**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




Washington,
      D.C. 20549




**FORM
      10-KSB**




x
            Annual
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934




**For
      the fiscal year ended December 31, 2007**




o
            Transition
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934




**Commission
      file number 001-33667**




**DIGITALFX
      INTERNATIONAL, INC.**


(Name
      of
      Small Business Issuer in Its Charter)


**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**


(Address
      of Principal Executive Offices and Zip Code)




**(702)
      938-9300**


(Issuer’s Telephone Number)




Securities
      registered under Section 12(b) of the Exchange Act:


Common
                  Stock, $.001 par value
              
              American
                  Stock Exchange(Title
                  of Class)
              
              (Name
                  of Exchange on which
                  Registered)




Securities
      registered under Section 12(g) of the Exchange Act:




None




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




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




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




Indicate
      by check mark whether the Company is a shell company (as defined in Rule 12b-2
      of the Exchange Act.)


Yes
o   No
x




The
      issuer’s revenues for the fiscal year ended December 31, 2007 were
      $23,511,000.




At
      March
      28, 2008, the aggregate market value of the voting stock held by non-affiliates
      of the issuer was $7,545,658.




At
      March
      28, 2008, the issuer had 25,927,710 shares of Common Stock, $0.001 par value,
      issued and outstanding.




Transitional
      Small Business Disclosure Format (check one):  Yes
o   No
x









1


**DIGITALFX
      INTERNATIONAL, INC.**





**2007
      FORM 10-KSB ANNUAL REPORT**





TABLE
      OF CONTENTS


**PART
                  I**
              
              
              
              **3**ITEM
                  1.
              
              Description
                  of Business
              
              3ITEM
                  2.
              
              Description
                  of Property
              
              14ITEM
                  3.
              
              Legal
                  Proceedings
              
              15ITEM
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              16**PART
                  II**
              
              
              
              **17**ITEM
                  5.
              
              Market
                  for Common Equity and Related Stockholder Matters
              
              17ITEM
                  6.
              
              Management’s
                  Discussion and Analysis or Plan of Operation
              
              18ITEM
                  7.
              
              Financial
                  Statements DigitalFX International, Inc. (formerly Qorus.com, Inc.)
and
                  Subsidiaries
              
              37ITEM
                  8.
              
              Changes
                  in and Disagreements with Accountants on Accounting andFinancial
                  Disclosure
              
              75ITEM
                  8A.
              
              Controls
                  and Procedures
              
              75ITEM
                  8B.
              
              Other
                  Information
              
              76**PART
                  III**
              
              
              
              **77**ITEM
                  9.
              
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate
                  Governance; Compliance with Section 16(a) of the Exchange
                  Act
              
              77ITEM
                  10.
              
              Executive
                  Compensation
              
              80ITEM
                  11.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              84ITEM
                  12.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              87ITEM
                  13.
              
              Exhibits
              
              89ITEM
                  14.
              
              Principal
                  Accountant Fees and Services
              
              89





2


**PART
      I**




**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**




This
      2007
      Annual Report on Form 10-KSB, including the sections entitled “Risk Factors,”
“Management’s Discussion and Analysis or Plan of Operation” and “Business,”
contains “forward-looking statements” that include information relating to
      future events, future financial performance, strategies, expectations,
      competitive environment, regulation and availability of resources. These
      forward-looking statements include, without limitation, statements regarding:
      proposed new services; our statements concerning litigation or other matters;
      statements concerning projections, predictions, expectations, estimates or
      forecasts for our business, financial and operating results and future economic
      performance; statements of management’s goals and objectives; and other similar
      expressions concerning matters that are not historical facts. Words such as
      “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,”
“expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and
“estimates,” and similar expressions, as well as statements in future tense,
      identify forward-looking statements.




Forward-looking
      statements should not be read as a guarantee of future performance or results,
      and will not necessarily be accurate indications of the times at, or by which,
      that performance or those results will be achieved. Forward-looking statements
      are based on information available at the time they are made and/or management’s
      good faith belief as of that time with respect to future events, and are subject
      to risks and uncertainties that could cause actual performance or results to
      differ materially from those expressed in or suggested by the forward-looking
      statements. Important factors that could cause these differences include, but
      are not limited to:




·
            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 or Plan of Operation” and
                “Business.”




Forward-looking
      statements speak only as of the date they are made. You should not put undue
      reliance on any forward-looking statements. We assume no obligation to update
      forward-looking statements to reflect actual results, changes in assumptions
      or
      changes in other factors affecting forward-looking information, except to the
      extent required by applicable securities laws. If we do update one or more
      forward-looking statements, no inference should be drawn that we will make
      additional updates with respect to those or other forward-looking
      statements.




**ITEM
                1.**
            **Description
                of Business**




**Overview**




DigitalFX
      International, Inc. is a digital communications and social networking company
      that, through a multi-tiered affiliate program, offers a suite of proprietary
      digital communication tools, including streaming video email, instant messaging,
      live webcasting, podcasting, blogging, video VOIP and digital vault storage.
      These tools help our customers create, manage and store their digital assets
      with the objective of making their digital lives richer and simpler. All digital
      assets stored on our servers can be shared among users and friends anywhere
      in
      the world.




We
      differentiate ourselves by providing instant transcoding of video content and
      the ability to publish video content into numerous formats
      automatically.




Our
      social networking website, www *.hello* World.com ,
      operated by our wholly-owned subsidiary, DigitalFX Networks, LLC, a Nevada
      limited liability company (“DigitalFX Networks), targets users from ages 18 to
      65. The site features a full suite of digital communication tools. Customers
      pay
      a monthly subscription fee to use the tools and to participate in the social
      network.




3




DigitalFX
      Networks also offers a video-enabled web platform to small and medium-sized
      businesses (“FirstStream”) through www.firststream.com .
      This
      service allows streaming video to be sent in any business email communication
      and also provides the small business with live broadcasting, podcasting and
      blogging ability. FirstStream allows the user to manage all incoming text or
      video emails and reply with streaming video emails from existing company
      domains. The various product offerings provide required media vault storage
      that
      allows small and medium-sized businesses to safely store all their digital
      content. The live broadcasting tools allow companies to communicate to
      employees, vendors or customers instantly with uniformity of
      message.




Our
      website, www.vmdirect.com ,
      operated by our wholly-owned subsidiary VMdirect, L.L.C., a Nevada limited
      liability company (“VMdirect”), offers affiliates (“Affiliates”) the tools
      necessary to effectively market and distribute our digital communication tools.
      VMdirect provides sales and marketing services to our other subsidiaries using
      a
      unique multi-tiered affiliate program made up of a developed network of over
      13,000 independent Affiliates who market subscription-based software
      products.




Our
      multi-tiered affiliate program drives the growth of our business. Rather than
      using traditional advertising and marketing methods, we chose to create a
      multi-tiered affiliate program to develop new customers. Affiliates earn
      commissions on a monthly residual basis by acquiring new Affiliates and retail
      customers for us. Affiliates also earn commissions from the sales activities
      of
      other Affiliates who they personally enroll. These rewards are extended for
      up
      to eight generations of Affiliates, meaning that an Affiliate earns a commission
      on the sales of the Affiliates they have personally enrolled as well as on
      the
      sales of second-, third-, and fourth-generation Affiliates, potentially eight
      levels deep. Our affiliate compensation plan is structured on a 3x8 matrix,
      meaning Affiliates can each enroll three Affiliates underneath themselves,
      before they begin to build their next organizational level. The layers of three
      continue down a total of eight levels.




Our
      wholly-owned subsidiary, DigitalFX Solutions, LLC, a Nevada limited liability
      company (“DigitalFX Solutions”), operates our website www.digitalfxsolutions.com ,
      which
      offers our video-enabled web platform to enterprise-sized businesses.
      Development was completed on this website during 2007, and in 2008, we expect
      to
      actively pursue the marketing and sale of enterprise related
      products.




In
      addition, in the fourth quarter of 2007, DigitalFX Solutions started its
      electronics division, DigitalFX Electronics. The purpose of the electronics
      division is to expand our current product offerings to other electronic devices,
      supplies, software and components. To that end, in conjunction with RazorStream,
      LLC (“RazorStream”), a company controlled by VM Investors, LLC, our majority
      shareholder, which is in turn managed by Craig Ellins, our Chairman, Chief
      Executive Officer and President, and Richard Kall, the Chairman of VMdirect,
      we
      are in the process of developing a unique internet appliance (“Set Top Box”)
      which will allow users to access their DigitalFX Studio features (further
      outlined in our description of products), stream high resolution on-demand
      audio
      and video content and participate in the social network, all from their
      television.




**History
      of the Company**




We
      were
      incorporated in the State of Florida on January 23, 1991 under the name Speak
      Up
      America Association, Inc. We changed our name on December 23, 1995 to Golf
      Ball
      World, Inc. and again on May 4, 1999 to Qorus.com, Inc. Prior to November 2001,
      we provided intelligent message communications services to enterprises in the
      travel and hospitality sectors. In November 2001, we sold substantially all
      of
      our assets to Avery Communications, Inc. after which we continued without
      material business assets, operations or revenues. On June 22, 2004, we
      consummated the transactions contemplated by a Securities Purchase Agreement
      dated June 10, 2004, by and among our company, Keating Reverse Merger Fund,
      LLC
      (“KRM Fund”), Thurston Interests, LLC (“Thurston”) and certain other
      shareholders of our company. The transactions resulted in a change of control
      whereby KRM Fund became our majority shareholder.




4




From
      November 2001 through June 15, 2006, we were a public “shell” company with
      nominal assets.




*Exchange
      Agreement*




On
      May
      23, 2006, we entered into an Exchange Agreement (the “Exchange Agreement”) with
      VMdirect, the members of VMdirect holding a majority of its membership interests
      (together with all of the members of VMdirect, the “VMdirect Members”), and KRM
      Fund. The closing of the transactions contemplated by the Exchange Agreement
      occurred on June 15, 2006. At the closing, we acquired all of the outstanding
      membership interests of VMdirect (the “Interests”) from the VMdirect Members,
      and the VMdirect Members contributed all of their Interests to us. In exchange,
      we issued to the VMdirect Members 1,014,589 shares of our Series A Convertible
      Preferred Stock, par value $0.01 per share (the “Preferred Shares”), which, as a
      result of the approval by a substantial majority of our outstanding shareholders
      entitled to vote and the approval by our board of directors on June 22, 2006,
      of
      amendments to our articles of incorporation that (i) changed our name to
      DigitalFX International, Inc., (ii) increased our authorized number of shares
      of
      common stock to 100,000,000, and (iii) adopted a 1-for-50 reverse stock split,
      on August 1, 2006 converted into approximately 21,150,959 shares of our common
      stock.




At
      the
      closing, VMdirect became our wholly-owned subsidiary. The exchange transaction
      was accounted for as a reverse merger (recapitalization) with VMdirect deemed
      to
      be the accounting acquirer, while we were deemed to be the legal acquirer.
      As
      such, our financial statements reflect the historical activity of VMdirect
      since
      its inception. All financial information in this document is that of our company
      and its consolidated subsidiaries.




*Kingdon
      Securities Purchase Agreement*




On
      December 22, 2006, we entered into a Securities Purchase Agreement (the “Kingdon
      Purchase Agreement”) with Kingdon Associates, Kingdon Family Partnership, L.P.
      and M. Kingdon Offshore Ltd. (the “Kingdon Investors”) pursuant to which we
      agreed to sell to the Kingdon Investors an aggregate of 1,000,000 shares of
      our
      common stock at a per share price of $4.75 for gross proceeds of $4.75 million.
      The transactions contemplated by the Kingdon Purchase Agreement closed on
      December 27, 2006. Immediately following the closing, we had 23,280,563 shares
      of common stock issued and outstanding.




In
      December 2007, pursuant to the anti-dilution provisions of the Kingdon Purchase
      Agreement, we issued the Kingdon Investors an additional 696,429 shares of
      our
      common stock.




*Convertible
      Note Agreements*




On
      November 29, 2007, we entered into a Securities Purchase Agreement with Portside
      Growth and Opportunity Fund, Highbridge International LLC and Iroquois Master
      Fund, Ltd. (the “Investors”) pursuant to which we issued on November 30, 2007,
      an aggregate principal amount of $7.0 million of three-year senior secured
      convertible notes, with a per share conversion price of $2.80 (“Existing
      Notes”), and five-year warrants (“Existing Warrants”) to purchase an aggregate
      of 875,000 shares of our common stock at $2.93 per share, to the
      Investors.




On
      March
      24, 2008, we entered into Amendment and Exchange Agreements with the Investors
      pursuant to which we agreed, along with the Investors, to restructure the
      financing consummated under the Securities Purchase Agreement to reduce the
      amount of the financing to $3.0 million, with each Investor receiving repayment
      of its pro-rata share of $4,000,000, including $2,000,000 held in a collateral
      account for certain letters of credit, through the exchange of Existing Notes
      for a combination of amended and restated senior secured convertible notes
      (“Amended and Restated Notes”) and an aggregate of 1,000,000 shares of our
      common stock (the “Common Shares”), and through the exchange of Existing
      Warrants for amended and restated warrants (“Amended and Restated Warrants”).
      The Amended and Restated Notes have an aggregate principal amount of $3.0
      million and a term of three years commencing from November 30, 2007. The Amended
      and Restated Warrants have a term of five years commencing from November 30,
      2007 and entitle the Investors to initially purchase an aggregate of 750,002
      shares of our common stock (subject to adjustment as provided in the Amended
      and
      Restated Warrants, including pursuant to economic anti-dilution adjustments).
      The Amended and Restated Notes carry interest at 7.50% per annum on the
      unpaid/unconverted principal balance, payable quarterly in cash, and are secured
      on a senior basis against all of our assets. We are required to make aggregate
      monthly principal payments of $25,000, plus accrued interest thereon, beginning
      July 1, 2008.




