5,600Capital lease obligation, current
    
    
    47
    
    
    
    Total current liabilities
    
    
    2,068
    
    
    
    8,716Capital lease obligation
    
    
    81
    
    
    
    Convertible notes payable, net
    
    
    826
    
    
    
    Total liabilities
    
    
    2,975
    
    
    
    8,716Commitments and ContingenciesStockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized,
2,000,000 shares issued and outstanding
    
    
    20
    
    
    
    Common stock, $0.001 par value, 100,000,000 shares authorized, and
31,937,998 and 24,919,710 shares issued and outstanding,
respectively
    
    
    25
    
    
    
    25Additional paid in capital
    
    
    16,982
    
    
    
    12,882Other comprehensive income (loss)
    
    
    8
    
    
    
    (286
    )Accumulated deficit
    
    
    (16,978
    )
    
    
    (6,900
    )Total stockholders equity
    
    
    57
    
    
    
    5,721Total liabilities and stockholders equity
    
    $
    3,032
    
    
    $
    14,437
 See Notes to Consolidated Financial Statements
  39




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DigitalFX International, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 (In thousands, except share and per share data)
 Year Ended December 31,2008
    
    
    2007Revenues
    
    $
    13,446
    
    
    $
    23,511Cost of revenues
    
    
    3,036
    
    
    
    4,121Gross profit
    
    
    10,410
    
    
    
    19,390Commission expenses
    
    
    5,547
    
    
    
    10,117Other operating expenses
    
    
    9,874
    
    
    
    12,577Operating loss
    
    
    (5,011
    )
    
    
    (3,304
    )Other (income) expense:Unrealized loss on investment
    
    
    531
    
    
    
    Unrealized loss on investment in company owned by related party
    
    
    325
    
    
    
    Loss on modification of debt
    
    
    2,528
    
    
    
    Financing costs, net
    
    
    692
    
    
    
    111Other income, net
    
    
    (11
    )
    
    
    (24
    )Other expense, net
    
    
    4,065
    
    
    
    87Loss before provision for income taxes
    
    
    (9,076
    )
    
    
    (3,391
    )Provision for income taxes
    
    
    762
    
    
    
    812Net loss
    
    
    (9,838
    )
    
    
    (2,579
    )Preferred stock dividend
    
    
    240
    
    
    
    Net loss available to common stockholders
    
    $
    (10,078
    )
    
    $
    (2,579
    )Net loss per share available to common stockholders:Basic and fully diluted
    
    $
    (0.39
    )
    
    $
    (0.11
    )Weighted average shares outstanding:Basic and fully diluted
    
    
    25,571,544
    
    
    
    23,952,916
 See Notes to Consolidated Financial Statements
  40




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DigitalFX International, Inc. and Subsidiaries
 
 Consolidated Statements of Stockholders Equity
 (In thousands, except share data)
 Years Ended December 31, 2008 and 2007
 Preferred
    
    
    Common
    
    
    Preferred
    
    
    Common
    
    
    AdditionalPaid-In
    
    
    OtherComprehensive
    
    
    AccumulatedShares
    
    
    Shares
    
    
    Stock
    
    
    Stock
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    TotalBalance, January 1, 2007
    
    
    
    
    
    
    23,280,563
    
    
    $
    
    
    
    $
    23
    
    
    $
    9,403
    
    
    $
    (21
    )
    
    $
    (4,321
    )
    
    $
    5,084Issuance of common stock for services
    
    
    
    
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    186Stock Dividend
    
    
    
    
    
    
    696,429
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    
    
    
    
    713,901
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    
    
    
    
    168,817
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47Fair value of vested options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563
    
    
    
    
    
    
    
    
    
    
    
    563Excess tax benefit related to stock options and warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    904
    
    
    
    
    
    
    
    
    
    
    
    904Fair value adjustment on investment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (273
    )
    
    
    
    
    
    
    (273
    )Fair value of warrants and beneficial conversion feature related to issuance of convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,781
    
    
    
    
    
    
    
    
    
    
    
    1,781Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Net loss for the year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,579
    )
    
    
    (2,579
    )Balance, January 1, 2008
    
    
    
    
    
    
    24,919,710
    
    
    
    
    
    
    
    25
    
    
    
    12,882
    
    
    
    (286
    )
    
    
    (6,900
    )
    
    
    5,721Capital contribution by shareholder on modification of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    
    
    
    
    950Capital contribution by shareholder for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    160Common stock issued on modification of debt
    
    
    
    
    
    
    5,167,343
    
    
    
    
    
    
    
    
    
    
    
    721
    
    
    
    
    
    
    
    
    
    
    
    721Common stock issued for services
    
    
    
    
    
    
    1,825,000
    
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    
    
    
    
    357Preferred stock issued with warrants
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    1,980
    
    
    
    
    
    
    
    
    
    
    
    2,000Beneficial conversion feature on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    (240
    )
    
    
    Exercise of options
    
    
    
    
    
    
    25,945
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Extinguishment of beneficial conversion feature on restructure of convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (370
    )
    
    
    
    
    
    
    
    
    
    
    (370
    )Fair value of vested options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    959Adjustment to tax benefits related to stock options and warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (904
    )
    
    
    
    
    
    
    
    
    
    
    (904
    )Fair value adjustment on investment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    272
    
    
    
    
    
    
    
    272Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Net loss for the year ended December 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,838
    )
    
    
    (9,838
    )Balance, December 31, 2008
    
    
    2,000,000
    
    
    
    31,937,998
    
    
    $
    20
    
    
    $
    25
    
    
    $
    16,982
    
    
    $
    8
    
    
    $
    (16,978
    )
    
    $
    57
 See Notes to Consolidated Financial Statements
  41




---



##### Table of Contents



DigitalFX International, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (In thousands)
 Years ended December 312008
    
    
    2007Operating activities:Net loss
    
    $
    (9,838
    )
    
    $
    (2,579
    )Adjustment to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    364
    
    
    
    319Equity based compensation expense
    
    
    959
    
    
    
    563Deferred income taxes
    
    
    996
    
    
    
    (820
    )Common Stock issued for services
    
    
    357
    
    
    
    186Capital contribution from shareholder for services
    
    
    160
    
    
    
    Unrealized loss on investment
    
    
    531
    
    
    
    175Unrealized loss on investment in company owned by related party
    
    
    325
    
    
    
    Loss on modification of debt
    
    
    2,528
    
    
    
    Amortization of financing costs and debt discount
    
    
    432
    
    
    
    66Changes in assets and liabilities:Accounts receivable
    
    
    (2
    )
    
    
    1Inventory
    
    
    391
    
    
    
    (715
    )Prepaid expenses and other assets
    
    
    160
    
    
    
    (283
    )Accounts payable and accrued expenses
    
    
    (1,104
    )
    
    
    515Due to affiliate
    
    
    
    
    
    
    (187
    )Net cash used in operating activities
    
    
    (3,741
    )
    
    
    (2,759
    )Investing activities:Purchase of investments
    
    
    
    
    
    
    (1,691
    )Purchase of convertible secured promissory note from related party
    
    
    
    
    
    
    (225
    )Acquisition in interest in company owned by related party
    
    
    (100
    )
    
    
    Purchases of property and equipment
    
    
    (72
    )
    
    
    (297
    )Net cash used in investing activities
    
    
    (172
    )
    
    
    (2,213
    )Financing activities:Proceeds from issuance of common stock, net
    
    
    7
    
    
    
    47Proceeds from issuance of preferred stock
    
    
    2,000
    
    
    
    Proceeds from issuance of convertible notes
    
    
    
    
    
    
    4,482Repayment of convertible notes
    
    
    (2,750
    )
    
    
    Repayment of capital lease financing
    
    
    (21
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (764
    )
    
    
    4,529Foreign currency translation
    
    
    22
    
    
    
    8
  42




---



##### Table of Contents



Years ended December 312008
    
    
    2007Change in cash and cash equivalents
    
    
    (4,655
    )
    
    
    (435
    )Cash and cash equivalents, beginning of period
    
    
    5,319
    
    
    