5




The
      Amended and Restated Notes are convertible into approximately 1,500,000 shares
      of our common stock, based on a conversion price of $2.00 per share (subject
      to
      adjustment as provided in the Amended and Restated Notes, including pursuant
      to
      economic anti-dilution adjustments), which shall reset on March 26, 2009 to
      the
      greater of (i) 105% of the arithmetic average of the dollar weighted average
      price of our common stock over each of the five consecutive trading days ending
      on the trading day immediately prior to March 26, 2009 and (ii) $1.00 (as
      adjusted for any stock splits, stock dividends, recapitalizations, combinations,
      reverse stock splits or other similar events); provided however, that in no
      event shall the adjusted conversion price be greater than $3.00 (as adjusted
      for
      any stock splits, stock dividends, recapitalizations, combinations, reverse
      stock splits or other similar events). The Amended and Restated Warrants have
      an
      exercise price of $0.959 per share (subject to adjustment as provided in the
      Amended and Restated Warrants, including pursuant to economic anti-dilution
      adjustments).




The
      Amended and Restated Notes are convertible at the option of the Investors prior
      to their maturity. Additionally, beginning November 30, 2008, and provided
      that
      we have complied with certain equity conditions, we will be able to require
      the
      Investors to convert the Amended and Restated Notes into shares of our common
      stock if the dollar volume weighted average price of our common stock is $2.75
      (subject to adjustment as provided in the Amended and Restated Notes) for twenty
      (20) out of thirty (30) consecutive trading days.




The
      maturity date of the Amended and Restated Notes is November 29, 2010. The
      Investors are entitled to accelerate the maturity date in the event that there
      occurs an event of default under the Amended and Restated Notes, including,
      without limitation, if we fail to register for resale the Common Shares and
      the
      shares underlying the Amended and Restated Notes and Amended and Restated
      Warrants, if we fail to pay any amount under the Amended and Restated Notes
      when
      due, if a judgment is rendered against us in an amount set forth in the Amended
      and Restated Notes, if we breach any representation or warranty under the
      Securities Purchase Agreement or other transaction documents, or if we fail
      to
      comply with the specified covenants set forth in the Amended and Restated Notes.
      Among the other covenants, the Amended and Restated Notes contain financial
      covenants whereby we will be required to achieve specified EBITDA and revenue
      targets in each of the fiscal quarters during which the Amended and Restated
      Notes are outstanding. Any failure to achieve an EBITDA or revenue target will
      be considered a breach of the financial covenant.




Upon
      the
      occurrence of an event of default under the Amended and Restated Notes, the
      Investors may require us to redeem all or any portion of the Amended and
      Restated Notes by delivering written notice thereof to us. The portion of the
      Amended and Restated Notes being redeemed shall be redeemed by us at a price
      equal to the
      greater of (i) the product of (A) the amount being redeemed and (B) the
      applicable redemption premium (between 100% and 125%) and (ii) the product
      of
      (A) the number of shares of our common stock issuable upon the conversion of
      such amount and (B) the greater of (I) the closing sale price of our common
      stock on the date immediately preceding such event of default, (II) the closing
      sale price of our common stock on the date immediately after such event of
      default and (III) the closing sale price of our common stock on the date the
      Investor delivers a redemption notice in connection with an event of
      default.




6




Pursuant
      to the Amendment and Exchange Agreements, the Registration Rights Agreement
      dated November 30, 2007 was amended to provide that we must register for resale
      100% of the sum (i) the aggregate number of shares of our common stock issued
      or
      issuable upon conversion of the Amended and Restated Notes as of the trading
      day
      immediately preceding the date the registration statement is initially filed
      with the Securities and Exchange Commission (the “SEC”), (ii) the aggregate
      number of shares of our common stock issued or issuable upon exercise of the
      Amended and Restated Warrants as of the trading day immediately preceding the
      date the registration statement is initially filed with the SEC, and (iii)
      the
      Common Shares, and to remove language that provided that if (i) we did not
      file
      a registration statement by a specified date, (ii) the registration statement
      was not declared effective on or prior to a specified effectiveness date, or
      (iii) after the effective date, such registration statement ceased to remain
      continuously effective prior to the expiration of a certain effectiveness
      period, we had to pay the Investors, on the occurrence of the event and for
      each
      month thereafter that it continued, an amount in cash as partial damages equal
      to 1.5% of the aggregate purchase price paid by the Investors for the shares
      underlying the Notes and Warrants then held by the Investors.




In
      addition, under the terms of the Amendment and Exchange Agreements, if a
      registration statement is not available for the resale of the Common Shares
      and
      the shares of our common stock underlying the Amended and Restated Notes and
      the
      Amended and Restated Warrants and we fail to satisfy the current public
      information requirement under Rule 144 promulgated under the Securities Act
      of
      1933, as amended (the “Securities Act”), we will pay the Investors on the
      occurrence of such event and for each month thereafter that such event continues
      (or until such time such information is no longer required under the rule),
      an
      amount in cash as partial liquidated damages equal to 1.5% of the aggregate
      purchase price of the Investors’ Amended and Restated Notes then
      outstanding.




Under
      the
      terms of the Amendment and Exchange Agreements, so long as the Amended and
      Restated Notes are outstanding, each Investor is not permitted to sell a number
      of Common Shares exceeding more than two-thirds (2/3) of the number of shares
      of
      our common stock previously issued, or required to have been issued, to such
      Investor upon conversion of such Investor's Amended and Restated
      Notes.




In
      connection with the restructuring transaction, VM Investors, LLC, our majority
      shareholder (whose members include Craig Ellins, our Chief Executive Officer,
      and Amy Black, the President of VMdirect), agreed to transfer 1,000,000 shares
      of our common stock back to us.




Maxim
      Group L.L.C. acted as placement agent in connection with the transaction. For
      their services as placement agent, we were required to pay Maxim an aggregate
      commission in cash equal to 8% of the gross proceeds from the sale of the
      Existing Notes and Existing Warrants, a non-accountable expense allowance of
      1%
      of the gross proceeds from the sale of the Existing Notes and Existing Warrants,
      plus a warrant to purchase 7% of the shares underlying the Existing Notes and
      Existing Warrants issuable to the Investors. We issued a warrant to purchase
      236,250 shares (subject to adjustment as provided in the Amended and Restated
      Warrants, including pursuant to economic anti-dilution adjustments) of our
      common stock with an exercise price of $2.93 and a term of 5 years to Maxim
      and
      paid Maxim a fee of $459,993.




**Principal
      Market**




Prior
      to
      August 23, 2007, bid and ask prices for shares of our common stock were quoted
      on the OTC Bulletin Board under the symbol “DFXN.” On August 23, 2007, our
      common stock began trading on the American Stock Exchange under the symbol
      “DXN.”




7




**Recent
      Developments**




During
      fiscal 2007 we took the following significant actions to support our
      business:




·
            Commenced
                sales of the VMdirect opportunity to Affiliates and retail customers
                in
                Ireland, Spain and Germany. Germany is the largest and most successful
                direct selling market in the European Union, accounting for over
                $8
                billion in sales, and boasting over 50 million Germans connected
                to the
                Internet.




·
            Commenced
                sales of the *hello*World product to retail (individual) customers
                in Austria, Belgium, Finland, Germany, Greece, Ireland, Italy, The
                Netherlands, Portugal, Slovenia and
                Spain.




·
            Released
                the fully scalable and enhanced version 5.0 of the DigitalFX Studio
                in
                February 2007, and continually launched feature and performance upgrades
                throughout the year.




·
            Released
                an upgraded FirstStream Studio and an updated FirstStream Learning
                Management System in June 2007 and a more user friendly FirstStream
                sales
                website and FirstStream Learning Management System in September,
                2007.




·
            Developed
                and integrated helloPhone, a new video enabled digital phone service,
                into
                the DigitalFX Studio, allowing Affiliates to call each other for
                free,
                launched two paid package alternatives offering more features, and
                prepared for expansion to all retail customers in
                2008.




·
            Launched
                the first issue of the VMdirect Affiliate magazine, Digital Life
                Made
                Simple, focused on recognition, products, best business practices
                and
                examples of use.




·
            Hosted
                DigitalU, our annual International Business Summit in November 2007,
                with
                over 1,200 Affiliates and customers in
                attendance.




·
            Introduced
                The Learning Media System which is fully customizable and has a
                comprehensive back-end administration system. The Learning Media
                System
                can support thousands of users with accountability and
                certification.




·
            Launched
                The One Vision Tour traveling seminar which encompassed marketing
                techniques to facilitate expansion of existing businesses and leadership
                skills to manage growing
                organizations.




·
            Developed
                our websitewww.digitalfxsolutions.com,
                which offers our video-enabled web platform to enterprise-sized
                businesses.




·
            Launched
                the electronics division of DigitalFX Solutions, DigitalFX
                Electronics.




·
            Commenced
                development, in conjunction with RazorStream, of the Set Top Box,
                which
                will allow users the ability to access their DigitalFX Studio features,
                stream high resolution on-demand audio and video content and participate
                in the social network, all from their
                television.




8


·
            Expanded
                the implementation of a customer relationship management system (RightNow)
                and a business intelligence system (Cognos) for additional insight
                into
                managing our business.




**Business
      of DigitalFX International, Inc.**




*General
      Overview*




We
      are a
      digital communications and social networking company. We develop and market
      proprietary web-based video enabled social networking and communication software
      applications, including video email, video instant messaging, live webcasting,
      podcasting, blogging and digital phone service. We bundle our proprietary
      applications with other open source applications and sell them as an integrated
      suite through an Internet-based subscription model. Our Web 2.0 communication
      tools enable users to create, transcode, send, manage and store all forms of
      digital media content (i.e., photos, videos and music). These innovative
      business and social networking applications are scalable, customizable and
      highly extendible, and provide individuals and enterprises with highly
      effective, multi-sensory communication tools.




Currently,
      the primary source of subscribers for these applications is our affiliate
      network, our social networking website, www.helloworld.com and the
      viral nature of our products. During 2007, we expanded our subscription base
      by
      offering our suite of communications tools to affinity groups, other social
      networks and to small and medium-sized businesses By providing individuals
      and
      business subscribers with our rich and expanding suite of collaborative
      applications, we are facilitating the rapidly accelerating trends in streaming
      media, social networking, podcasting and self-generated content. With our
      marketing strategy, which is based on a commission structure encouraging the
      expansion of the number of our marketing Affiliates, and the ease of use of
      our
      products - designed to simplify the creation and management of digital media
      -
      we expect to simplify the digital lives of millions of subscribers on a global
      basis.




We
      currently market our products on the Internet and maintain Affiliates in the
      United States, U.S. Virgin Islands, Puerto Rico, Guam, Canada, the United
      Kingdom, Mexico, Australia, New Zealand, Ireland, Spain and
      Germany.




*Growth
      Strategy*




The
      primary business strategy and the principal source of our recent growth involve
      our multi-tiered affiliate program and the viral nature of our products. In
      the
      multi-tiered affiliate program, Affiliates purchase business packages that
      range
      in initial price from approximately $79 to $1,999 (in the USA). These packages
      provide Affiliates with the products and tools they need to get started with
      and
      build their VMdirect business. The business packages (except for the basic
      plan)
      include a web camera, an affiliate training CD, product CDs, *hello* World
      30-day trial accounts and access to an online administration and training
      center, which includes a real-time commission engine, organization reports,
      promotional tools, contact management systems, a video email auto-responder
      and
      other marketing tools. With these tools, Affiliates use their personal sales
      efforts to share the benefits of *hello* World
      and
      VMdirect with others. Affiliates earn commissions by enrolling customers and
      other Affiliates, participating in an enrollment matrix that pays commissions
      up
      to eight levels deep. As of December 31, 2007, we had over 13,000 active
      Affiliates.




Viral
      marketing dynamics occur as customers use the digital communications tools
      and
      share the opportunity to resell *hello* World.
      Consumers who are pleased with the product often communicate their positive
      experiences to friends and colleagues, and can share our product by simply
      forwarding an email. Word can quickly spread to a new group of users, who in
      turn promote the product’s benefits to others, who then do the same with the
      people they know. This type of word-of-mouth advertising has come to be
      described as “viral” marketing because it can rapidly spread from one person to
      another, email by email. Retail subscriptions in the U.S.A. start at $9.95
      per
      month, depending on the level of features desired by the customer.




9




Our
      website www.digitalfxsolutions.com offers
      our video-enabled web platform to enterprise-sized businesses. Development
      was
      completed on this website during 2007, and in 2008, we expect to actively pursue
      the marketing and sale of enterprise related products.




In
      addition, we launched the electronics division of DigitalFX Solutions in late
      2007. The purpose of this division is to expand our current product offerings
      to
      other electronic devices, supplies, software and components. To that end, in
      conjunction with RazorStream, we are in the process of developing the Set Top
      Box which will allow users the ability to access their DigitalFX Studio
      features, stream high resolution on demand audio and video content and
      participate in the social network, all from their television.




*Market
      Opportunity*




DigitalFX
      International is positioned in the rapidly expanding digital communications
      and
      online social networking businesses. The Aberdeen Group forecast the streaming
      media industry to grow to $12 billion in 2008, up 500% from $2 billion in 2004.
      Moreover, self-generated media on the Internet such as the creation and sending
      of webcasts, blogs and photos, etc., is expanding rapidly as well as Internet
      sharing of calendars and contacts.




The
      market for our services is rapidly evolving and growing. Social networking
      and
      streaming media are areas of high interest, dominating both the consumer and
      financial press. According to Forrester Research, over 1 billion videos were
      viewed online in 2007, and over 3 billion people will be communicating online
      by
      2009. We expect that the annual rate of growth of adoption of streaming media
      tools in 2008 will exceed 2007 as more users become comfortable with this
      technology, the Internet and personal computer usage.




Other
      trends in our favor include the dispersion of families and friends around the
      country and globe who want to visually communicate on a regular basis and the
      desire of many companies to reduce resources spent on employee air and
      automobile travel. We differentiate ourselves from other social networking
      sites
      by allowing our members to retain copyright and ownership of all the content
      that they have created, as well as being able to offer a family friendly, safe
      user environment by knowing who our users are because of our paid subscription
      based model.