    5,754Cash and cash equivalents, end of period
    
    $
    664
    
    
    $
    5,319Supplemental cash flow information:Cash paid for income taxes
    
    $
    
    
    
    $
    116Cash paid for interest
    
    $
    301
    
    
    $
    Non-Cash Financing and Investing Activities:Reclassification of deposits to fixed assets
    
    $
    
    
    
    $
    373Reclassification of inventory and prepaid expenses to assets held for exchange
    
    $
    402
    
    
    $
    Repayment of convertible notes from restricted cash
    
    $
    2,000
    
    
    $
    Book value of stock issued in exchange for reduction in principal balance of convertible notes
    
    $
    600
    
    
    $
    Book value of investments exchanged for reduction in principal balance of convertible notes
    
    $
    800
    
    
    $
    Reduction of tax benefit related to stock options and warrants
    
    $
    904
    
    
    $
    904Tax effect of loss on investment
    
    $
    140
    
    
    $
    Unrealized loss on investment, net of tax
    
    $
    
    
    
    $
    273Fair value of warrants issued in conjunction with convertible debt
    
    $
    
    
    
    $
    1,411Beneficial conversion feature related to convertible debt
    
    $
    
    
    
    $
    370Capital lease financing
    
    $
    150
    
    
    $
    
 See Notes to Consolidated Financial Statements
  43




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Note 1. The Company and Basis of Presentation
 Company
 www.helloWorld.com
  www.vmdirect.com
  Merger and Stock Split
  Change in Management and Directors
   44




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  Going Concern
   Note 2. Accounting Policies
 Principles of consolidation
  Use of Estimates and Assumptions
   45




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Cash and Cash Equivalents
    Deferred Financing Costs
  Inventories
  Investments
   46




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  Fair Value of Financial Instruments
        Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalInvestments, at fair value
    
    $
    169
    
    
    $
    
    
    
    $
    
    
    
    $
    169Assets held for exchange
    
    $
    
    
    
    $
    
    
    
    $
    402
    
    
    $
    402
  Property and Equipment
   47




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Impairment of Long-Lived Assets
  Revenues
  Affiliate Business Packages
     48




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Monthly Subscriptions
   Apparel and Merchandise
  Electronic Components
  Conferences and Events
  Shipping and Handling Fees
  Product Returns and Cancellations
   49




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
   Stock-Based Compensation
  Valuation Assumptions
  December 31,
    
    
    December 31,2008
    
    
    2007Dividend yield
    
    
    -0-
    
    
    
    -0-Risk-free interest rate
    
    
    1.50%  4.64%
    
    
    
    4.50%  4.64%Expected volatility
    
    
    42.00%  101.54%
    
    
    
    42.00%  68.38%Expected life of options
    
    
    5 years
    
    
    
    5 years
  50




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Earnings (Loss) Per Share
    Member Incentives
  Income Taxes
   Foreign Currency Translation
   51




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Comprehensive Income (Loss)
  Years ended December 31,2008
    
    
    2007Net loss
    
    $
    (9,838
    )
    
    $
    (2,579
    )Foreign currency translation
    
    
    22
    
    
    
    8Unrealized
loss on investment, (net of taxes of $140)
    
    
    272
    
    
    
    (273
    )Comprehensive loss
    
    $
    (9,544
    )
    
    $
    (2,844
    )
 Recent Accounting Pronouncements
     52




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
   Note 3. Product, Customer and Geographic Information
    December 31,
    
    
    December 31,2008
    
    
    2007Revenue:Subscription fees for access plans and
administrative tools
    
    $
    10,810
    
    
    $
    17,620Affiliate business packages
    
    
    1,897
    
    
    
    4,128Upgrades to business packages
    
    
    330
    
    
    
    1,074Merchandise and Shipping fees
    
    
    409
    
    
    
    419Event and Conference revenue
    
    
    
    
    
    
    270Total Revenue
    
    $
    13,446
    
    
    $
    23,511
  53




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  December 31,
    
    
    December 31,2008
    
    
    2007United States, Canada & Mexico
    
    
    86
    %
    
    
    90
    %United Kingdom
    
    
    3
    %
    
    
    2
    %Australia/New Zealand
    
    
    6
    %
    
    
    6
    %Europe
    
    
    5
    %
    
    
    2
    %100
    %
    
    
    100
    %
   December 31,
    
    
    December 31,2008
    
    
    2007Affiliates
    
    
    83
    %
    
    
    90
    %Retail and other customers
    
    
    17
    %
    
    
    10
    %100
    %
    
    
    100
    %
 Note 4. Inventories
  December 31,
    
    
    December 31,2008
    
    
    2007Kits, cameras and merchandise
    
    $
    361
    
    
    $
    615Electronic parts and components
    
    
    
    
    
    
    250Less: Allowance for obsolete inventory
    
    
    (66
    )
    
    
    (16
    )$
    295
    
    
    $
    849
 Note 5. Investment In and Convertible Secured Promissory Note due from Related Party
   54




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
     Note 6. Investments
  December 31, 2008
    
    
    December 31, 2007Unrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedCost
    
    
    Loss
    
    
    Net
    
    
    Cost
    
    
    Loss
    
    
    NetFusion Telecommunications
Intl Inc.
    
    $
    700
    
    
    $
    (531
    )
    
    $
    169
    
    
    $
    700
    
    
    $
    (414
    )
    
    $
    286CJ Vision
Enterprises, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    
    
    
    
    816Transparensee Systems, Inc.
    
    
    175
    
    
    
    (175
    )
    
    
    
    
    
    
    175
    
    
    
    (175
    )
    
    
    $
    875
    
    
    $
    (706
    )
    
    $
    169
    
    
    $
    1,691
    
    
    $
    (589
    )
    
    $
    1,102
  55




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Fusion Telecommunications Intl Inc.
    CJ Vision Enterprises, Inc./Pet Express Supply, Inc./WoozyFly, Inc.
      56




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
   Transparensee Systems, Inc.
    Note 7. Assets Held for Exchange
    57




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
   Note 8. Property and Equipment
  December 31,
    
    
    December 31,2008
    
    
    2007Furniture and fixtures
    
    $
    47
    
    
    $
    47Computers and equipment
    
    
    441
    
    
    
    441Capital lease equipment
    
    
    149
    
    
    
    Purchased software
    
    
    789
    
    
    
    7161,426
    
    
    
    1,204Less: accumulated depreciation and amortization
    
    
    (940
    )
    
    
    (576
    )$
    486
    
    
    $
    628
  Note 9. Convertible Notes Payable
  Loan
    
    
    Loan
    
    
    Current
    
    
    NoncurrentBalance
    
    
    discount
    
    
    portion
    
    
    PortionAmended and Restated Notes
    
    $
    580
    
    
    $
    (63
    )
    
    $
    44
    
    
    $
    473Amended and Restated
Notes, related party
    
    
    359
    
    
    
    
    
    
    
    6
    
    
    
    353$
    939
    
    
    $
    (63
    )
    
    $
    50
    
    
    $
    826
  Loan
    
    
    Loan
    
    
    Current
    
    
    NoncurrentBalance
    
    
    discount
    
    
    portion
    
    
    PortionConvertible Notes Payable
    
    $
    7,000
    
    
    $
    (1,400
    )
    
    $
    5,600
    
    
    $
    $
    7,000
    
    
    $
    (1,400
    )
    
    $
    5,600
    
    
    $
    
  58




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  First Debt Restructuring
     59




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
       60




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
       61




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Second Debt Restructuring
 The Debt Reduction:
 The Forbearance:
 The Richard Kall Note
  62




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 Terms of the New Notes
     63




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
    Year ended December 31, 2009
    
    $
    50Year ended December 31, 2010
    
    
    889Totals
    
    $
    939
 Note 10. Equity Transactions
 Sale of Common Stock
    64




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  Authorization and Issuance of Series A Preferred Stock
   The Richard Kall Investment
   65




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  Other
     Note 11. Stock Options and Warrants
 Options
     66




---



##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
   Range of
    
    
    Weighted AverageShares
    
    
    Exercise Prices
    
    
    Exercise PriceOutstanding at January 1, 2007
    
    
    1,178
    
    
    $
    0.26-$7.75
    
    
    $
    2.12Granted
    
    
    557
    
    
    $
    3.08-$4.20
    
    
    $
    3.73Exercised
    
    
    (169
    )
    