We
      intend
      to continue to grow our business through continued product enhancements with
      additional features and functionality; the expansion of the DigitalFX Studio
      to
      small businesses and enterprise customers; and by offering ancillary products
      and services through the affiliate program.




During
      2008, we also plan to consider strategic acquisition opportunities to accelerate
      growth. We will evaluate prospects that are synergistic and look to invest
      in
      businesses or technologies that offer complementary products or services that
      enhance our business model.




*Products*




*DigitalFX
      Studio*




Video
      Mail is a web-based email client with streaming media options that allow users
      to create or reply with embedded video messages. The videos can be delivered
      in
      multiple media formats ensuring higher delivery rates than ever before. Each
      email account comes with: a private video vault for storing and managing videos,
      the ability to upload custom graphics and videos, and the option to
      cut-and-paste video on demand onto external websites.




10




Video
      IM
      is a video-enabled instant messenger tool that allows users to send real-time
      streaming video to anyone that has agreed to join their contact
      list.




Live
      Webcasting is an easy-to-use webcasting tool that allows a user to broadcast
      live over the Internet to one or many simultaneous viewers, and be able to
      offer
      their broadcast as private, public or pay-per-view.




Podcasting
      enables video recordings to be available for downloading and subscriptions
      by
      others in single or episodic delivery via RSS (real simple
      syndication).




Blogging
      allows the creation of an online video and text diary.




Digital
      video enabled phone service allows our Affiliates to call and see other
      Affiliates, computer to computer, anywhere in the world for free. Paid
      subscriptions are also available for additional calling ability. The service
      will be made available to our retail customers in 2008.




To
      support our customers and Affiliates, we have developed a complete line of
      video
      tutorials and maintain a technical support desk that is available twenty-four
      hours a day. Additionally, our marketing staff and account executives assist
      Affiliates in becoming more effective in the areas of marketing and
      sales.




*Web-based
      Social Networks*




*hello* World.com
      is a web portal currently utilizing a commercial-free, subscription-based
      application service provider model through which customers create a personal
      profile highlighted by their digital content as well as access our wide spectrum
      of streaming video content and utilize as an integrated suite of
      consumer-oriented streaming media applications, including video email, video
      chat and live web-casting. Through the portal, users are able to access their
      personal digital media vaults as well as other user-generated content (music,
      videos, photos submitted by other members) and can utilize the community tools
      to search for other members.




*Customers*




No
      individual customer accounted for a material portion of our revenue during
      the
      past two years. At December 31, 2007, we had approximately 28,000 active
      customers as compared to approximately 26,000 at December 31, 2006.




We
      aim to
      provide worldwide customers with industry leading product and technical support
      services through our highly trained customer support personnel located in Las
      Vegas, Nevada. Our support services include phone, email and live chat
      communication and offer technical assistance with system issues or
      interruptions, bug fixes, telephone support and user information for upgrades
      or
      enhancements of particular software product releases when and if they become
      generally available. In addition to our customer support personnel being
      available 24 hours a day, 7 days a week, 365 days a year, we provide a
      comprehensive evolving knowledge base and conduct quality audits of our products
      and services and training information. We also support our affiliate network
      in
      all aspects of the VMdirect business opportunity.




All
      Affiliates and customers have access to the VMdirect or *hello*World
      customer support website that provides the latest product information, general
      service updates and up-to-date knowledge base articles. The customer support
      websites also provide electronic forms for opening technical support incidents
      and feedback for suggesting product, service and company
      enhancements.




11




*Competition*




We
      compete against well-capitalized streaming media and Internet companies as
      well
      as many smaller companies. The market for our
      products and services is highly competitive. The streaming media sector is
      evolving and growing rapidly, and companies are continually introducing new
      products and services. Some of our current competitors have larger user bases,
      longer operating histories, higher brand recognition, and greater financial
      resources than we have.




We
      believe the streaming media solutions we offer are comparable and in many cases
      superior to those offered by our competitors because
      in addition to having superior picture quality, our primary products
      ( www.helloworld.com and www.firststream.com )
      allow a
      user to upload any format of video and transcode it into a range of commonly
      used video formats to ensure that the video can be properly viewed .
      In
      addition to our products and services, we have a knowledgeable and attentive
      customer support team as well as dedicated account managers who focus on the
      needs of our customer and Affiliate base.




Competitive
      parameters include the range of our product offerings, the performance and
      quality of our products and services, the reliability of our infrastructure,
      our
      expertise and experience in streaming media technology ,
      our
      scalability and capacity, ease of use, the price of our services, and the level
      of customer support.




Although
      we do not currently compete against any one entity with respect to all of the
      features of our services, we do compete with numerous companies with respect
      to
      specific elements. These elements encompass five primary markets: streaming
      media, social networking, on-demand collaboration, digital media management
      and
      self-generated media publishing. In the realm of streaming media services aimed
      at the consumer and small business marketplace, our competitors consist of
      numerous companies including Easystream, Playstream, Co-Video Systems and
      SightSpeed. In the domain of streaming media services targeted to mid-size
      and
      large enterprises, our competitors will include Akamai,
      VitalStream and Savvis, along with a number of smaller private companies. With
      respect to social networking, our *hello* World
      site and its features compete with broader social networking and Internet sites
      that include MySpace.com and LiveJournal.com. With respect to on-demand
      collaboration, we compete with WebEx and Radvision. In the realm of digital
      media management, we compete with thePlatform and Virage. In the realm of
      self-generated media publishing, we compete with such companies as YouTube
      and
      Flickr.




In
      some
      cases, competitors may have longer operating histories, more customers, greater
      financial strength, more name recognition, and larger technical staffs. These
      competitors may be able to attract customers more easily because of their
      financial resources and, awareness in the market and free subscriptions because
      of advertising revenue. Our larger competitors can also devote substantially
      more resources to business development and may adopt more aggressive pricing
      policies.




*Trademarks,
      Domain Names and other Intellectual Property*




Our
      registered intellectual property is primarily in the form of trademarks. We
      have
      registered the VMdirect® and Video Says It
      Better® trademarks with the United States Patent and Trademark Office and have
      filed applications for the registration of the trademarks *hello*WorldTM,
      Connecting People, Changing LivesTM, and Digital Life Made SimpleTM. We have not
      tried to register copyrights or patents on any of our software programs,
      methods, or other ideas, but we believe that some of our computer code may
      have
      common law copyright protection.




12




We
      also
      own the www.vmdirect.com , www.firststream.com , www.helloworld.com and www.digitalfxsolutions.com domain
      names, and own or hold exclusive and non-exclusive licenses to several
      proprietary software applications relating to video e-mail, video instant
      messaging, live webcasting, digital vault storage technology and podcasting,
      including a perpetual non-exclusive license we obtained from
      RazorStream.




We
      have a
      policy of entering into confidentiality and non-disclosure agreements with
      our
      employees and some of our vendors and customers as we deem necessary. We also
      have a policy of not allowing customers to access our software’s source code.
      These agreements and policies are intended to protect our intellectual property,
      but we cannot ensure that these agreements or the other steps we have taken
      to
      protect our intellectual property will be sufficient to prevent theft,
      unauthorized use or adverse infringement claims. We cannot prevent piracy of
      our
      software, methods and features, and we cannot determine the extent to which our
      software, methods and features are being pirated. Further, the laws of some
      foreign countries do not protect our proprietary rights as well as the laws
      of
      the United States.




We
      will
      continue to expand the VMdirect, *hello* World
      and
      FirstStream brands and our proprietary trademarks, domains and
      software.




*Product
      Development*




We
      conduct continuing product development to support and expand our product
      offerings internally, as well as through the use of third party services. We
      spent $1,356,000 on product development in 2007 primarily on the adaptation
      of
      our DigitalFX Studio product to small and enterprise sized businesses, the
      improvement of existing and development of new features, and the development
      of
      the Set Top Box. Our spending in 2008 will focus on continual enhancement of
      our
      existing products and new products which utilize our technology such as
      FirstStream-in-a-Box, a retail quality packaged version of our FirstStream
      product.




*Seasonality*




We
      experience seasonality in our business in specific months during the year.
      December and July are historically lower, as Affiliates are focused on family
      holidays and vacations. We expect this trend to continue.




**Employees**




As
      of
      March 28, 2008, we had 67 full-time employees and two part-time employees,
      all
      located in Las Vegas, Nevada. Since inception, we
      have never
      had a work stoppage, and our employees are not represented by a labor union.
      We
      consider our relationships with our employees to be positive.




**Government
      Regulation**




Our
      marketing program is subject to a number of federal and state regulations
      administered by the Federal Trade Commission and various state agencies in
      the
      United States, directed at preventing fraudulent or deceptive shams by ensuring
      that product sales are made to consumers of the products and that compensation,
      recognition, and advancement within the marketing organization are based on
      the
      sale of products rather than investment in the organization or other
      non-sales-related criteria. These regulatory requirements do not include “bright
      line” rules and are inherently fact-based. Thus, even though we believe that our
      marketing program complies with applicable federal and state laws or
      regulations, a governmental agency or court could determine that we have failed
      to meet these requirements in a particular case. Such an adverse determination
      could require us to make modifications to our marketing system, increasing
      our
      operating expenses. The negative publicity associated with such an adverse
      determination could also reduce Affiliate and end user demand for our products,
      which would consequently reduce our sales and revenues.




13




Our
      ability to capitalize on growth in new international markets and to maintain
      the
      current level of operations in our existing international markets is exposed
      to
      risks associated with international operations, including:




·
            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;
                and




·
            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.




We
      conduct our international VMdirect operations in Australia, Canada, Mexico,
      New
      Zealand, Spain, Germany, Ireland and the United Kingdom. We have not been
      affected in the past by any of the potential political, legal or regulatory
      risks identified above. While we do not consider these risks to be material in
      the foreign countries in which we currently operate, they may become material
      risks in other countries where we may expand our business.




Legislative
      or regulatory changes in one or more of our present or future markets could
      lead
      to the determination that our marketing system do not comply with applicable
      laws and regulations and could result in the prohibition of our marketing
      system. Failure to comply with applicable laws and regulations could result
      in
      the imposition of legal fines and/or penalties which would increase our
      operating costs. We may also be required to comply with directives or orders
      from various courts or applicable regulatory bodies to comply with new
      legislation or regulation, which would detract management’s attention from the
      operation of our business. Further we could be prohibited from distributing
      products through our marketing system or may be required to modify our marketing
      system.




**ITEM
                2.**
            **Description
                of Property**




Our
      principal executive offices are located at 3035 East Patrick Lane, Suite 9,
      Las
      Vegas, Nevada 89120. Our telephone number is (702) 938-9300. It is from this
      facility that we conduct all of our executive and administrative functions
      and
      ship merchandise to Affiliates and consumers. We utilize approximately 11,000
      square feet and pay approximately $18,000 per month pursuant to the governing
      lease agreement, which expires in January, 2009.




VMdirect
      was party to a Sublease dated August 8, 2005 with Public Market Ventures, Inc.
      (“PMV”), pursuant to which we leased our administrative office space. VMdirect
      was also party to a Lease Agreement dated September 15, 2005 with Patrick
      Airport Business Center, LLC (“PABC” and together with PMV the “landlord”),
      pursuant to which we leased warehousing space for our computer servers. We
      were
      not permitted to make any alterations or improvements to, or assign or sublease,
      the premises without the landlord’s prior written consent. We were also required
      to execute, acknowledge and deliver to the landlord, within 15 days of the
      landlord’s request, instruments or assurances as the landlord may deem necessary
      or appropriate to evidence or confirm the subordination or superiority of these
      leases to any security instrument. The initial terms of these leases expired
      on
      January 31, 2007. On February 7, 2007, we signed a new lease with PABC for
      the
      existing 11,000 square feet for a one year period from February 1, 2007 through
      January 31, 2008. In December, 2007, we extended this lease for another one
      year
      period from February 1, 2008 through January 31, 2009. This lease and the
      extension have terms substantially similar to the lease referenced above dated
      September 15, 2005.




14




**ITEM
                3.**
            **Legal
                Proceedings**




Except
      as
      described below, we are not involved in any legal proceedings that require
      disclosure in this report.




From
      time
      to time, we may be involved in litigation relating to claims arising out of
      our
      operations in the normal course of business. Except as is described below,
      we
      are not currently party to any legal proceedings, the adverse outcome of which,
      in management’s opinion, individually or in the aggregate, would have a material
      adverse effect on our results of operations or financial position.




On
      February 7, 2007, VMdirect and DigitalFX Solutions jointly filed a lawsuit
      in
      the Superior Court of the State of California for the County of Los Angeles
      against a former Affiliate of VMdirect alleging a number of complaints including
      unfair business practice, misappropriation of trade secrets, slander,
      intentional interference with contractual relationship, intentional interference
      with prospective economic advantage and breach of contract, and seeking
      compensatory and punitive damages in amounts to be proved at trial, injunctive
      relief and attorneys’ fees and costs. The defendant became an Affiliate of
      VMdirect in May 2006 and agreed to adhere to VMdirect’s Code of Ethics for
      Affiliates. Upon signing up as an Affiliate, defendant represented that he
      was
      capable of bringing a substantial number of new Affiliates to VMdirect, and
      in
      reliance on this representation, VMdirect agreed to provide certain privileges
      to defendant including posting of training materials on VMdirect’s website.
      VMdirect also agreed to work with defendant to develop training materials.
      Although VMdirect paid for all of the costs of developing the materials and
      its
      personnel actively participated in the development of such materials, defendant
      demanded aggregate compensation of $300,000 for creating the training and
      motivational materials after they were completed. After VMdirect did not pay
      this fee to defendant, defendant requested that VMdirect stop using the
      materials, began disparaging VMdirect and its officers, and engaged in
      cross-recruiting Affiliates from other VMdirect networks, a practice prohibited
      by VMdirect’s Code of Ethics for its Affiliates. VMdirect then terminated
      defendant’s distribution network and believes that defendant continues to use
      VMdirect’s proprietary trade secrets to recruit Affiliates to join other network
      marketing companies that compete with VMdirect.




On
      March
      6, 2007, we, along with VMdirect and DigitalFX Solutions, were served with
      a
      cross complaint for damages filed in the Superior Court of California for the
      County of Los Angeles, by this same former Affiliate for alleged breach of
      contract, fraud-intentional misrepresentation, fraud-intentional
      concealment/omission, fraud-false promises, negligent misrepresentation and
      infringement of the rights of publicity and privacy, and seeking general,
      exemplary and punitive damages in amounts to be determined at trial and an
      order
      enjoining our use of his name, image, photograph and likeness for any purpose
      without his written consent. This former Affiliate alleges that the officers
      of
      VMdirect agreed to grant him 60,000 shares of our common stock, agreed to pay
      him a percentage of sales to small businesses and enterprises in connection
      with
      his creation of certain training materials, agreed to pay for the costs of
      all
      training materials created by him and agreed that all training materials which
      contained his likeness would remain his intellectual property. This former
      Affiliate also alleges that it was expressly agreed that a copy of such
      materials would be made available to him for posting as promotional materials
      on
      his own website and that his consent for VMdirect to use his image and likeness
      on its websites would be revocable at any time.




On
      March
      6, 2007, legal counsel for the same former Affiliate filed a Notice of Removal
      of Action with the United States District Court of the Central District of
      California seeking to remove the case from the Superior Court of California
      to
      the United States District Court. Our legal counsel filed a motion to remand
      the
      case back to the Superior Court of California which motion was
      granted.




15




On
      August
      31, 2007, the former Affiliate unsuccessfully applied for a temporary
      restraining order (“TRO”) to enjoin VMdirect from using on its website the
      training materials featuring the former Affiliate. As a result of this
      unsuccessful application, the Court ordered VMdirect and DigitalFX Solutions
      to
      qualify to do business in California if they wished to proceed with their
      complaint against the former Affiliate. On December 10, 2007, DigitalFX
      Solutions qualified to do business in California. On December 14, 2007, VMdirect
      qualified to do business in California. VMdirect and DigitalFX Solutions
      complied with the Court order for the purpose of pursuing their litigation
      against the former Affiliate.




Management
      believes there exists no basis for the former Affiliate's claims and intends
      to
      defend this matter vigorously. In
      the
      event our management’s assessment of the case is incorrect, or the former
      Affiliate actually obtains a favorable judgment for the claimed damages, the
      economic impact on us would be insignificant and would not materially affect
      our
      operations.




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




No
      matters were submitted to a vote of our shareholders in the quarter ended
      December 31, 2007.




16


**PART
      II**




**ITEM
                5.**
            **Market
                for Common Equity and Related Stockholder Matters****and Small Business Issuer Purchases of Equity
                Securities**




**Common
      Stock**






Our
      common stock is quoted on the American Stock Exchange (“AMEX”) under the symbol
“DXN.” Prior to August 23, 2007, bid and ask prices for shares of our common
      stock were quoted on the OTC Bulletin Board under the symbol “DFXN.” The
      following table sets forth, for the periods indicated, the high and low bid
      information for our common stock, as determined from quotations on the OTC
      Bulletin Board and AMEX. The information has been adjusted to reflect a 1-for-50
      reverse stock split of our common stock which took effect on August 1, 2006.
      The
      following quotations reflect inter-dealer prices, without retail mark-up,
      mark-down or commission and may not represent actual transactions.


**High**
              
              **Low****Year
                  Ended December 31, 2006**First
                  Quarter
              
              $
              20.00
              
              $
              1.50Second
                  Quarter
              
              $
              16.50
              
              $
              5.00Third
                  Quarter
              
              $
              15.50
              
              $
              2.00Fourth
                  Quarter
              
              $
              10.50
              
              $
              4.00**Year
                  Ended December 31, 2007**First
                  Quarter
              
              $
              5.50
              
              $
              2.50Second
                  Quarter
              
              $
              6.25
              
              $
              2.69Third
                  Quarter
              
              $
              5.10
              
              $
              2.75Fourth
                  Quarter
              
              $
              3.60
              
              $
              1.20




On
      March
      28, 2008, the closing sales price of our common stock as reported on AMEX was
      $0.95 per share. As of March 28, 2008, there were approximately 155 record
      holders of our common stock. The number of holders of record is based on the
      actual number of holders registered on the books of our transfer agent and
      does
      not reflect holders of shares in “street name” or persons, partnerships,
      associations, corporations or other entities identified in security position
      listings maintained by depository trust companies.




**Dividend
      Rights**




Subject
      to preferences that may apply to shares of preferred stock outstanding at the
      time, the holders of outstanding shares of our common stock are entitled to
      receive dividends out of funds legally available at the times and in the amounts
      that our board of directors may determine. We have never paid dividends on
      our
      common stock and have no current plan to pay any dividends. We intend to retain
      our future earnings to re-invest in our ongoing business.




17


**ITEM
                6.**
            **Management’s
                Discussion and Analysis or Plan of
                Operation**




*This
      discussion summarizes the significant factors affecting our operating results,
      financial condition and liquidity and cash flows for the fiscal years ended
      December 31, 2007 and 2006. All financial information that follows is that
      of
      our company, our company’s wholly-owned subsidiary VMdirect, L.L.C. and
      VMdirect, L.L.C.’s wholly-owned U.K. subsidiary, and our company’s wholly-owned
      Nevada and Ireland subsidiaries. The discussion and analysis that follows should
      be read together with our Consolidated Financial Statements included elsewhere
      in this Annual Report on Form 10-KSB. Except for historical information, the
      matters discussed in this Management’s Discussion and Analysis of Financial
      Condition and Results of Operations are forward looking statements that involve
      risks and uncertainties and are based upon judgments concerning various factors
      that are beyond our control.*




**Overview**




We
      are a
      digital communications and social networking company that, directly and through
      a multi-tiered affiliate program, offers a suite of proprietary digital
      communication tools, including video email, video instant messaging, live
      webcasting, podcasting, blogging, and digital vault storage. Our social
      networking website, www *.*hellow orld.com ,
      operated by our wholly-owned subsidiary, DigitalFX Networks, targets users
      from
      ages 18 to 65. The site features a full suite of digital communication tools,
      and Affiliates and retail customers pay a monthly subscription fee to use the
      tools and participate in the social network. Additionally, our website, www.vmdirect.com ,
      operated by our wholly-owned subsidiary VMdirect, offers Affiliates the tools
      necessary to effectively market and distribute our digital communication
      tools.




Our
      multi-tiered affiliate program drives the growth of our business. Rather than
      using traditional advertising and marketing methods, we chose to create a
      multi-tiered affiliate program to develop new customers. Affiliates earn retail
      commissions on a monthly residual basis by acquiring new retail customers for
      us. Affiliates earn additional commissions from the sales activities of
      Affiliates who they personally enroll. These rewards are extended for up to
      eight generations of Affiliates, meaning that an Affiliate earns a commission
      on
      the sales of the Affiliates they have personally enrolled as well as on the
      sales of second-, third-, and fourth-generation Affiliates, potentially eight
      levels deep. Our Affiliate compensation plan is structured on a 3x8 matrix,
      meaning A ffiliates
      can each enroll three Affiliates underneath themselves, before they begin to
      build their next organizational level. The layers of three continue down a
      total
      of eight levels.




The
      market for our services is relatively new and rapidly evolving and growing.
      Social networking and streaming media are areas of high interest, dominating
      both the consumer and financial press. According to the Aberdeen Group, the
      streaming media industry is expected to grow from $2 billion in 2004 to an
      estimated $12 billion by 2008. We expect that the annual rate of growth of
      adoption of streaming media tools in 2008 will exceed 2007 as more users become
      comfortable with this technology, the Internet and personal computer
      usage.




Social
      networking sites are also among the fastest growing Web destinations. In May
      2006, the top 10 social networking sites combined for over 1/3 of total unique
      Internet visits. Other trends in our favor include the dispersion of families
      and friends around the country and globe who want to visually communicate on
      a
      regular basis and the desire of many companies to reduce resources spent on
      employee air and automobile travel. We differentiate ourselves from other social
      networking sites by allowing our members to retain copyright and ownership
      of
      all the content that they have created.




We
      intend
      to continue to grow our business through continued product enhancements with
      additional features and functionality; the extension of the DigitalFX Studio
      to
      small businesses and enterprise customers; and by offering ancillary products
      and services through the affiliate program. In 2007, we initiated a traveling
      leadership seminar called the One Vision Tour that delivered substantial
      training to Affiliates and potential new customers. The seminar encompassed
      marketing techniques to facilitate expansion of existing businesses and
      leadership skills to manage growing organizations.




18




During
      2008, we also plan to consider strategic acquisition opportunities to accelerate
      growth. We will evaluate prospects that are synergistic and look to invest
      in
      businesses or technologies that offer complementary products or services that
      enhance our business model.




**General**




Net
      sales
      are comprised of gross sales less credits, returns, chargebacks and
      allowances.




Cost
      of
      revenues consists primarily of technology fees, portal content and support
      costs, cameras and training materials in business packages, fulfillment
      expenses, inbound and outbound freight costs, direct expenses for sales and
      training conferences, purchased merchandise, and reserve for inventory
      obsolescence.




Commission
      expenses include all monies earned by Affiliates in our multi-tiered program.
      When a sale is made from us to a customer through the efforts of our affiliate
      network, the sale is recorded as revenue and the Affiliates earn commissions
      as
      a percentage of this sale. We have no other internal sales
      expenses.




Other
      operating expenses consist of product development, marketing, technical and
      customer support, general and administrative and equity-based
      compensation.




The
      exchange transaction was accounted for as a reverse merger (recapitalization)
      with VMdirect deemed to be the accounting acquirer, while we were deemed to
      be
      the legal acquirer. Immediately prior to the exchange transaction, we had no
      material operations, assets, or liabilities. Accordingly, for all meaningful
      purposes, the following discussion, which represents a discussion of the
      operations of our wholly-owned subsidiary, VMdirect, and our other Nevada and
      European subsidiaries, for the periods presented, represents a discussion of
      our
      operations for the periods presented.




**Results
      of Operations**




**Year
      Ended December 31, 2007 Compared with Year Ended December 31, 2006 (in
      thousands, except for customer base data)**




The
      following table presents net revenue by category for the years ended December
      31, 2007 and 2006.




**Revenue:**
            
            **2007**
            
            **2006**Subscription
                fees for access plans
            
            $
            17,620
            
            $
            11,848Affiliate
                business packages
            
            
            4,128
            
            
            7,745Upgrades
                to business packages
            
            
            1,074
            
            
            1,552Merchandise
                and shipping fees
            
            
            419
            
            
            921Conferences
                and events
            
            
            270
            
            
            734Total
                Revenue, net
            
            $
            23,511
            
            $
            22,800






Net
      revenues increased $711 in 2007 or 3.1% to $23,511 from $22,800 in 2006. During
      2007, our number of active customers increased to approximately 28,000 in 2007
      from approximately 26,000 in 2006. In addition, we continued our international
      expansion program with 2007 launches in the countries of Spain, Germany and
      Ireland.




19




*Subscription
      Fee Revenue*




Recurring
      revenue from subscription fees for access plans from Affiliates and retail
      customers increased in total by $5,772, from $11,848 in 2006 to $17,620 in
      2007.




Subscription
      fees from Affiliates increased $4,670 to $15,238 in 2007 from $10,568 in 2006.
      While our number of active Affiliates declined from approximately 14,000 at
      the
      end of 2006 to over 13,000 at then end of 2007, recurring revenue from our
      Fast
      Track program, which retails for $299, and Chief Executive program, which
      retails for $1,999, increased 73% and 31% from 2006 to 2007,
      respectively.




Subscription
      fees from retail customers increased $1,102 from $1,280 in 2006 to $2,382 in
      2007. We increased the number of our active retail customers by 25%, from 12,000
      in 2006 to 15,000 in 2007. We offer retail access plans at $9.95, $29.95 and
      $39.95 (U.S.A. prices) per month. During 2007, more of these customers enrolled
      in plans at a higher monthly price than in 2006. This change, coupled with
      the
      growth in both retail customers accounted for the increase in subscription
      revenue from retail customers.




*Affiliate
      Business Package Revenue and Upgrades*




Affiliate
      business package revenue, which represent new Affiliate kit sales, decreased
      $3,617 to $4,128 in 2007 from $7,745 in 2006. In 2007, sales of our Basic kit,
      which retails for $79, increased by 2,000 units while sales of our Fast Track
      kit, which retails for $299 and our Chief Executive kit, which retails for
      $1,999, decreased by approximately 3,000 units, attributing to a net decrease
      in
      new Affiliate kit units of approximately 1,000. In September 2007, we initiated
      sales in Germany, Spain and Ireland, accounting for 2% of sales. As of December
      31, 2007, we had over 700 customers in these three countries.




Revenue
      related to Affiliate upgrades decreased $477 from $1,551 in 2006 to $1,074
      in
      2007. During 2007, 1,100 Affiliates elected to upgrade to a higher level once
      enrolled, down from 1,500 in 2006.




During
      2007, our attention was focused primarily on product enhancements and
      international growth. In 2008, we intend to aggressively pursue the recruitment
      of new Affiliate business and the promotion of upgrades as we have in previous
      years.




*Other
      Revenue*




Merchandise
      sales consisting of web cameras and branded apparel and shipping and handling
      revenues decreased $502 to $419 in 2007 from $921 in 2006.




Revenue
      from sales conferences and events is comprised of registration fees. Revenue
      from sales conferences and events decreased $464 from 2006 to 2007 because
      during 2006, two conferences were held in May and September, versus only one
      event in November, 2007.




Gross
      Profit increased $1,034 or 5.6% in 2007. As a percentage of sales, gross profit
      increased from 81% of sales to 82% from 2006 to 2007. This slight increase
      was
      attributable to our continued efforts in controlling our product
      costs.




Commission
      expenses decreased $342 to $10,117 in 2007 from $10,459 in 2006. Commission
      expense as a percent of sales decreased from 46% in 2006 to 43% in 2007. This
      decrease as a percent of sales in 2007 was expected based on changes in the
      product mix sold and structural differences in the commission program for small
      business sales which commenced in 2007.