    $
    0.26-$0.33
    
    
    $
    0.27Cancelled
    
    
    (192
    )
    
    $
    0.26-$7.75
    
    
    $
    1.10Outstanding at December 31, 2007
    
    
    1,374
    
    
    $
    0.26-$7.75
    
    
    $
    3.14Granted
    
    
    949
    
    
    $
    0.55- $1.21
    
    
    $
    1.09Exercised
    
    
    (26
    )
    
    $
    0.26-$0.33
    
    
    $
    0.29Cancelled
    
    
    (1,467
    )
    
    $
    0.26-$7.75
    
    
    $
    3.12Outstanding at December 31, 2008
    
    
    830
    
    
    $
    0.26-$1.21
    
    
    $
    0.91Exercisable at December 31, 2008
    
    
    602
    
    
    $
    0.26-$1.21
    
    
    $
    0.83
  Weighted AverageWeighted
    
    
    RemainingAverage
    
    
    Contractual Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    (months)
    
    
    Intrinsic ValueShares Granted
Quarter Ended
December 31, 2005
    
    
    139
    
    
    $
    0.26
    
    
    $
    0.26
    
    
    
    4
    
    
    
    Shares Granted
Quarter Ended 
June
30, 2008
    
    
    690
    
    
    $
    0.55$1.21
    
    
    $
    1.04
    
    
    
    95
    
    
    
    Outstanding at
December 31, 2008
    
    
    830
    
    
    $
    0.26$1.21
    
    
    $
    0.91
    
    
    
    99
    
    
    $
    Exercisable at
December 31, 2008
    
    
    602
    
    
    $
    0.26$1.21
    
    
    $
    0.83
    
    
    
    96
    
    
    
    
  67




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  Warrants
 Warrants issued under Individual Stock Purchase Warrant Agreements
  Warrants issued in connection with Convertible Notes Payable (see Note 9)
      68




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  Range of
    
    
    Weighted AverageShares
    
    
    Exercise Prices
    
    
    Exercise PriceOutstanding at January 1, 2007
    
    
    1,057
    
    
    
    0.26
    
    
    
    0.26Granted
    
    
    1,111
    
    
    
    2.93
    
    
    
    2.93Exercised
    
    
    (768
    )
    
    
    0.26
    
    
    
    0.26Cancelled
    
    
    
    
    
    
    
    
    
    
    Outstanding at December 31, 2007
    
    
    1,400
    
    
    $
    2.38
    
    
    $
    2.38Granted
    
    
    750
    
    
    $
    0.240.959
    
    
    $
    0.33Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    (875
    )
    
    $
    2.93
    
    
    $
    2.93Outstanding at December 31, 2008
    
    
    1,275
    
    
    $
    0.26$0.959
    
    
    $
    0.79Exercisable at December 31, 2008
    
    
    1,275
    
    
    $
    0.26$0.959
    
    
    $
    0.79
  Weighted AverageRemainingContractual Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    (months)
    
    
    Intrinsic ValueOutstanding at December 31, 2008
    
    
    1,275
    
    
    $
    0.26$0.959
    
    
    
    43
    
    
    $
    Exercisable at December 31, 2008
    
    
    1,275
    
    
    $
    0.26$0.959
    
    
    
    43
    
    
    $
    
  Note 12. Related Parties
 RazorStream, LLC
   69




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  st th
  Other Related Party Transactions
   70




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
     Note 13. Income Taxes
 Income Taxes
  December 31, 2008
    
    
    December 31, 2007Current tax provision   federal
    
    $
    (233
    )
    
    $
    912 foreign
    
    
    
    
    
    
    Deferred tax provision- federal
    
    
    965
    
    
    
    (1,693
    ) foreign
    
    
    30
    
    
    
    (31
    )Income tax provision (benefit)
    
    $
    762
    
    
    $
    (812
    )
  71




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
  December 31, 2008
    
    
    December 31, 2007Income before income tax provision
    
    $
    (9,076
    )
    
    $
    (3,391
    )Expected tax (federal statutory
rate 34%)
    
    
    (3,086
    )
    
    
    (1,152
    )Permanent differences
    
    
    387
    
    
    
    194Foreign tax rate difference
    
    
    25
    
    
    
    94Change in valuation allowance
    
    
    3,437
    
    
    
    41Other differences
    
    
    (1
    )
    
    
    11Income tax provision
    
    $
    762
    
    
    $
    (812
    )
   December 31, 2008
    
    
    December 31, 2007Stock based compensation
    
    $
    19
    
    
    $
    19Depreciation and amortization
    
    
    14
    
    
    
    31Accrued expenses
    
    
    135
    
    
    
    Deferred financing costs
    
    
    273
    
    
    
    Impairment on investments
    
    
    356
    
    
    
    140Net operating loss carryforward
    
    
    2,634
    
    
    
    1,845Other
    
    
    47
    
    
    
    46Valuation allowance
    
    
    (3,478
    )
    
    
    (41
    )Net deferred income tax asset
    
    $
    
    
    
    $
    2,040
   72




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
 an interpretation of
FASB Statement No. 109, Accounting for Income Taxes
   Note 14. Commitments and Contingencies
 Legal Proceedings
    73




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##### Table of Contents



Digital FX International, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
(In Thousands, Except for Share and Per Share Data)
Years Ended December 31, 2008 and 2007
   Mr. Mickey Elfenbein served as the Companys Chief Operating Officer from September 17, 2007 through October 17,
2008. Mr. Elfenbein was party to an employment agreement with the Company pursuant to which Mr. Elfenbein received
base compensation at an annual rate of no less than $250. The employment agreement had a term of three years subject
to automatic one-year renewals unless either party provided 120 days prior written notice to the other of non-renewal.
If the Company were to terminate Mr. Elfenbeins employment for any reason other than for cause (as defined in the
employment agreement), his death or his permanent disability, or if Mr. Elfenbein terminates his employment due to a
constructive termination (as defined in the employment agreement), the Company is required to pay Mr. Elfenbein his
then current base salary for a period of 12 months, and to continue his benefits (covering Mr. Elfenbein and his
family) for the same period, unless Mr. Elfenbein commences other employment pursuant to which he receives comparable
benefits. On October 17, 2008, the Company terminated its relationship with Mr. Elfenbein, and the Company continues
to negotiate the terms of Mr. Elfenbeins separation. On March 14, 2009 the Company received an arbitration notice and
believes the matter will be settled through arbitration. The Company believes that it had cause to terminate Mr.
Elfenbein, and that no further amounts are due or payable to him, and there is no accrual for severance or termination
claims necessary as of December 31, 2008. The AttainResponse Option On December 17, 2008, the Company acquired an option (the Option) to purchase up to 48% of the outstanding
equity securities or other interests (the Option Interest) in AttainResponse LLC, a Colorado based company (AttainResponse) which engages in the development and management of content delivery applications to include text and video
email hosting, email marketing and streaming video hosting, currently marketed under the brand F5. The Option was acquired from the majority members of AttainResponse who together own and control over 70% of the
company. The Option can be exercised by the Company during a period of 12 months starting December 17, 2008 (the
Option Term), through the Companys issuance of an aggregate of 4,375,000 shares of the Companys common stock to the
AttainResponses members participating in the Option. Upon exercise of the Option, the Company also agreed to assume
up to $119 of debt owed by AttainResponse. The exercise of the Option is conditioned upon the completion of additional research and development tasks and a
seamless integration of AttainResponses technology with the Companys technology, as well as the entry into the
license and service agreement. If the monthly revenues of the Company reach $1,500 during the Option Term, the Company
will be obligated to exercise the Option. Note 15. Subsequent Events In March 2009, Richard Kall advanced the Company $200 for operating purposes. The terms of this financial
instrument are currently being negotiated.  74




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##### Table of Contents



ITEM 9.
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
  
 ITEM 9A. Controls and Procedures
 Disclosure Controls and Procedures
  Financial Statements
  Internal Control over Financial Reporting
     75