20




The
      following table represents a breakdown of other operating expenses for the
      years
      ended December 31, 2007 and 2006. These comparisons are not necessarily
      indicative of future spending.




**2007**
            
            **2006**Salaries,
                benefits and other compensation
            
            $
            4,745
            
            $
            2,116Corporate
                expenses
            
            
            1,422
            
            
            509Product
                development
            
            
            1,356
            
            
            1,278International
                deployment and administration
            
            
            1,023
            
            
            225Merchant
                fees
            
            
            1,008
            
            
            787Marketing
                expenses
            
            
            559
            
            
            292General
                and administrative
            
            
            2,464
            
            
            1,525Total
                Other Operating Expenses
            
            
            12,577
            
            $
            6,732




Other
      operating expenses increased as a percentage of revenue from 30% in 2006 to
      53%
      in 2007.




Salaries,
      benefits and other compensation increased $2,629 to $4,745 in 2007 from $2,116
      in 2006. Total headcount at December 31, 2007 was 82 versus 51 at December
      31,
      2006. The largest increase in headcount was in technical and customer support
      (increase of 16 full time staff) which related directly to the growth of our
      product line and international expansion. We also added staff in the
      international administration and project management departments, information
      technology, marketing and sales. In addition, our stock based compensation
      increased by $258 during 2007.




Corporate
      expenses increased $913 from $509 in 2006 to $1,422 in 2007. This relates
      primarily to the costs of being a public corporation for a full year in 2007,
      including one-time Sarbanes Oxley compliance expenses of $120, legal and audit
      fees, investor relations and insurance.




Product
      development costs increased $77 to $1,356 in 2007 from $1,278 in 2006. We spent
      $1,356 on product development in 2007 primarily on the adaptation of our
      DigitalFX Studio product to small and enterprise sized businesses, the
      improvement of existing and development of new features, and the development
      of
      the Set Top Box. Our spending in 2008 will focus on continual enhancement of
      our
      existing products and new products which utilize our technology and that will
      distribute capital, such as FirstStream-in-a-Box, a retail quality version
      of
      our FirstStream product.




International
      administrative expenses increased $798 from $225 in 2006 to $1,023 in 2007.
      This
      increase related primarily to the establishment of our Ireland based subsidiary,
      DigitalFX Europe, Ltd., and the consulting, marketing and legal costs related
      to
      the launch of our products in the countries of Germany, Spain and Ireland.
      In
      2006, international administrative expenses only included those associated
      with
      VMdirect’s UK subsidiary, VMdirect UK., Ltd. For reporting purposes, expenses
      related to the administration of Australia, New Zealand, Mexico, Canada and
      others are not considered material and are included in other General and
      administrative expenses.




Merchant
      fees increased $221 from $787 in 2006 to $1,008 in 2007. This relates to our
      increase in volume and our international expansion into new markets, which
      required that we establish additional merchant banking
      relationships.




Marketing
      expenses increased $267 to $559 in 2007 from $292 in 2006. This relates
      primarily to an increase in Affiliate incentive and recognition programs and
      the
      production and launch of the first issue of the VMdirect Affiliate magazine,
      Digital Life Made Simple, during 2007.




21




General
      and administrative expenses increased $939 to $2,464 in 2007 from $1,525 in
      2006. The increase in 2007 was related to increases in utilities and facilities
      expenses, consulting fees and depreciation and amortization.




We
      expect
      that our other operating expenses will decrease as a percentage of net sales
      through our efforts at controlling overhead expenses. We expect this reduction
      in operating expenses as a percent of sales will be partially offset by
      additional legal, administrative and translation costs to establish operations
      in foreign countries, and product development costs and costs associated with
      marketing our products through an infomercial platform. We expect to continue
      our international expansion as well as concentrating on domestic
      sales.




Other
      expense, net decreased to $87 in 2007 from $572 in 2006. This decrease was
      due
      to one-time fees associated with the exchange transaction in 2006 ($635 net
      of
      interest income of $52). In 2007, other expenses consist of interest expense
      associated with the convertible notes of $111, the valuation write down on
      one
      of our investments of $175, offset by interest income of $183 and other income
      of $16. Interest Income is comprised of interest earned on our cash and short
      term investments. Interest income increased due to higher cash balances and
      to
      higher interest yields.




**Liquidity
      and Capital Resources**




Our
      cash
      requirements are principally for working capital. Historically, we have funded
      our working capital needs through operations, the sale of equity and debt
      interests and through additional capital contributions by our former
      members.




For
      the
      year ended December 31, 2007, cash used by operating activities was ($2,759)
      and
      consisted of net loss of ($2,579), increased by non-cash items of $489 and
      decreased by $669 due to changes in other operating assets and liabilities.
      The
      latter consisted of increases in accounts payable, accrued expenses and accounts
      receivable of $516, offset by decreases in inventory of $715, prepaid expenses
      and reserves of $283 and due to affiliate of $187.




For
      the
      year ended December 31, 2006, cash provided by operating activities was $1,386
      and consisted of net income of $480, increased by non-cash items of $264 and
      by
      $642 due to changes in other operating assets and liabilities. The latter
      consisted of increases in accounts payable and accrued expenses of $1,555,
      a
      decrease in inventory of $19, offset by increases in accounts receivable of
      $22
      and prepaids, merchant reserves and deposits of $908.




Net
      cash
      used in Investing Activities during the year ended December 31, 2007 totaling
      ($2,213) consisted of the purchase of investments totaling $1,691, the purchase
      of a convertible secured promissory note of $225 and capital expenditures on
      computer equipment and software licenses of $297. For the year ended December
      31, 2006, net cash used in investing activities of ($547) was the result of
      capital expenditures for computer and video equipment and software
      licenses.




Net
      cash
      provided by Financing Activities during the year ended December 31, 2007
      consisted of the proceeds from the issuance of convertible notes of $6,482
      and
      proceeds from the exercise of stock options of $47. For the year ended December
      31, 2006, net cash provided by Financing Activities consisted of proceeds from
      the sale of equity interests of $4,941, proceeds from the exercise of warrants
      of $43, net of the payoff of a note payable of $50 and distributions to
      shareholders of $265. Net cash provided by financing activities increased $1,859
      to $6,528 in 2007 from $4,669 in 2006.




On
      December 22, 2006, we entered into a Securities Purchase Agreement with Kingdon
      Associates, Kingdon Family Partnership, L.P. and M. Kingdon Offshore Ltd. (the
      “Kingdon Investors”) pursuant to which we agreed to sell to the Kingdon
      Investors an aggregate of 1,000,000 shares of our common stock at a per share
      price of $4.75 for gross proceeds of $4.75 million. The transactions
      contemplated by the Securities Purchase Agreement closed on December 27, 2006,
      with net proceeds to us of approximately $4.36 million, after payment of
      commissions and expenses, which we used for general working capital
      purposes.




22




On
      November 29, 2007, we entered into a Securities Purchase Agreement with Portside
      Growth and Opportunity Fund, Highbridge International, LLC and Iroquois Master
      Fund, Ltd. pursuant to which we issued an aggregate principal amount of $7.0
      million of three-year senior secured convertible notes, and five-year warrants
      to purchase an aggregate of 875,000 shares of our common stock, to the
      Investors. The transactions contemplated by the Securities Purchase Agreement
      closed on November 30, 2007, with net proceeds to us of approximately $4.3
      million, net of $2 million held in a collateral account for certain letters
      of
      credit, after payment of commissions and expenses.




This
      agreement was substantially restructured on March 24, 2008, when we entered
      into
      an Amendment and Exchange Agreement with each of the Investors. Under the terms
      of the Amendment and Exchange Agreements, we agreed, along with the Investors,
      to restructure the financing consummated under the Securities Purchase Agreement
      to reduce the amount of the financing to $3,000,000, with the Investors
      receiving repayment of their pro-rata share of $4,000,000, including $2,000,000
      held in a collateral account for certain letters of credit, through the exchange
      of Existing Notes for a combination of Amended and Restated Notes and the Common
      Shares, and through the exchange of Existing Warrants for Amended and Restated
      Warrants. The Amended and Restated Notes have an aggregate principal amount
      of
      $3,000,000 and a term of three years commencing from November 30, 2007. The
      Amended and Restated Warrants have a term of five years commencing from November
      30, 2007 and entitle the Investors to initially purchase an aggregate of 750,002
      shares of our common stock (subject to adjustment as provided in the Amended
      and
      Restated Warrants, including pursuant to economic anti-dilution adjustments).
      The Amended and Restated Notes carry interest at 7.50% per annum on the
      unpaid/unconverted principal balance, payable quarterly in cash, and are secured
      on a senior basis against all of our assets. We are also required to make
      aggregate monthly principal payments of $25,000, plus accrued interest thereon,
      beginning July 1, 2008.




The
      Amended and Restated Notes are convertible into approximately 1,500,000 shares
      (subject to adjustment as provided in the Amended and Restated Notes, including
      pursuant to economic anti-dilution adjustments), based on an initial conversion
      price equal to $2.00 per share (subject to adjustment as provided in the Amended
      and Restated Notes, including pursuant to economic anti-dilution adjustments),
      which shall reset on March 26, 2009 to the greater of (i) 105% of the arithmetic
      average of the dollar weighted average price of our common stock over each
      of
      the five (5) consecutive trading days ending on the trading day immediately
      prior to March 26, 2009 and (ii) $1.00 (as adjusted for any stock splits, stock
      dividends, recapitalizations, combinations, reverse stock splits or other
      similar events); provided however, that in no event shall the adjusted
      conversion price be greater than $3.00 (as adjusted for any stock splits, stock
      dividends, recapitalizations, combinations, reverse stock splits or other
      similar events). The Amended and Restated Warrants have an exercise price of
      $0.959 per share (subject to adjustment as provided in the Amended and Restated
      Warrants, including pursuant to economic anti-dilution
      adjustments).




The
      Amended and Restated Notes are convertible at the option of the Investors prior
      to their maturity. Additionally, beginning November 30, 2008, and provided
      that
      we have complied with certain equity conditions, we will be able to require
      the
      Investors to convert the Amended and Restated Notes to shares of our common
      stock if the dollar volume weighted average price of our common stock is $2.75
      (subject to adjustment as provided in the Amended and Restated Notes) for twenty
      (20) out of thirty (30) consecutive trading days.




The
      restructuring transaction closed on March 26, 2008. The remaining proceeds
      of
      approximately $2.1 million, after the payment of aggregate transaction expenses,
      will be used for strategic initiatives and general working capital
      purposes.




23




Also
      in
      connection with the restructuring transaction, we agreed to reimburse the fund
      manager of one of the Investors for its out-of-pocket expenses incurred in
      connection with the transactions contemplated by the Securities Purchase
      Agreement, including the actual and reasonable fees and disbursements of the
      fund manager’s legal counsel, up to an aggregate amount of $20,000.




We
      expect
      that with our present cash flows, we will have adequate working capital to
      continue to grow our operations and develop our products, international markets
      and business plan as anticipated. While there is currently no definitive plan
      of
      debt or equity financing, there is no assurance that external financing will
      be
      available if needed in the future, or if available, that it would be available
      on terms acceptable to us.




Our
      business benefits from low capital expenditure requirements. Our capital
      expenditures for 2008 are expected to primarily relate to enhancements for
      software applications.




**Backlog**




Backlog
      is only relevant to our affiliate business packages and merchandise sales,
      as
      all subscription services are delivered upon enrollment or at monthly renewal.
      We do not believe that backlog is a meaningful indicator of future business
      prospects due to the short period of time from affiliate business package and
      merchandise order to product shipment. Most products are shipped one to two
      days
      from the date ordered; therefore, backlog information is not material to an
      understanding of our business.




**Geographic
      Information**




The
      breakdown of revenues generated by geographic region for the years ended
      December 31, 2007 and 2006 is as follows:




**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**United
                States, Canada & Mexico
            
            
            90
            %
            
            89
            %United
                Kingdom
            
            
            2
            %
            
            3
            %Spain,
                Germany & Ireland
            
            
            2
            %
            
            -Australia
            
            
            5
            %
            
            7
            %New
                Zealand
            
            
            1
            %
            
            1
            %100
            %
            
            100
            %




**Critical
      Accounting Policies**




We
      prepare our Consolidated Financial Statements in conformity with accounting
      principles generally accepted in the United States, which require us to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and revenue and expenses during the year. Actual results could
      differ from those estimates. We consider the following policies to be most
      critical in understanding the judgments that are involved in preparing our
      financial statements and the uncertainties that could impact our results of
      operations, financial condition and cash flows.




*Revenue
      Recognition*




We
      generate revenue through (i) sales of affiliate business packages and selling
      aids to Affiliates which include cameras, sales literature, and training videos,
      (ii) sales of monthly subscriptions to retail customers and Affiliates with
      a
      wide spectrum of streaming video content as well as an integrated suite of
      streaming media applications, including video email, video chat, and live
      web-casting, (iii) sales of branded apparel and merchandise, and (iv) hosting
      conferences and events.




24




*Affiliate
      Business Packages*




We
      recognize revenue from the sales of affiliate business packages and selling
      aids, including shipping revenue, in accordance with SAB No. 104, *“Revenue
      Recognition* ,”
when
      persuasive evidence of an order arrangement exists, delivery has occurred,
      the
      sales price is fixed or determinable and collectibility is reasonably assured.
      Generally, these criteria are met at the time the product is shipped to our
      customers when title and risk of loss have transferred. We consider all
      deliverables to be met at this point. Costs incurred for the shipping and
      handling of our products are recorded as cost of sales as incurred.




Allowances
      for subsequent customer returns of affiliate business packages are provided
      when
      revenues are recorded. Affiliate business packages returned within the first
      30
      days of purchase are generally refunded at 90 percent of the sales price.
      Returned products that were damaged during shipment to the customer are replaced
      immediately at our expense. On a monthly basis, we calculate a sales allowance
      which is an estimate of refunds for package returns that are within the 30
      day
      time frame that have not yet been returned or processed. The estimate is based
      on an analysis of the historical rate of package returns using data from the
      four months preceding the date of measurement. We have found that this method
      approximates actual returns for the next 30 days. Increases or decreases to
      the
      sales allowance are charged to revenue.




*Monthly
      Subscriptions*




We
      sell
      subscriptions for our internet-based studio suite of products through a unique
      multi-tiered affiliate program using non-related independent distributors,
      known
      as Affiliates. We also market subscriptions directly to retail customers who
      purchase them for their personal use. We recognize revenue when all of the
      criteria of SAB No. 104 referred to above are met, which is when the
      subscription is initiated, and then monthly based on an automatic renewal.
      Our
      services are provided immediately upon enrollment and continue until cancelled.
      The recurring subscription can be cancelled at any time in writing. If cancelled
      within the first 30 days after enrollment, 90% of the fee is refunded, pro-rated
      for the number of days not used during the month. If a subscription is cancelled
      after the first month of service, a full refund is issued for the month if
      the
      cancellation is received in writing within 48 hours of the renewal billing.
      No
      refund is issued if a subscription is cancelled more than 48 hours after the
      renewal billing for the month. We record an allowance for subscription
      cancellations based on an analysis of historical data for the four months
      preceding the date of measurement. We apply a cancellation percentage to
      subscription revenue that is subject to cancellation within the first 30 days
      of
      enrollment or 48 hours of renewal. The accuracy of these estimates is dependent
      on the rate of future cancellations being consistent with the historical rate.
      Increases or decreases to the sales allowance are charged to
      revenue.




*Apparel
      and Merchandise*




We
      also
      sell select products to Affiliates to assist them in building their businesses
      and in selling subscriptions to the portal. These products include cameras,
      branded apparel and other merchandise. Revenue for these sales, including
      shipping revenue, are recognized when all the criteria of SAB No. 104 described
      above are met, which is generally upon shipment.




25




*Conferences
      and Events*




We
      also
      earn fees for certain events we host such as sales and training conferences
      and
      seminars. Revenue is recognized when all of the criteria of SAB No. 104
      described above are met, which is generally after the event has occurred.
      Amounts collected prior to the event are reflected as deferred revenue, and
      recognized after the event has occurred.




*Allowance
      for Doubtful Accounts*




Our
      receivables consist entirely of receivables from credit card companies, arising
      from the sale of product and services to our customers. We do not record an
      allowance for doubtful accounts on these receivables, as monies processed by
      credit card processors are collected 100% within three to five
      days.




*Inventories*




Inventories
      are valued at the lower of cost or market. They are written down, as required,
      to provide for estimated obsolete or not salable inventory based on assumptions
      about future demand for our products and market conditions. If future demand
      and
      market conditions are less favorable than management’s assumptions, additional
      inventory write-downs could be required. Likewise, favorable future demand
      and
      market conditions could positively impact future operating results if
      written-off inventory is sold.




**Stock-Based
      Compensation**




We
      periodically issue stock options and warrants to employees and non-employees
      in
      non-capital raising transactions for services and for financing costs. We
      adopted SFAS No. 123R, “Accounting for Stock-Based Compensation” effective
      January 1, 2006, and are using the modified prospective method in which
      compensation cost is recognized beginning with the effective date (a) based
      on
      the requirements of SFAS No. 123R for all share-based payments granted after
      the
      effective date and (b) based on the requirements of SFAS No. 123R for all awards
      granted to employees prior to the effective date of SFAS No. 123R that remain
      unvested on the effective date. We account for stock option and warrant grants
      issued and vesting to non-employees in accordance with EITF No. 96-18:
“Accounting for Equity Instruments that are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF 00-18
“Accounting Recognition for Certain Transactions involving Equity Instruments
      Granted to Other Than Employees” whereby the fair value of the stock
      compensation is based on the measurement date as determined at either a) the
      date at which a performance commitment is reached, or b) at the date at which
      the necessary performance to earn the equity instrument is
      complete.




We
      recognize compensation cost for equity-based compensation for all new or
      modified grants issued after December 31, 2005. In addition, commencing January
      1, 2006, we recognized the unvested portion of the grant date fair value of
      awards issued prior to adoption of SFAS No. 123R based on the fair value
      previously calculated for disclosure purposes over the remaining vesting period
      of the outstanding stock options and warrants.




We
      estimate the fair value of stock options pursuant to SFAS No. 123R using the
      Black-Scholes option-pricing model, which was developed for use in estimating
      the fair value of options that have no vesting restrictions and are fully
      transferable. This model requires the input of subjective assumptions, including
      the expected price volatility of the underlying stock and the expected life
      of
      stock options. Projected data related to the expected volatility of stock
      options is based on the average volatility of the trading prices of comparable
      companies and the expected life of stock options is based upon the average
      term
      and vesting schedules of the options. Changes in these subjective assumptions
      can materially affect the fair value of the estimate, and therefore the existing
      valuation models do not provide a precise measure of the fair value of our
      employee stock options.




26




**Recent
      Accounting Pronouncements**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      provides enhanced guidance for using fair
      value to measure assets and liabilities. SFAS No. 157 provides a common
      definition of fair value and establishes a framework to make the measurement
      of
      fair value in generally accepted accounting principles more consistent and
      comparable. SFAS No. 157 also requires expanded disclosures to provide
      information about the extent to which fair value is used to measure assets
      and
      liabilities, the methods and assumptions used to measure fair value, and the
      effect of fair value measures on earnings. SFAS No. 157 is effective for
      financial statements issued in fiscal years beginning after November 15, 2007 and
      for
      interim periods within those fiscal years .
      We do
      not believe the adoption of SFAS No. 157 will have a material, if any, effect
      on
      our consolidated results of operations, financial position, or cash
      flows.





In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — including an amendment of FASB Statement
      No. 115” (FAS 159).  FAS 159, which becomes effective for the
      company on January 1, 2008, permits companies to choose to measure many
      financial instruments and certain other items at fair value and report
      unrealized gains and losses in earnings. Such accounting is optional and is
      generally to be applied instrument by instrument. We do not anticipate that
      election, if any, of this fair-value option will have a material effect on
      our
      consolidated financial position, results of operations, cash flows or
      disclosures.





In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141 (R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





We
      do not
      believe that the adoption of the above recent pronouncements will have a
      material effect on our consolidated results of operations, financial position,
      or cash flows.




27





**Qualitative
      and Quantitative Disclosures About Market Risk**




We
      currently have limited financial market risks from changes in foreign currency
      exchange rates or changes in interest rates and do not use derivative financial
      instruments. For the year ended December 31, 2007, 2% of total revenue is
      denominated in British pounds, 5% in Australian dollars. 2% in Euros, and 1%
      in
      New Zealand dollars. In the future, we expect to enter into transactions in
      additional currencies. An adverse change in exchange rates would result in
      a
      decline in income before taxes, assuming that each exchange rate would change
      in
      the same direction relative to the U.S. dollar. In addition to the direct
      effects of changes in exchange rates, such changes typically affect the volume
      of sales or foreign currency sales price as competitors’ products become more or
      less attractive.




**Off-Balance
      Sheet Arrangements**




We
      have
      no off-balance sheet arrangements or financing activities with special purpose
      entities.




**RISK
      FACTORS**




INVESTING
      IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY
      CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN
      THIS
      REPORT BEFORE PURCHASING SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING
      RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND/OR RESULTS OF OPERATIONS
      COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN THAT CASE, THE TRADING PRICE
      OF
      OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE SOME OR ALL OF YOUR
      INVESTMENT.




**Risks
      Related to Our Business**




**Our
      operating results may fluctuate significantly based on customer acceptance
      of
      our products.**




Management
      expects that we will experience substantial variations in our net sales and
      operating results from quarter to quarter due to customer acceptance of our
      products. We rely on sales by our Affiliates to generate significant revenues
      for us. If customers don’t accept our products, our sales and revenues would
      decline, resulting in a reduction in our operating income.




Customer
      interest for our products could also be impacted by the timing of our
      introduction of new products. If our competitors introduce new products around
      the same time that we issue new products, and if such competing products are
      superior to our own, customers’ desire for our products could decrease,
      resulting in a decrease in our sales and revenues. To the extent that we
      introduce new products and customers decide not to migrate to our new products
      from our older products, our revenues could be negatively impacted due to the
      loss of revenue from those customers. In the event that our newer products
      do
      not sell as well as our older products, we could also experience a reduction
      in
      our revenues and operating income.




As
      a
      result of fluctuations in our revenue and operating expenses that may occur,
      management believes that period-to-period comparisons of our results of
      operations are not a good indication of our future performance.




**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.**




While
      we
      previously achieved operating profits, we did not achieve an operating profit
      for the year ended December 31, 2007, and we have a history of operating losses.
      Given the competitive and evolving nature of the industry in which we operate,
      the technical difficulties we recently experienced with version 5.0 of the
      DigitalFX Studio product, and potential technical difficulties we may encounter
      in the future, we may not be able to achieve, sustain or increase profitability
      and our failure to do so would adversely affect our business, including our
      ability to raise additional funds.




28




**We
      may not be able to effectively manage our growth.**




Our
      strategy envisions growing our business. To date, our growth has been derived
      primarily from the growth of our multi-tiered Affiliate base and we intend
      to
      continue to employ this growth strategy. To manage anticipated growth, we plan
      to expand our technology to handle increasing volume on our websites and to
      expand our administrative and marketing organizations to accommodate larger
      numbers of our Affiliates. We must also effectively manage our relationships
      with the increasing number of retail customers/users of our products. We will
      need to hire, train, supervise and manage new employees. These processes are
      time consuming and expensive, will increase management responsibilities and
      will
      divert management attention. Any growth in or expansion of our business is
      likely to continue to place a strain on our management and administrative
      resources, infrastructure and systems. We cannot assure you that we will be
      able
      to:




·
            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.




Our
      inability or failure to manage our growth and expansion effectively could result
      in strained Affiliate and customer relationships based on dissatisfaction with
      our service to these groups, our failure to meet demand for our products and/or
      increased expenses to us to resolve these issues, and a consequent significant
      decrease in the number of our Affiliates and end users. Any significant decrease
      in our Affiliate base or the number of retail customers, or the election of
      new
      Affiliates to sign on for lower level packages would result in a decrease in
      revenues.




**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.**




Currently,
      our primary business is the sale of our studio suite of products to our
      Affiliates. Our future success depends, in part, on our ability to expand our
      product and service offerings. To that end we have engage in product development
      activities, including activities related to the Set Top Box, to provide
      additional products and related services to our customers. The process of
      developing new products is complex and uncertain, and if we fail to accurately
      predict customers’ changing needs and emerging technological trends our business
      could be harmed. We must commit significant resources to developing new products
      before knowing whether our investments will result in products the market will
      accept. Furthermore, we may not execute successfully on commercializing those
      products because of errors in product planning or timing, technical hurdles
      that
      we fail to overcome in a timely fashion, or a lack of appropriate resources.
      This could result in competitors providing those solutions before we do and
      a
      reduction in net sales and earnings.




The
      success of new products depends on several factors, including proper new product
      definition, timely completion and introduction of these products,
      differentiation of new products from those of our competitors, and market
      acceptance of these products. There can be no assurance that we will
      successfully identify new product opportunities, develop and bring new products
      to market in a timely manner, or achieve market acceptance of our products
      or
      that products and technologies developed by others will not render our products
      or technologies obsolete or noncompetitive.




29




**If
      we continue to experience technological difficulties with our products our
      Affiliate base could shrink, customer growth could decrease and our business
      could suffer.**




In
      November 2006, we released the 5.0 version of the DigitalFX Studio that included
      expanded functionality and features. The testing we conducted did not reveal
      various technical difficulties that remained with the product. In addition,
      the
      5.0 version rolled out in November 2006 did not contain all of the enhancements
      that our Affiliates were expecting due to development delays. The result was
      a
      product with lower than expected functionality and operating difficulties.
      As a
      result of these issues, our Affiliate network has not marketed our products
      and
      the business opportunity as widely as projected in our plan. While we have
      taken
      steps to ameliorate these difficulties, to the extent that we continue to
      encounter technical difficulties, and to the extent that enhancements to the
      products we release or new products have technical difficulties, the reputation
      of our products could suffer, our Affiliate base could shrink and our ability
      to
      generate new customers, and consequently revenue, would be negatively impacted.
      Our ability to grow our business would also be negatively impacted.




**Ninety
      percent of our revenues for the year ended December 31, 2007 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.**




To
      date,
      our revenue growth has been derived primarily from the growth of our
      multi-tiered Affiliate base. Rather than using traditional advertising and
      sales
      methods, we chose to create a multi-tiered affiliate program to develop new
      customers. Affiliates earn retail commissions on a monthly residual basis by
      acquiring new customers for us. Affiliates earn additional commissions from
      the
      sales activities of Affiliates who they personally enroll. These rewards are
      extended for up to eight generations of Affiliates, meaning that an Affiliate
      earns a commission on the sales of the Affiliates they have personally enrolled
      as well as on the sales of second-, third-, and fourth-generation Affiliates,
      potentially eight levels deep. Our Affiliate compensation plan is structured
      on
      a 3x8 matrix, meaning Affiliates can each enroll three Affiliates underneath
      themselves before they begin to build their next organizational level. The
      layers of three continue down a total of eight levels.




Our
      success and the planned growth and expansion of our business depend on us
      achieving greater and broader acceptance of our products and expanding our
      customer base. There can be no assurance that customers will subscribe to our
      product offerings or that we will continue to expand our customer base. Though
      we plan to continue to provide tools to our Affiliates to enable them to
      generate sales, we cannot guarantee that the time and resources we spend on
      these efforts will generate a commensurate increase in users of our product
      offerings. If we are unable to effectively market or expand our product
      offerings, and if our Affiliate enrollment does not continue to grow, we will
      be
      unable to grow and expand our business or implement our business strategy.
      This
      could materially impair our ability to increase sales and revenue and materially
      and adversely affect our margins, which could harm our business and cause our
      stock price to decline.