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##### Table of Contents



ITEM 9B. Other Information
   76




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##### Table of Contents



PART III
 
 ITEM 10. Directors, Executive Officers and Corporate Governance.
  Name
    
    Age
    
    PositionRichard Kall (1)
    
    
    68
    
    
    Chairman of the Board & Chief Executive OfficerAbraham Sofer(2)
    
    
    54
    
    
    PresidentTracy Sperry(2)
    
    
    39
    
    
    Chief Financial Officer & SecretarySusan R. Hantman(3)
    
    
    62
    
    
    DirectorDavid J. Weaver(4)
    
    
    58
    
    
    Director
 (1)
    
    Mr. Kall was elected as a director, the Chairman of our board of directors and
our Chief Executive Officer on October 15, 2008.(2)
    
    These persons were appointed to their respective positions effective October 17, 2008.(3)
    
    Ms. Hantman was elected as a director on October 17, 2008.(4)
    
    Mr. Weaver was elected as a director on July 23, 2008. Richard Kall
 Abraham Sofer
 Tracy Sperry
 Susan R. Hantman
  77




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##### Table of Contents



David J. Weaver
  Identification of Audit Committee
   78




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##### Table of Contents



Audit Committee Financial Expert
  Code of Ethical Conduct
  Section 16(a) Beneficial Ownership Reporting Compliance
   79




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##### Table of Contents



ITEM 11. Executive Compensation.
 Summary Compensation Table
  All OtherStock
    
    
    Option
    
    
    Compen-Salary
    
    
    Bonus
    
    
    Awards
    
    
    Awards
    
    
    sation
    
    
    TotalName and Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Richard Kall.(1)
    
    
    2008
    
    
    
    124,996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,531Chairman and Chief Executive Officer
    
    
    2007
    
    
    
    125,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Craig Ellins.(2)
    
    
    2008
    
    
    
    97,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,260Former Chairman, Chief Executive
    
    
    2007
    
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Officer and PresidentAbraham Sofer.(3)
    
    
    2008
    
    
    
    101,346
    
    
    
    
    
    
    
    4,760
    
    
    
    2,518
    
    
    
    10,000
    
    
    
    118,624President
    
    
    2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tracy Sperry.(4)
    
    
    2008
    
    
    
    122,385
    
    
    
    
    
    
    
    5,100
    
    
    
    6,779
    
    
    
    
    
    
    
    134,264Chief Financial Officer and Secretary
    
    
    2007
    
    
    
    104,385
    
    
    
    
    
    
    
    
    
    
    
    4,967
    
    
    
    Mickey Elfenbein.(5)
    
    
    2008
    
    
    
    193,939
    
    
    
    
    
    
    
    10,200
    
    
    
    661,774
    
    
    
    32,638
    
    
    
    898,551Former Chief
Operating Officer and Secretary
    
    
    2007
    
    
    
    59,119
    
    
    
    6,000
    
    
    
    
    
    
    
    76,691
    
    
    
    
    
    
    
    141,810
 (1)
    
    Mr. Kall became our Chairman and Chief Executive Officer on October 15, 2008. Mr. Kalls
current annual salary is $200,000 and he may also receive a discretionary bonus as determined by
the compensation committee of our board of directors. Mr. Kall does not have an employment
agreement with us. Mr. Kalls 2008 includes salary of $92,465 related to 2008 services rendered
that will be paid out in 2009.(2)
    
    Mr. Ellins served as our Chairman, Chief Executive Officer and President from June 15,
2006 through October 15, 2008, when he resigned as our Chairman of the Board, Chief Executive
Officer and President, and from all other officer positions held with our company and each of our
subsidiaries. Mr. Ellins annual salary was $100,000 and he was eligible to receive a
discretionary bonus as determined by the compensation committee of our board of directors. Mr.
Ellins did not have an employment agreement with us. On October 15, 2008, Mr. Ellins entered into
a Separation and Release Agreement dated October 15, 2008 with us pursuant to which we paid to Mr.
Ellins deferred compensation accrued for the third quarter of fiscal 2008, and the parties agreed
to mutual releases of existing claims.(3)
    
    Mr. Sofer became our President on October 17, 2008. Mr. Sofer previously served as our
General Counsel from May 2008 through October 17, 2008. In connection with his employment by us
Mr. Sofer was granted an option to purchase 50,000 shares of our common stock at a per share price
of $1.21. The other material terms of the option are discussed below. The fair value of the
options was estimated on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for the year ended December 31, 2008: risk-free interest
rate ranging from 1.50% to 4.64%; expected dividend yield of zero percent; expected option life of
five years; and current volatility ranging from 42.00% to 101.54%. Mr. Sofer was also granted
14,000 fully-vested shares of restricted stock on October 13, 2008, at a per share price of $0.34.
The fair value of the shares of restricted stock was based on the closing sale price of our common
stock on the date of grant. Mr. Sofer is party to an employment agreement with us pursuant to
which Mr. Sofer receives base compensation at an annual rate of $170,000. The employment agreement
has an initial term of one year subject to two automatic one-year renewals unless the employment
agreement terminates for Mr. Sofers death or disability, is terminated by us for cause (as defined
in the employment agreement), or is terminated by either party upon 30 days prior written notice.
Mr. Sofer is entitled to reimbursement of expenses, to 2 weeks paid vacation (increasing to 3 weeks
in the third year of the term) and to participate in our stock incentive plan and regular health and other benefit
plans. We also agreed to pay Mr. Sofers annual fees to the State Bar of Nevada, the State Bar of
New York and the Bar of the District of Columbia, along with fees for continuing legal education
courses necessary to obtain his license to practice law in Nevada. Additionally, we paid Mr.
Sofers relocation expenses to Nevada in the amount of $10,000, which amount was reflected as other
compensation in the summary compensation table. Mr. Sofer agreed not to compete with us or to
solicit our employees or contractors for a period of 2 years after his employment with us. If we
terminate Mr. Sofers employment for any reason other than for cause, his death or his permanent
disability, or if Mr. Sofer terminates his employment due to a constructive termination (as defined
in the employment agreement), we are required to pay Mr. Sofer his then current base salary for a
period of 3 months.  80




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##### Table of Contents



(4)
    
    Ms. Sperry became our Chief Financial Officer and Secretary on October 17, 2008. Ms
Sperry previously served as our Acting Chief Financial Officer from February 2008 through October
17, 2008, and as our Director of Finance from May 2006 through February 2008. Mr. Sperry was
granted an option to purchase 10,000 shares of our common stock at a per share price of $3.50, and
an option to purchase 5,000 shares of our common stock at a per share price of $3.65. On May 13,
2008, those options were cancelled and we issued Ms. Sperry two new options to purchase 15,000
shares of common stock at an exercise price of $1.21 with the same vesting provisions as the
cancelled options, each terminating on May 12, 2018. The other material terms of these options are
discussed below. The fair value of these options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions for the year
ended December 31, 2007: risk-free interest rate ranging from 4.5% to 4.64%; expected dividend
yield of zero percent; expected option life of five years; and current volatility ranging from
42.00% to 68.38%; and the compensation expense for fiscal 2008 includes an additional charge in
connection with the repricing as required by generally accepted accounting principles. On May 13,
2008, we also issued to Ms. Sperry a new option to purchase 10,000 shares of common stock at an
exercise price of $1.21, terminating on May 12, 2018. The other material terms of these options
are discussed below. The fair value of these options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions for the year
ended December 31, 2008: risk-free interest rate ranging from 1.50% to 4.64%; expected dividend
yield of zero percent; expected option life of five years; and current volatility ranging from
42.00% to 101.54%. Ms. Sperry was also granted 15,000 fully-vested shares of restricted stock on
October 13, 2008, at a per share price of $0.34. The fair value of the shares of restricted stock
was based on the closing sale price of our common stock on the date of grant.(5)
    