Our
      future success depends largely upon our ability to attract and retain a large
      active base of Affiliates who purchase and sell our products. We cannot give
      any
      assurances that the productivity of our Affiliates will continue at their
      current levels or increase in the future. Several factors affect our ability
      to
      attract and retain a significant number of Affiliates, including:




·
            on-going
                motivation of our Affiliates;




·
            general
                economic conditions;




·
            significant
                changes in the amount of commissions
                paid;




·
            public
                perception and acceptance of direct
                selling;




30


·
            public
                perception and acceptance of us and our
                products;




·
            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.**




Our
      ability to capitalize on growth in new international markets and to maintain
      the
      current level of operations in our existing international markets is exposed
      to
      risks associated with international operations, including:




·
            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.




We
      currently conduct activities in Australia, Canada, Ireland, Mexico, New Zealand,
      the United Kingdom, Germany and Spain. We have not been affected in the past
      by
      any of the potential political, legal or regulatory risks identified above.
      While we do not consider these risks to be material in the foreign countries
      in
      which we currently operate, they may be material in other countries where we
      may
      expand our business.




We
      are
      also subject to the risk that due to legislative or regulatory changes in one
      or
      more of our present or future markets, our marketing system could be found
      not
      to comply with applicable laws and regulations or may be prohibited. Failure
      to
      comply with applicable laws and regulations could result in the imposition
      of
      legal fines and/or penalties which would increase our operating costs. We may
      also be required to comply with directives or orders from various courts or
      applicable regulatory bodies to conform to the requirements of new legislation
      or regulation, which would detract management’s attention from the operation of
      our business. Further we could be prohibited from distributing products through
      our marketing system or may be required to modify our marketing
      system.




Our
      services are priced in local currency. As a result, our financial results could
      be affected by factors such as changes in foreign currency exchange rates or
      weak economic conditions in foreign markets. We do not currently engage in
      hedging activities or other actions to decrease fluctuations in operating
      results due to changes in foreign currency exchange rates, although we may
      do so
      when the amount of revenue obtained from sources outside of the United States
      becomes significant.




31





**We
      also face legal and regulatory risks in the United States, the affect of which
      could reduce our sales and revenues.**




Our
      marketing program is subject to a number of federal and state regulations
      administered by the Federal Trade Commission and various state agencies in
      the
      United States, directed at preventing fraudulent or deceptive schemes by
      ensuring that product sales are made to consumers of the products and that
      compensation, recognition, and advancement within the marketing organization
      are
      based on the sale of products rather than investment in the organization or
      other non-sales-related criteria. These regulatory requirements do not include
      “bright line” rules and are inherently fact-based. Thus, even though we believe
      that our marketing program complies with applicable federal and state laws
      or
      regulations, we are subject to the risk that a governmental agency or court
      could determine that we have failed to meet these requirements in a particular
      case. Such an adverse determination could require us to make modifications
      to
      our marketing system, increasing our operating expenses. The negative publicity
      associated with such an adverse determination could also reduce Affiliate and
      end user demand for our products, which would consequently 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.**




Although
      we use various means to address misconduct by our multi-level Affiliates,
      including maintaining policies and procedures to govern the conduct of our
      Affiliates and conducting training seminars, it is still difficult to detect
      and
      correct all instances of misconduct. Violations of our policies and procedures
      by our Affiliates could lead to litigation, formal or informal complaints,
      enforcement actions, and inquiries by various federal, state, or foreign
      regulatory authorities against us and/or our Affiliates. Litigation, complaints,
      and enforcement actions involving us and our Affiliates could consume
      considerable amounts of financial and other corporate resources, which could
      have a negative impact on our sales, revenue, profitability and growth
      prospects.




We
      have
      not been, and are not currently, subject to any material litigation, complaint
      or enforcement action regarding Affiliate misconduct by any federal, state
      or
      foreign regulatory authority.




**We
      may be unable to compete successfully against existing and future competitors,
      which could decrease our revenue and margins and harm our
      business.**




The
      digital communications and social networking industries are highly competitive.
      Our future growth and financial success depend on our ability to further
      penetrate and expand our user base, as well as our ability to grow our revenue
      models. Our competitors possess greater resources than we do and in many cases
      are owned by companies with broader business lines. For example, we encounter
      competition in the social networking space from www.myspace.com ,
      a
      company acquired by News Corporation, and we offer video instant messaging
      services similar to those offered at www.skype.com ,
      a
      subsidiary of eBay, Inc. There can be no assurance that we will be able to
      maintain our growth rate or increase our market share in our industry at the
      expense of existing competitors.




**We
      may not be able to adequately protect our intellectual property rights which
      would affect our ability to compete in our industry.**




Our
      intellectual property relates to the initiation, receipt and management of
      digital communications. We rely in part on trade secret, unfair competition,
      trade dress and trademark law to protect our rights to certain aspects of our
      intellectual property, including our software technologies, domain names and
      recognized trademarks, all of which we believe are important to the success
      of
      our products and our competitive position. There can be no assurance that any
      of
      our trademark applications will result in the issuance of a registered
      trademark, or that any trademark granted will be effective in thwarting
      competition or be held valid if subsequently challenged. In addition, there
      can
      be no assurance that the actions taken by us to protect our proprietary rights
      will be adequate to prevent imitation of our products, that our proprietary
      information will not become known to competitors, that we can meaningfully
      protect our rights to unpatented proprietary information or that others will
      not
      independently develop substantially equivalent or better products that do not
      infringe on our intellectual property rights.




32




We
      could
      be required to devote substantial resources to enforce and protect our
      intellectual property, which could divert our resources from the conduct of
      our
      business and result in increased expenses. In addition, an adverse determination
      in litigation could subject us to the loss of our rights to particular
      intellectual property, could require us to grant licenses to third parties,
      could prevent us from selling or using certain aspects of our products or could
      subject us to substantial liability, any of which could reduce our sales and/or
      result in the entry of additional competitors into 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.**




Others
      may initiate claims against us for infringing on their intellectual property
      rights. We may be subject to costly litigation relating to such infringement
      claims and we may be required to pay compensatory and punitive damages or
      license fees if we settle or are found culpable in such litigation. In addition,
      we may be precluded from offering products that rely on intellectual property
      that is found to have been infringed by us. We also may be required to cease
      offering the affected products while a determination as to infringement is
      considered and could eventually be required to modify our products to cease
      the
      infringing activity. These developments could cause a decrease in our operating
      income and reduce our available cash flow, which could harm our business and
      cause our stock price to decline.




**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.**




We
      rely
      on certain intellectual property licensed from third parties and may be required
      to license additional products from third parties in the future. There can
      be no
      assurance that these third party licenses will be available or will continue
      to
      be available to us on acceptable terms or at all. Our inability to enter into
      and maintain any license necessary for the conduct of our business could result
      in our expenditure of significant capital to develop or obtain alternate
      technologies and to integrate such alternate technologies into our current
      products, or could result in our cessation of the development or sales of
      products for which such licenses are necessary.




**We
      may be unable to attract and retain qualified, experienced, highly skilled
      personnel, which could adversely affect the implementation of our business
      plan.**




Our
      success depends to a significant degree upon our ability to attract, retain
      and
      motivate skilled and qualified personnel. In particular, we are heavily
      dependent on the continued services of Craig Ellins and the other members of
      our
      senior management team. We do not have long-term employment agreements with
      most
      members of our senior management team, each of whom may voluntarily terminate
      his or her employment with us at any time. Following any termination of
      employment, those employees without employment agreements would not be subject
      to any non-competition covenants or non-solicitation covenants. The loss of
      any
      key employee, including members of our senior management team, could result
      in a
      decrease in the efficacy with which we implement our business plan due to the
      loss of our experienced managers, increased competition in our industry and
      could negatively impact our sales and marketing operations. Our inability to
      attract highly skilled personnel with sufficient experience in our industry
      could result in less innovation in our products and a consequent decrease in
      our
      competitive position, and a decrease in the quality of our service to our
      Affiliates and end users and a consequent decrease in our sales, revenue and
      operating income.




33




**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.**




Our
      management team had limited experience managing the reporting requirements
      of
      the federal securities laws prior to serving as our executive officers.
      Management will be required to implement appropriate programs and policies
      to
      comply with existing disclosure requirements and to respond to increased
      reporting requirements pursuant to Section 404 of the Sarbanes-Oxley Act. These
      increased requirements include the preparation of an internal report which
      states the responsibility of management for establishing and maintaining an
      adequate internal control structure and procedures for financial reporting
      and
      containing an assessment, as of the end of each fiscal year, of the
      effectiveness of the internal control structure and procedures for financial
      reporting. Management’s efforts to familiarize itself with and to implement
      appropriate procedures to comply with the disclosure requirements of the federal
      securities laws could divert its attention from the operation of our business.
      Management’s failure to comply with the disclosure requirements of the federal
      securities laws could lead to the imposition of fines and penalties by the
      SEC
      or the cessation of trading of our common stock on AMEX.




**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.**




Our
      future success will depend, in part, on our ability to keep up with changes
      in
      consumer tastes and our continued ability to differentiate our products through
      implementation of new technologies. We may not, however, be able to successfully
      do so, and our competitors may be able to implement new technologies at a much
      lower cost. These types of developments could render our products less
      competitive and possibly eliminate any differentiating advantage that we might
      hold at the present time.




**Other
      Risks Related to an Investment in Our Common Stock**




**There
      is limited trading, and consequently limited liquidity, of our common
      stock.**




Prior
      to
      August 23, 2007, bid and ask prices for shares of our common stock were quoted
      on the OTC Bulletin Board under the symbol “DFXN.” On August 23, 2007, our
      common stock began trading on AMEX. Although our common stock is quoted on
      AMEX,
      there is limited trading of our common stock and our common stock is not broadly
      followed by securities analysts. The average daily volume of our common stock
      as
      reported on AMEX for the three-month period ended December 31, 2007 was
      approximately 30,000 shares. Consequently, shareholders may find it difficult
      to
      sell shares of our common stock.




While
      we
      are hopeful that we will command the interest of a greater number of investors
      and analysts, more active trading of our common stock may never develop or
      be
      maintained. More active trading generally results in lower price volatility
      and
      more efficient execution of buy and sell orders. The absence of active trading
      reduces the liquidity of our common stock. As a result of the lack of trading
      activity, the quoted price for our common stock on AMEX is not necessarily
      a
      reliable indicator of its fair market value. Further, if we cease to be traded,
      holders of our common stock would find it more difficult to dispose of, or
      to
      obtain accurate quotations as to the market value of, our common stock, and
      the
      market value of our common stock would likely decline.




34




**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.**




The
      market price of our common stock is likely to be highly volatile and could
      be
      subject to wide fluctuations in response to a number of factors that are beyond
      our control, including announcements of new products or services by our
      competitors. In addition, the market price of our common stock could be subject
      to wide fluctuations in response to a variety of factors,
      including:




·
            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.




In
      the
      past, shareholders have often instituted securities class action litigation
      after periods of volatility in the market price of a company’s securities. If a
      shareholder were to file any such class action suit against us, we would incur
      substantial legal fees and our management’s attention and resources would be
      diverted from operating our business to respond to the litigation, which could
      impact our productivity and profitability.




**Substantial
      future sales of our common stock in the public market could cause our stock
      price to fall.**




Upon
      the
      effectiveness of any registration statement that we may file with respect to
      the
      resale of shares held by our shareholders, a significant number of our shares
      of
      common stock may become eligible for sale. The sale of these shares could
      depress the market price of our common stock. Sales of a significant number
      of
      shares of our common stock in the open market could harm the market price of
      our
      common stock. A reduced market price for our shares could make it more difficult
      to raise funds through future offerings of common stock.




On
      November 30, 2007, upon the expiration of the lock up agreements restricting
      sales by the selling shareholders listed in the prospectus included on the
      post-effective amendment to the registration statement on Form SB-2 we filed
      with the SEC on May 22, 2007, additional shares of our common stock became
      eligible for unrestricted resale. As additional shares of our common stock
      become available for resale in the open market (including shares issued upon
      the
      exercise of our outstanding options and warrants), the supply of our publicly
      traded shares will increase, which could decrease its price.




Some
      of
      our shares may also be offered from time to time in the open market pursuant
      to
      Rule 144, and these sales may have a depressive effect on the market price
      of
      our shares. In general, a non-affiliate who has held restricted shares for
      a
      period of six months may sell an unrestricted number of shares of our common
      stock into the market.




**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.**




Any
      sale
      of common stock by us in a future private placement offering could result in
      dilution to the existing shareholders as a direct result of our issuance of
      additional shares of our capital stock. In addition, our business strategy
      may
      include expansion through internal growth, by acquiring complementary
      businesses, by acquiring or licensing additional brands, or by establishing
      strategic relationships with targeted customers and suppliers. In order to
      do
      so, or to finance the cost of our other activities, we may issue additional
      equity securities that could dilute our shareholders’ stock ownership. We may
      also assume additional debt and incur impairment losses related to goodwill
      and
      other tangible assets if we acquire another company and this could negatively
      impact our earnings and results of operations.




35




**We
      have not paid dividends in the past and do not expect to pay dividends for
      the
      foreseeable future, and any return on investment may be limited to potential
      future appreciation on the value of our common stock.**




We
      currently intend to retain any future earnings to support the development and
      expansion of our business and do not anticipate paying cash dividends in the
      foreseeable future. Our payment of any future dividends will be at the
      discretion of our board of directors after taking into account various factors,
      including without limitation, our financial condition, operating results, cash
      needs, growth plans and the terms of any credit agreements that we may be a
      party to at the time. To the extent we do not pay dividends, our stock may
      be
      less valuable because a return on investment will only occur if and to the
      extent our stock price appreciates, which may never occur. In addition,
      investors must rely on sales of their common stock after price appreciation
      as
      the only way to realize their investment, and if the price of our stock does
      not
      appreciate, then there will be no return on investment. Investors seeking cash
      dividends should not purchase our common stock.