    Mr. Elfenbein served as our Chief Operating Officer from September 17, 2007 through
October 17, 2008 and served as our Secretary from February 1, 2008 through October 17, 2008. Mr.
Elfenbein was granted an option to purchase 300,000 shares of our common stock at a per share price
of $3.80. On May 13, 2008, those options were cancelled and we issued Mr. Elfenbein two new
options to purchase 125,000 shares of common stock at an exercise price of $1.21 and 175,000 shares
of common stock at an exercise price of $0.55 with the same vesting provisions as the cancelled
options, and each terminating on May 12, 2018. The other material terms of these options are
discussed below. The fair value of these options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions for the year
ended December 31, 2007: risk-free interest rate ranging from 4.5% to 4.64%; expected dividend
yield of zero percent; expected option life of five years; and current volatility ranging from
42.00% to 68.38%; and the compensation expense for fiscal 2008 includes an additional charge in
connection with the repricing as required by generally accepted accounting principles. Mr.
Elfenbein was also granted 30,000 fully-vested shares of restricted stock on October 13, 2008, at a
per share price of $0.34. The fair value of the shares of restricted stock was based on the
closing sale price of our common stock on the date of grant. Mr. Elfenbein was party to an
employment agreement with us pursuant to which Mr. Elfenbein received base compensation at an
annual rate of no less than $250,000. The employment agreement had a term of three years subject
to automatic one-year renewals unless either party provided 120 days prior written notice to the
other of non-renewal. Mr. Elfenbein was also entitled to participate in our bonus pool at the
discretion of the compensation committee of our board of directors, and was entitled to three weeks
paid vacation and reimbursement of expenses, including a non-accountable amount of $750 per month
to cover additional expenses. Additionally, Mr. Elfenbein agreed to relocate from his current
residence to Las Vegas, Nevada and in connection with such relocation, we paid Mr. Elfenbein
$32,638 to be applied to costs related to his relocation, which amount was reflected as other
compensation in the summary compensation table. If we terminate Mr. Elfenbeins employment for any
reason other than for cause (as defined in the employment agreement), his death or his permanent
disability, or if Mr. Elfenbein terminates his employment due to a constructive termination (as
defined in the employment agreement), we are required to pay Mr. Elfenbein his then current base
salary for a period of 12 months, and to continue his benefits (covering Mr. Elfenbein and his family) for
the same period, unless Mr. Elfenbein commences other employment pursuant to which he receives
comparable benefits. If Mr. Elfenbeins employment is terminated for any reason other than for
cause, Mr. Elfenbeins options fully vest. On October 17, 2008, we terminated our relationship
with Mr. Elfenbein. We are currently investigating several incidents relating to Mr. Elfenbeins
employment with us. On March 14, 2009, we received an
arbitration notice and believe the matter will be settled through
arbitration. We believe that we had cause to terminate Mr. Elfenbein,
and that no further amounts are due or payable to him.  81




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End Table
  Number of
    
    
    Number ofSecurities
    
    
    SecuritiesUnderlying
    
    
    UnderlyingUnexercised
    
    
    UnexercisedOptions (#)
    
    
    Options (#)
    
    
    Option Exercise
    
    
    Option ExpirationName
    
    Exercisable
    
    
    Unexercisable
    
    
    Price ($)
    
    
    DateRichard Kall
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Craig Ellins
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Abraham Sofer (1)
    
    
    
    
    
    
    50,000
    
    
    
    1.21
    
    
    
    5/12/2018Tracy Sperry (2)
    
    
    5,208
    
    
    
    4,792
    
    
    
    1.21
    
    
    
    5/12/20181,875
    
    
    
    3,125
    
    
    
    1.21
    
    
    
    5/12/2018
    
    
    
    10,000
    
    
    
    1.21
    
    
    
    5/12/2018Mickey
Elfenbein (2)
    
    
    125,000
    
    
    
    
    
    
    
    1.21
    
    
    
    4/17/2009175,000
    
    
    
    
    
    
    
    0.55
    
    
    
    4/17/2009
 (1)
    
    The options entitle Mr. Sofer to purchase an aggregate of 50,000 shares of common stock
at a per share exercise price of $1.21. These options, granted on May 13, 2008, vest over
four years as follows: 25% on the first anniversary of the date of grant, and the remainder
monthly thereafter on a ratable basis for 36 months.(2)
    
    The options, granted on May 13, 2008, entitle Ms. Sperry to purchase an aggregate of
25,000 shares of common stock at a per share exercise price of $1.21. Options to purchase
10,000 shares of common stock vest as follows: 37.5% on the date of grant and 2.083%
thereafter on a monthly basis commencing June 1, 2008. Options to purchase 5,000 shares of
common stock vest as follows: 25% on June 29, 2008, then monthly thereafter on a ratable
basis for 36 months. Options to purchase 10,000 shares of common stock vest as follows:
25% on the first anniversary of the date of grant, and the remainder monthly thereafter on
a ratable basis for 36 months.(3)
    
    The options, granted on May 13, 2008, entitle Mr. Elfenbein to purchase 125,000 shares
of common stock at a per share exercise price of $1.21, and 175,000 shares of common stock
at a per share exercise price of $0.55. Both options vested as follows: 33.4% on September
17, 2008, and the remainder yearly thereafter on a ratable basis for two years. Both options fully vested
on October 17, 2008, upon the termination of our relationship with Mr. Elfenbein.  82




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##### Table of Contents



Director Compensation
  Fees Earned orPaid in Cash
    
    
    Stock Awards
    
    
    Option Awards
    
    
    TotalName
    
    ($)
    
    
    ($)(1)
    
    
    ($)(2)
    
    
    ($)Susan R. Hantman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    David J. Weaver (3)
    
    
    
    
    
    
    3,400
    
    
    
    
    
    
    
    3,400Emanuel Gerard (4)
    
    
    11,500
    
    
    
    
    
    
    
    4,703
    
    
    
    16,203Jerry Haleva (5)
    
    
    15,000
    
    
    
    10,200
    
    
    
    7,717
    
    
    
    32,917Kevin Keating (6)
    
    
    15,500
    
    
    
    10,200
    
    
    
    7,717
    
    
    
    33,417
 (1)
    
    The fair value of stock awards is based on the closing price of the common
stock on the date of the award grant.(2)
    
    The fair value of options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions for
the year ended December 31, 2007: grant date fair value of $3.45  $4.20; risk-free
interest rate ranging from 4.5% to 4.64%; expected dividend yield of zero percent;
expected option life of five years; and current volatility ranging from 42.00% to
68.38%.(3)
    
    Mr. Weaver received an award of 10,000 fully-vested shares of restricted stock
on October 13, 2008, at a per share price of $0.34 in connection with services rendered
as a director. As of December 31, 2008, Mr. Weaver owned 10,000 shares of common stock
issued pursuant to previously described award.(4)
    
    Prior to the termination of his term as a director on July 23, 2008, Mr. Gerard
held options to purchase 30,000 shares of our common stock at a per share price of
$3.08. On May 13, 2008, those options were cancelled and we issued Mr. Gerard a new
option to purchase 30,000 shares of common stock at an exercise price of $1.21 with the
same vesting provisions as the cancelled option, terminating on May 12, 2018. The
option vested 25% at the date of grant and 25% on each anniversary of September 21,
2007 for a three-year period. All of Mr. Gerards options terminated on October 23,
2008 and Mr. Gerard held no options to purchase common stock as of December 31, 2008.(5)
    
    Prior to his resignation as a director on October 13, 2008, Mr. Haleva held
options to purchase 30,000 shares of our common stock at a per share price of $4.20.
On May 13, 2008, those options were cancelled and we issued Mr. Haleva a new option to
purchase 30,000 shares of common stock at an exercise price of $1.21 with the same
vesting provisions as the cancelled option, terminating on May 12, 2018. The option
vested 25% at the date of grant and 25% on each anniversary of April 27, 2007 for a
three-year period. Mr. Haleva also received an award of 45,000 fully-vested shares of
restricted stock on October 13, 2008, at a per share price of $0.34 in connection with
services rendered as a director. As of December 31, 2008, Mr. Haleva held options to
purchase 15,000 shares of common stock, with such options expiring January 13, 2009.(6)
    
    Prior to his resignation as a director on October 13, 2008, Mr. Keating held
options to purchase 30,000 shares of our common stock at a per share price of $4.20.
On May 13, 2008, those options were cancelled and we issued Mr. Keating a new option to
purchase 30,000 shares of common stock at an exercise price of $1.21 with the same
vesting provisions as the cancelled option, terminating on May 12, 2018. The option
vested 25% at the date of grant and 25% on each anniversary of April 27, 2007 for a
three-year period. Mr. Keating also received an award of 45,000 fully-vested shares of
restricted stock on October 13, 2008, at a per share price of $0.34 in connection with services
rendered as a director. As of December 31, 2008, Mr. Keating held options to purchase
15,000 shares of common stock, with such options expiring January 13, 2009.  83




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
    
    quarterly cash retainer of $2,500;
 
    
    in person attendance fee of $1,000; and
 
    
    telephonic attendance fee of $500.
 
 ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
    84




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Shares Beneficially OwnedName of Beneficial Owner (1)
    
    Number
    
    
    Percent of ClassRichard Kall (2)
    
    
    16,866,637
    
    
    
    52.8
    %Craig Ellins
    
    
    2,500
    
    
    
    *Abraham Sofer (3)
    
    
    26,500
    
    
    
    *Tracy Sperry (4)
    
    
    26,042
    
    
    
    *Mickey Elfenbein (5)
    
    
    330,500
    
    
    
    1.0
    %Susan R. Hantman
    
    
    
    
    
    
    David J. Weaver
    
    
    10,000
    
    
    
    *All Executive Officers and Directors as a Group (7 persons)(6)
    
    
    17,262,179
    
    
    
    53.5
    %5% ShareholdersVM Investors, LLC (7)
    
    
    16,108,169
    
    
    
    50.4
    %Portside Growth and Opportunity Fund (8)c/o Ramius LLC599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %Ramius LLC (8)599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %C4S & CO LLC (8)599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %Peter A. Cohen (8)599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %Mrogan B. Stark (8)599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %Thomas W. Strauss (8)599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %Jeffrey M. Solomon (8)599 Lexington Avenue, 20th Floor, New York, NY 10022
    
    
    6,550,402
    
    
    
    19.1
    %Highbridge International LLC (9)c/o Highbridge Capital Management, LLC9 West 57th Street, 27th Floor, New York, NY 10019
    
    
    1,978,381
    
    
    
    6.1
    %
 *
    
    Less than 1%.1.
    
    Unless otherwise stated, the address is c/o DigitalFX International,
Inc., 3035 East Patrick Lane, Suite 9, Las Vegas, Nevada 89120.2.
    
    Consists of 758,468 shares of common stock held directly and 16,108,169
shares of common stock held by VM Investors, LLC. Mr. Kall, as the manager of VM
Investors, LLC, may be deemed to beneficially own the shares of common stock held
by VM Investors, LLC but disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest therein.3.
    
    Includes of 12,500 shares of common stock that may be acquired from us
within 60 days of March 19, 2009 upon the exercise of outstanding stock options.4.
    
    Includes of 11,042 shares of common stock that may be acquired from us
within 60 days of March 19, 2009 upon the exercise of outstanding stock options.  85




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5.
    
    Includes of 300,000 shares of common stock that may be acquired from us
within 60 days of March 19, 2009 upon the exercise of outstanding stock options.6.
    
    Includes 323,542 shares of common stock that may be acquired from us
within 60 days of March 19, 2009 upon the exercise of outstanding stock options.7.
    
    Richard Kall, as the manager of VM Investors, LLC, has voting control
and exercises investment discretion over the securities held by VM Investors, LLC,
and may be deemed to beneficially own the shares of common stock held by VM
Investors, LLC. Mr. Kall disclaims such beneficial ownership except to the extent
of his pecuniary interest therein.8.
    
    Includes 1,804,503 shares of common stock issuable upon the conversion
of a Second Amended and Restated Senior Secured Convertible Note and 471,060 shares
of common stock issuable upon the exercise of an Amended and Restated Warrant.
Portside Growth and Opportunity Fund (Portside) may be deemed to beneficially own
the shares disclosed in the table above. Ramius LLC (Ramius) as the investment
adviser of Portside, has voting control and investment discretion over securities
held by Portside, and may be deemed to beneficially own the shares of common stock
beneficially owned by Portside. Ramius Capital disclaims beneficial ownership of
the shares held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss
and Jeffrey M. Solomon are the sole managing members of C4S& Co., LLC, the sole
managing member of Ramius Capital. As a result, C4S & Co., LLC, and Messrs. Cohen,
Stark, Strauss and Solomon may be considered beneficial owners of any shares deemed
to be beneficially owned by Portside but disclaim beneficial ownership of these
shares.9.
    
    Includes 541,351 shares of common stock issuable upon the conversion of
a Second Amended and Restated Senior Secured Convertible Note and 141,318 shares of
common stock issuable upon the exercise of an Amended and Restated Warrant.
Highbridge Capital Management, LLC is the trading manager of Highbridge
International LLC and has voting control and investment discretion over the
securities held by Highbridge International LLC. Glenn Dubin and Henry Swieca
control Highbridge Capital Management, LLC and have voting control and investment
discretion over the securities held by Highbridge International LLC. Each of
Highbridge Capital Management, LLC, Glenn Dubin and Henry Swieca disclaims
beneficial ownership of the securities held by Highbridge International LLC.  Shares Beneficially OwnedName of Beneficial Owner (1)
    
    Number
    
    
    Percent of ClassRichard Kall(2)
    
    
    3,000,000
    
    
    
    100.0
    %
 1.
    
    Unless otherwise stated, the address is c/o DigitalFX International,
Inc., 3035 East Patrick Lane, Suite 9, Las Vegas, Nevada 89120.  86




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Changes in Control
  Equity Compensation Plan Information
  Number of securitiesWeighted-average
    
    
    remaining available forNumber of securities to
    
    
    exercise price of
    
    
    future issuance underbe issued upon exercise
    
    
    outstanding
    
    
    equity compensation plansof outstanding options,
    
    
    options, warrants
    
    
    (excluding securitieswarrants and rights
    
    
    and rights
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    829,755
    (1)
    
    $
    0.91
    
    
    
    2,484,750Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    829,755
    
    
    $
    0.91
    
    
    
    2,484,750
 (1)
    
    Includes options originally issued by VMdirect and assumed by us which currently entitle
the holders thereof to purchase shares of our common stock as follows: an aggregate of 139,105
shares at a per share exercise price of $0.26 expiring on December 31, 2015. 2006 Stock Incentive Plan
    87




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ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
 Related Party Transactions
  
    
    in which the amount involved exceeds the lesser of $120,000 or one percent of
the average of our total assets at year-end for the last two completed fiscal
years; and
 
    
    in which any director, executive officer, other shareholder of more than 5% of
our common stock or any member of their immediate family had or will have a direct
or indirect material interest.
  88




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st th
    89




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90




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Director Independence
  
 ITEM 14. Principal Accounting Fees and Services.
 Audit Fees
  Audit-Related Fees
    91




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PART IV
 
 ITEM 15. Exhibits, Financial Statement Schedules.
    92




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##### Table of Contents



SIGNATURES
  DIGITALFX INTERNATIONAL, INC.By:
    /s/ Richard KallRichard KallChairman and Chief Executive OfficerDate: March 20, 2009    Signature
    
    Title
    
    Date/s/ Richard Kall

Richard Kall
    
    Chairman and Chief Executive Officer
(Principal Executive Officer)
    
    March 20, 2009/s/ Abraham Sofer

Abraham Sofer
    
    President
    
    March 20, 2009/s/ Tracy Sperry

Tracy Sperry
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 20, 2009/s/ Susan Hantman

Susan Hantman
    
    Director
    
    March 20, 2009/s/ David J. Weaver

David J. Weaver
    
    Director
    
    March 20, 2009




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title3.1.1
    
    
    Articles of Incorporation of the Company effective January
23, 1991. Filed previously as Exhibit 2.1 to the Companys
Form 10-SB Registration Statement (File #: 000-27551),
filed with the Securities and Exchange Commission on
October 5, 1999, and incorporated herein by this reference.3.1.2
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective December 23, 1995. Filed previously as
Exhibit 2.1 to the Companys Form 10-SB Registration
Statement (File #: 000-27551), filed with the Securities
and Exchange Commission on October 5, 1999, and
incorporated herein by this reference.3.1.3
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective May 4, 1999. Filed previously as Exhibit
2.1 to the Companys Form 10-SB Registration Statement
(File #: 000-27551), filed with the Securities and Exchange
Commission on October 5, 1999, and incorporated herein by
this reference.3.1.4
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective June 7, 2006. Filed previously as
Exhibit 3.2 to the Companys Current Report on Form 8-K
(File #: 000-27551), filed with the Securities and Exchange
Commission on June 19, 2006, and incorporated herein by
this reference.3.1.5
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective August 1, 2006. Filed previously as
Exhibit A to the Companys Definitive Information Statement
on Schedule 14C (File #: 000-27551), filed with the
Securities and Exchange Commission on July 7, 2006, and
incorporated herein by this reference.3.1.6
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective December 18, 2008. Filed previously as
Exhibit 3.1 to the Companys Current Report on Form 8-K/A
(File #: 001-33667), filed with the Securities and Exchange
Commission on December 24, 2008, and incorporated herein by
this reference.3.2
    
    
    Bylaws of the Company. Filed previously as Exhibit 3.2 to
the Companys Form 10-QSB (File #: 001-33667), filed with
the Securities and Exchange Commission on November 14,
2007, and incorporated herein by this reference.4.1
    
    
    Articles of Incorporation of the Company effective January
23, 1991. Filed previously as Exhibit 2.1 to the Companys
Form 10-SB Registration Statement (File #: 000-27551),
filed with the Securities and Exchange Commission on
October 5, 1999, and incorporated herein by this reference.4.2
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective December 23, 1995. Filed previously as
Exhibit 2.1 to the Companys Form 10-SB Registration
Statement (File #: 000-27551), filed with the Securities
and Exchange Commission on October 5, 1999, and
incorporated herein by this reference.4.3
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective May 4, 1999. Filed previously as Exhibit
2.1 to the Companys Form 10-SB Registration Statement
(File #: 000-27551), filed with the Securities and Exchange
Commission on October 5, 1999, and incorporated herein by
this reference.




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##### Table of Contents



Exhibit 
 Number
    
    Exhibit Title4.4
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective June 7, 2006. Filed previously as
Exhibit 3.2 to the Companys Current Report on Form 8-K
(File #: 000-27551), filed with the Securities and Exchange
Commission on June 19, 2006, and incorporated herein by
this reference.4.5
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective August 1, 2006. Filed previously as
Exhibit A to the Companys Definitive Information Statement
on Schedule 14C (File #: 000-27551), filed with the
Securities and Exchange Commission on July 7, 2006, and
incorporated herein by this reference.4.6
    
    
    Articles of Amendment of Articles of Incorporation of the
Company effective December 18, 2008. Filed previously as
Exhibit 3.1 to the Companys Current Report on Form 8-K-A
(File #: 001-33667), filed with the Securities and Exchange
Commission on December 24, 2008, and incorporated herein by
this reference.4.7
    
    
    Bylaws of the Company. Filed previously as Exhibit 3.2 to
the Companys Form 10-QSB (File #: 001-33667), filed with
the Securities and Exchange Commission on November 14,
2007, and incorporated herein by this reference.10.1
    
    
    Sublease dated August 8, 2005, by and between Public Market
Ventures, Inc. and VMdirect, L.L.C. Filed previously as
Exhibit 10.3 to the Companys Current Report on Form 8-K
(File #: 000-27551), filed with the Securities and Exchange
Commission on June 19, 2006, and incorporated herein by
this reference.10.2
    
    
    License, Hosting and Services Agreement dated as of May 1,
2005, by and between VMdirect, L.L.C., a Nevada Limited
Liability company, and RazorStream, LLC, a Nevada limited
liability company. Filed previously as Exhibit 10.4 to the
Companys Current Report on Form 8-K (File #: 000-27551),
filed with the Securities and Exchange Commission on June
19, 2006, and incorporated herein by this reference.10.3
    
    
    2006 Stock Incentive Plan. Filed previously as Exhibit B
to the Companys Definitive Information Statement on
Schedule 14C (File #: 000-27551), filed with the Securities
and Exchange Commission on July 7, 2006, and incorporated
herein by this reference.**10.4
    
    
    Form of VMdirect, L.L.C. Warrant. Filed previously as
Exhibit 10.9 to Amendment No. 1 to the Companys
Registration Statement on Form SB-2 (File #: 333-136855),
filed with the Securities and Exchange Commission on
October 5, 2006, and incorporated herein by this reference.10.5
    
    
    Form of Warrant Assignment and Assumption Agreement. Filed
previously as Exhibit 10.10 to Amendment No. 1 to the
Companys Registration Statement on Form SB-2 (File #: 333-136855), filed with the Securities and Exchange
Commission on October 5, 2006, and incorporated herein by
this reference.10.6
    
    
    Form of Amended and Restated License, Hosting and Services
Agreement with RazorStream LLC. Filed previously as
Exhibit 10.15 to the Companys Annual Report on Form
10-KSB/A (File #: 000-27551), filed with the Securities and
Exchange Commission on March 19, 2007, and incorporated
herein by this reference.10.7
    
    
    Lease Agreement dated February 7, 2007, between Patrick
Airport Business Center, LLC and the Company. Filed
previously as Exhibit 10.16 to the Companys Annual Report
on Form 10-KSB/A (File #: 000-27551), filed with the
Securities and Exchange Commission on March 19, 2007, and
incorporated herein by this reference.




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##### Table of Contents



Exhibit
Number
    
    Exhibit Title10.8
    
    
    Professional Services Agreement dated February 22, 2007,
between Bolsover Endeavours and the Company. Filed
previously as Exhibit 10.17 to the Companys Annual Report
on Form 10-KSB/A (File #: 000-27551), filed with the
Securities and Exchange Commission on March 19, 2007, and
incorporated herein by this reference.10.9
    
    
    Form of Subscription and Rights Agreement between DigitalFX
International, Inc. and Fusion Telecommunications
International, Inc. Filed previously as Exhibit 10.1 to
the Companys Quarterly Report on Form 10-QSB (File #: 000-27551), filed with the Securities and Exchange
Commission on August 14, 2007, and incorporated herein by
this reference.10.10
    
    
    Private Label Purchase Agreement dated May 23, 2007,
between DigitalFX International, Inc. and Fusion
Telecommunications International, Inc. Filed previously as
Exhibit 10.2 to the Companys Quarterly Report on Form
10-QSB (File #: 000-27551), filed with the Securities and
Exchange Commission on August 14, 2007, and incorporated
herein by this reference.*10.11
    
    
    Subscription, Loan and Rights Agreement dated June 8, 2007,
between DigitalFX International, Inc. and SaySwap, Inc.
Filed previously as Exhibit 10.3 to the Companys Quarterly
Report on Form 10-QSB (File #: 000-27551), filed with the
Securities and Exchange Commission on August 14, 2007, and
incorporated herein by this reference.10.12
    
    
    Promissory Note dated June 8, 2007, issued by SaySwap, Inc.
in favor of DigitalFX International, Inc. Filed previously
as Exhibit 10.4 to the Companys Quarterly Report on Form
10-QSB (File #: 000-27551), filed with the Securities and
Exchange Commission on August 14, 2007, and incorporated
herein by this reference.10.13
    
    
    Software License and Services Agreement dated June 8, 2007,
between DigitalFX International, Inc. and Transparensee
Systems, Inc. Filed previously as Exhibit 10.5 to the
Companys Quarterly Report on Form 10-QSB (File #: 000-27551), filed with the Securities and Exchange
Commission on August 14, 2007, and incorporated herein by
this reference.*10.14
    
    
    Reseller Agreement dated June 8, 2007, between DigitalFX
International, Inc. and Transparensee Systems, Inc. Filed
previously as Exhibit 10.6 to the Companys Quarterly
Report on Form 10-QSB (File #: 000-27551), filed with the
Securities and Exchange Commission on August 14, 2007, and
incorporated herein by this reference.*10.15
    
    
    Promissory Note dated June 8, 2007, issued by Transparensee
Systems, Inc. in favor of DigitalFX International, Inc.
Filed previously as Exhibit 10.7 to the Companys Quarterly
Report on Form 10-QSB (File #: 000-27551), filed with the
Securities and Exchange Commission on August 14, 2007, and
incorporated herein by this reference.10.16
    
    
    Employment Agreement dated August 24, 2007, between
DigitalFX International, Inc. and Mickey Elfenbein. Filed
previously as Exhibit 10.1 to the Companys Current Report
on Form 8-K (File #: 001-33667), filed with the Securities
and Exchange Commission on August 30, 2007, and
incorporated herein by this reference.**10.17
    
    
    Membership Interest Purchase Agreement dated November 6,
2007, among DigitalFX International, Inc., Richard J.
Milham, Jr. and Blue Trident Enterprises, LLC. Filed as
Exhibit 10.23 to the Companys Annual Report on Form 10-K
(File #: 001-33667), filed with the Securities and Exchange
Commission on March 31, 2008, and incorporated herein by
this reference.




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##### Table of Contents



Exhibit
Number
    
    Exhibit Title10.18
    
    
    Securities Purchase Agreement dated November 29, 2007, by
and between the Company and the Buyers listed on the
Schedule of Buyers attached thereto. Filed previously as
Exhibit 10.1 to the Companys Current Report on Form 8-K
(File #: 001-33667), filed with the Securities and Exchange
Commission on November 30, 2007, and incorporated herein by
this reference.10.19
    
    
    Form of Senior Secured Convertible Note. Filed previously
as Exhibit 10.2 to the Companys Current Report on Form 8-K
(File #: 001-33667), filed with the Securities and Exchange
Commission on November 30, 2007, and incorporated herein by
this reference.10.20
    
    
    Form of Warrant. Filed previously as Exhibit 10.3 to the
Companys Current Report on Form 8-K (File #: 001-33667),
filed with the Securities and Exchange Commission on
November 30, 2007, and incorporated herein by this
reference.10.21
    
    
    Form of Registration Rights Agreement. Filed previously as
Exhibit 10.4 to the Companys Current Report on Form 8-K
(File #: 001-33667), filed with the Securities and Exchange
Commission on November 30, 2007, and incorporated herein by
this reference.10.22
    
    
    Form of Security Agreement. Filed previously as Exhibit
10.5 to the Companys Current Report on Form 8-K (File #: 001-33667), filed with the Securities and Exchange
Commission on November 30, 2007, and incorporated herein by
this reference.10.23
    
    
    Form of Pledge Agreement. Filed previously as Exhibit 10.6
to the Companys Current Report on Form 8-K (File #: 001-33667), filed with the Securities and Exchange
Commission on November 30, 2007, and incorporated herein by
this reference.10.24
    
    
    Form of Guaranty. Filed previously as Exhibit 10.7 to the
Companys Current Report on Form 8-K (File #: 001-33667),
filed with the Securities and Exchange Commission on
November 30, 2007, and incorporated herein by this
reference.10.25
    
    
    Letter Agreement dated June 1, 2007 and executed December
3, 2007, between DigitalFX International, Inc. and C J
Vision Enterprises, Inc. Filed as Exhibit 10.31 to the
Companys Annual Report on Form 10-KSB (File #: 001-33667),
filed with the Securities and Exchange Commission on March
31, 2008, and incorporated herein by this reference.10.26
    
    
    Subscription Agreement dated June 18, 2007 and executed
December 3, 2007, between DigitalFX International, Inc. and
C J Vision Enterprises, Inc. Filed as Exhibit 10.32 to the
Companys Annual Report on Form 10-KSB (File #: 001-33667),
filed with the Securities and Exchange Commission on March
31, 2008, and incorporated herein by this reference.10.27
    
    
    Separation Agreement and Release of All Claims dated
February 4, 2008, between DigitalFX International, Inc. and
Lorne Walker. Filed as Exhibit 10.33 to the Companys
Annual Report on Form 10-KSB (File #: 001-33667), filed
with the Securities and Exchange Commission on March 31,
2008, and incorporated herein by this reference.10.28
    
    
    Form of Amendment and Exchange Agreement dated March 24,
2008. Filed previously as Exhibit 10.1 to the Companys
Current Report on Form 8-K (File #: 001-33667), filed with
the Securities and Exchange Commission on March 25, 2008,
and incorporated herein by this reference.10.29
    
    
    Form of Amended and Restated Senior Secured Convertible
Note. Filed previously as Exhibit 10.2 to the Companys
Current Report on Form 8-K (File #: 001-33667), filed with
the Securities and Exchange Commission on March 25, 2008,
and incorporated herein by this reference.




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##### Table of Contents



Exhibit 
Number
    
    Exhibit Title10.30
    
    
    Form of Amended and Restated Warrant. Filed previously as
Exhibit 10.3 to the Companys Current Report on Form 8-K
(File #: 001-33667), filed with the Securities and Exchange
Commission on March 25, 2008, and incorporated herein by
this reference.10.31
    
    
    Employment Agreement dated April 29, 2008, between the
Company and Abraham Sofer. **10.32
    
    
    Share Exchange Agreement dated July 28, 2008, between CJ
Vision Enterprises, Inc., all of the shareholders of CJ
Vision Enterprises, Inc. and Pet Express Supply, Inc.10.33
    
    
    Form of Indemnification Agreement. Filed previously as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
(File #: 001-33667), filed with the Securities and Exchange
Commission on November 14, 2008, and incorporated herein by
this reference.10.34
    
    
    Framework Agreement dated October 15, 2008, among the
Company, Richard Kall, Craig Ellins and Amy Black. Filed
previously as Exhibit 10.1 to the Companys Current Report
on Form 8-K (File #: 001-33667), filed with the Securities
and Exchange Commission on October 17, 2008, and
incorporated herein by this reference.10.35
    
    
    Form of Note Purchase Agreement. Filed previously as
Exhibit 10.2 to the Companys Current Report on Form 8-K
(File #: 001-33667), filed with the Securities and Exchange
Commission on October 17, 2008, and incorporated herein by
this reference.10.36
    
    
    Series A 12% Cumulative Convertible Preferred Stock
Purchase Agreement dated December 22, 2008, between the
Company and Richard Kall. Filed previously as Exhibit 10.1
to the Companys Current Report on Form 8-K/A (File #: 001-33667), filed with the Securities and Exchange
Commission on December 24, 2008, and incorporated herein by
this reference.10.37
    
    
    Warrant to Purchase Series A 12% Cumulative Convertible
Preferred Stock issued on December 22, 2008 by the Company
in favor of Richard Kall. Filed previously as Exhibit 10.2
to the Companys Current Report on Form 8-K/A (File #: 001-33667), filed with the Securities and Exchange
Commission on December 24, 2008, and incorporated herein by
this reference.10.38
    
    
    Agreement dated December 22, 2008, between the Company and
Richard Kall. Filed previously as Exhibit 10.3 to the
Companys Current Report on Form 8-K/A (File #: 001-33667),
filed with the Securities and Exchange Commission on
December 24, 2008, and incorporated herein by this
reference.10.39
    
    
    Form of Amendment and Exchange Agreement dated December 22,
2008. Filed previously as Exhibit 10.4 to the Companys
Current Report on Form 8-K/A (File #: 001-33667), filed
with the Securities and Exchange Commission on December 24,
2008, and incorporated herein by this reference.10.40
    
    
    Form of Second Amended and Restated Senior Secured
Convertible Note. Filed previously as Exhibit 10.5 to the
Companys Current Report on Form 8-K/A (File #: 001-33667),
filed with the Securities and Exchange Commission on
December 24, 2008, and incorporated herein by this
reference.21.1
    
    
    List of Subsidiaries.23.1
    
    
    Consent of Weinberg & Company, P.A.24.1
    
    
    Power of Attorney (included as part of the Signature Page
of this Annual Report on Form 10-K).




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##### Table of Contents



Exhibit 
 Number
    
    Exhibit Title31.1
    
    
    Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as amended.31.2
    
    
    Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as amended.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Confidential treatment requested.**
    
    Management contract or compensatory plan.