**Our
      officers, directors and principal shareholders, controlling approximately 69%
      of
      our outstanding common stock, can exert significant influence over us and may
      make decisions that are not in the best interests of all
      shareholders.**




Our
      officers, directors and principal shareholders (greater than 5% shareholders)
      collectively control approximately 69% of our outstanding common stock. As
      a
      result, these shareholders will be able to affect the outcome of, or exert
      significant influence over, all matters requiring shareholder approval,
      including the election and removal of directors and any change in control.
      In
      particular, this concentration of ownership of our common stock could have
      the
      effect of delaying or preventing a change of control of us or otherwise
      discouraging or preventing a potential acquirer from attempting to obtain
      control of us. This, in turn, could have a negative effect on the market price
      of our common stock. It could also prevent our shareholders from realizing
      a
      premium over the market prices for their shares of common stock. Moreover,
      the
      interests of this concentration of ownership may not always coincide with our
      interests or the interests of other shareholders, and accordingly, they could
      cause us to enter into transactions or agreements that we would not otherwise
      consider.




**Anti-takeover
      provisions may limit the ability of another party to acquire us, which could
      cause our stock price to decline.**




Our
      articles of incorporation, as amended, our bylaws and Florida law contain
      provisions that could discourage, delay or prevent a third party from acquiring
      us, even if doing so may be beneficial to our shareholders. In addition, these
      provisions could limit the price investors would be willing to pay in the future
      for shares of our common stock.




36


**ITEM
                7.**
            **Financial
                Statements DigitalFX International, Inc. and
                Subsidiaries**




Index
      to
      financial statements




**Page**Report
                of Independent Registered Public Accounting Firm
            
            38Consolidated
                Balance Sheet at December 31, 2007
            
            39Consolidated
                Statements of Operations for the Years Ended December 31, 2007and
                December 31, 2006
            
            40Consolidated
                Statements of Stockholders’ Equity for the Years EndedDecember
                31, 2007 and December 31, 2006
            
            41Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007and
                December 31, 2006
            
            42Notes
                to Consolidated Financial Statements for the Years EndedDecember
                31, 2007 and December 31, 2006
            
            43




37




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors


DigitalFX
      International, Inc. and Subsidiaries


Las
      Vegas, Nevada




We
      have
      audited the consolidated balance sheet of DigitalFX International, Inc. (the
      “Company”) and Subsidiaries as of December 31, 2007, and the related
      consolidated statements of operations, stockholders’ equity and cash flows for
      the years ended December 31, 2007 and 2006. These consolidated financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.




We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance whether the consolidated
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present
      fairly, in all material respects, the consolidated financial position of
      DigitalFX International, Inc. and Subsidiaries as of December 31, 2007 and
      the
      consolidated results of their operations and their cash flows for the years
      ended December 31, 2007 and 2006, in conformity with accounting principles
      generally accepted in the United States of America.




/s/
                Weinberg and Company, P.AWeinberg
                and Company, P.A




March
      17,
      2008


Los
      Angeles, California




38




**DigitalFX
      International, Inc. and Subsidiaries**





**Consolidated
      Balance Sheet**


**December
      31, 2007**


**(In
      thousands, except share data)**




**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            5,319Accounts
                receivable
            
            
            50Inventories,
                net
            
            
            849Prepaid
                bandwidth charges, affiliate
            
            
            51Prepaid
                expenses and other assets
            
            
            411Deferred
                financing costs
            
            
            961Deferred
                income taxes, net
            
            
            45Total
                current assets
            
            
            7,686Restricted
                cash
            
            
            2,000Convertible
                secured promissory note from related party
            
            
            225Investments,
                net
            
            
            1,102Property
                and equipment, net of accumulated depreciation and amortization of
                $576
            
            
            628Deposits,
                merchant processors
            
            
            789Other
                assets
            
            
            12Deferred
                income taxes, net
            
            
            1,995Total
                assets
            
            $
            14,437**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            383Accrued
                expenses
            
            
            1,114Accrued
                commissions
            
            
            1,619Total
                current liabilities
            
            
            3,116Convertible
                Notes Payable, net
            
            
            5,600Commitments
                and ContingenciesStockholders’
                equity:Preferred
                Stock, $0.01 par value, 5,000,000 shares authorized, no shares issued
                and
                outstanding
            
            
            -Common
                Stock, $0.001 par value, 100,000,000 shares authorized, 24,919,710
                shares
                issued and outstanding
            
            
            25Additional
                Paid In Capital
            
            
            12,882Other
                comprehensive loss
            
            
            (286
            )Accumulated
                deficit
            
            
            (6,900
            )Total
                stockholders’ equity
            
            
            5,721Total
                liabilities and stockholders’ equity
            
            $
            14,437





*See
      Notes to Consolidated Financial Statements*




39




**DigitalFX
      International, Inc. and Subsidiaries**





**Consolidated
      Statements of Operations**


**(In
      thousands, except share and per share data** **)**


Years
                  Ended December 31,2007
              
              2006Revenues
              
              $
              23,511
              
              $
              22,800Cost
                  of revenues
              
              
              4,121
              
              
              4,444Gross
                  profit
              
              
              19,390
              
              
              18,356Commission
                  expenses
              
              
              10,117
              
              
              10,459Other
                  operating expenses
              
              
              12,577
              
              
              6,732Operating
                  income (loss)
              
              
              (3,304
              )
              
              1,165Other
                  income (expense):Expenses
                  relating to exchange transaction
              
              
              -
              
              
              (635
              )Financing
                  costs
              
              
              (111
              )
              
              -Other
                  income, net
              
              
              24
              
              
              63Other
                  expenses, net
              
              
              (87
              )
              
              (572
              )Income
                  (loss) before provision for income taxes
              
              
              (3,391
              )
              
              593Benefit
                  (provision) for income taxes
              
              
              812
              
              
              (113
              )Net
                  income (loss)
              
              $
              (2,579
              )
              $
              480Net
                  income (loss) per share:Basic
              
              $
              (.11
              )
              $
              .02Fully
                  diluted
              
              $
              (.11
              )
              $
              .02Weighted
                  average shares outstanding:Basic
              
              
              23,952,916
              
              
              21,032,218Fully
                  diluted
              
              
              23,952,916
              
              
              22,832,198




*See
      Notes to Consolidated Financial Statements*




40




**DigitalFX
      International, Inc. and Subsidiaries**




**Consolidated
      Statements of Stockholders’ Equity**


**(In
      thousands, except share data)**


Additional
              
              
              
              OtherCommon
              
              Common
              
              Paid-In
              
              Deferred
              
              Comprehensive
              
              AccumulatedShares
              
              Stock
              
              Capital
              
              Compensation
              
              Loss
              
              Deficit
              
              Total**Balance,
                  January 1, 2006**
              
              
              19,631,179
              
              $
              20
              
              $
              4,440
              
              $
              (57
              )
              $
              (1
              )
              $
              (4,802
              )
              $
              (400
              )Reclassification
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              (57
              )
              
              57
              
              
              **-**
              
              
              -
              
              
              -Issuance
                  of common stock
              
              
              2,519,780
              
              
              2
              
              
              4,939
              
              
              -
              
              
              **-**
              
              
              -
              
              
              4,941Exercise
                  of warrants
              
              
              165,247
              
              
              -
              
              
              43
              
              
              -
              
              
              **-**
              
              
              -
              
              
              43Distributions
                  to shareholders
              
              
              -
              
              
              -
              
              
              (265
              )
              
              -
              
              
              **-**
              
              
              -
              
              
              (265
              )Amortization
                  of fair value of warrants
              
              
              -
              
              
              -
              
              
              175
              
              
              -
              
              
              **-**
              
              
              -
              
              
              175Amortization
                  of fair value of options
              
              
              -
              
              
              -
              
              
              130
              
              
              -
              
              
              **-**
              
              
              -
              
              
              130Effect
                  of merger transaction
              
              
              964,357
              
              
              1
              
              
              (2
              )
              
              -
              
              
              **-**
              
              
              -
              
              
              (1
              )Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (19
              )
              
              -
              
              
              (19
              )Net
                  income for the year ended December 31, 2006
              
              
              -
              
              
              -
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              480
              
              
              480**Balance,
                  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,
                  December 31, 2007**
              
              
              24,919,710
              
              $
              25
              
              $
              12,882
              
              $
              -
              
              $
              (286
              )
              $
              (6,900
              )
              $
              5,721




*See
      Notes to Consolidated Financial Statements*





41




**DigitalFX
      International, Inc. and Subsidiaries**




**Consolidated
      Statements of Cash Flows**




**(In
      thousands)**


Years
                  ended December 312007
              
              2006Operating
                  activities:Net
                  income (loss)
              
              $
              (2,579
              )
              $
              480Adjustment
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Depreciation
                  and amortization
              
              
              319
              
              
              135Equity
                  based compensation expense
              
              
              563
              
              
              305Deferred
                  income taxes
              
              
              (820
              )
              
              (176
              )Common
                  stock issued for services
              
              
              186
              
              
              -Valuation
                  allowance on investment
              
              
              175
              
              
              -Amortization
                  of deferred financing costs
              
              
              27
              
              
              -Amortization
                  of debt discount
              
              
              39
              
              
              -Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              1
              
              
              (22
              )Inventory
              
              
              (715
              )
              
              19Prepaid
                  expenses and reserves
              
              
              (283
              )
              
              (908
              )Accounts
                  payable and accrued expenses
              
              
              515
              
              
              1,420Due
                  to affiliate
              
              
              (187
              )
              
              133Net
                  cash provided by (used in) operating activities
              
              
              (2,759
              )
              
              1,386Investing
                  activities:Purchase
                  of investments
              
              
              (1,691
              )
              
              -Purchase
                  of convertible secured promissory note
              
              
              (225
              )
              
              -Purchases
                  of property and equipment
              
              
              (297
              )
              
              (174
              )Deposits
                  on software
              
              
              -
              
              
              (373
              )Net
                  cash used in investing activities
              
              
              (2,213
              )
              
              (547
              )Financing
                  activities:Proceeds
                  from issuance of common stock, net
              
              
              47
              
              
              4,984Proceeds
                  from issuance of convertible notes
              
              
              4,482
              
              
              -Increase
                  in restricted cash
              
              
              2,000
              
              
              -Principal
                  payments on note payable
              
              
              -
              
              
              (50
              )Distributions
                  to shareholders
              
              
              -
              
              
              (265
              )Net
                  cash provided by financing activities
              
              
              6,529
              
              
              4,669Foreign
                  currency translation
              
              
              8
              
              
              (19
              )Change
                  in cash and cash equivalents
              
              
              1,565
              
              
              5,489Cash
                  and cash equivalents, beginning of period
              
              
              5,754
              
              
              265Cash
                  and cash equivalents, end of period
              
              $
              7,319
              
              $
              5,754Supplemental
                  cash flow information:Cash
                  paid for interest
              
              $
              -
              
              $
              2Cash
                  paid for income taxes
              
              $
              116
              
              $
              250Non-Cash
                  Financing and Investing Activities:Tax
                  benefit related to stock options and warrants exercised
              
              $
              904
              
              
              -Reclassification
                  of deposits to fixed assets
              
              $
              373
              
              
              -Unrealized
                  loss of investment, net of tax
              
              $
              273
              
              
              -Fair
                  value of warrants issued in conjunction with convertible
                  debt
              
              $
              1,411
              
              
              -Beneficial
                  conversion feature related to convertible debt
              
              $
              370
              
              
              -
  *See
        Notes to Consolidated Financial Statements*
  42


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




**Note
      1.**   **The
      Company and Basis of Presentation**




**Company**




DigitalFX
      International, Inc. (the “Company”), a Florida corporation, is a holding
      company, and creator of digital communications and social networking solutions,
      as showcased on its social network www.helloworld.com operated by its
      wholly-owned subsidiary, DigitalFX Networks, LLC, a Nevada limited liability
      company (“DigitalFX Networks”).




The
      Company develops, hosts and markets proprietary communication and collaboration
      services, and social networking software applications, including video email,
      video instant messaging and live webcasting. The portal utilizes a
      commercial-free, subscription-based Application Service Provider (ASP)
      model.




The
      Company sells subscriptions to its portal through a unique multi-tiered
      affiliate program using non-related independent distributors, known as
“Affiliates.” The Company also markets subscriptions directly to “Retail
      Customers” who purchase them for their personal use. In addition to offering
      portal subscriptions, the Company sells select products to these Affiliates
      through its U.S. subsidiary VMdirect, L.L.C., a Nevada limited liability company
      (“VMdirect”), and its wholly-owned U.K. and Ireland subsidiaries to assist them
      in building their businesses and in selling subscriptions to the
      portal.




The
      Company has developed an additional portal called FirstStream, www.firststream.com ,
      through
      which subscriptions are offered by certain qualified Affiliates to small and
      medium sized businesses. These are sold through DigitalFX Networks.





The
      Company’s wholly-owned subsidiary, DigitalFX Solutions, LLC, a Nevada limited
      liability company (“DigitalFX Solutions”), operates its website www.digitalfxsolutions.com ,
      which
      offers the Company’s video-enabled web platform to enterprise-sized businesses.
      In addition, DigitalFX Solutions has an electronics division, whose purpose
      is
      to expand the Company’s current product offerings to other electronic devices,
      supplies, software and components.




The
      condensed consolidated financial statements include the accounts of the Company,
      VMdirect and its wholly-owned U.K. and Ireland subsidiaries, and the Company’s
      wholly-owned Nevada subsidiaries. Inter-company transactions and balances have
      been eliminated.





**Merger
      and Stock Split**




On
      June
      15, 2006, Qorus.com, Inc., an inactive Florida corporation (“Qorus”) with no
      current operations, issued to the members of VMdirect 1,014,589 shares of Series
      A Convertible Preferred Stock, par value $0.01 per share, of Qorus (the
“Preferred Stock”), which were converted into 1,057,547,456 shares of Qorus’
common stock (“Conversion Shares”). The number of shares of Preferred Stock
      issued to the Members and the number of Conversion Shares gives effect to the
      issuance of 289,292 membership units by VMdirect for an aggregate purchase
      price
      of $625,000, a transaction that was completed immediately prior to the Closing.
      The transaction has been accounted for as a reverse merger (recapitalization)
      with the Company deemed the accounting acquirer, and Qorus the legal acquirer.
      As such, the financial statements herein reflect the historical activity of
      VMdirect since its inception, and the historical stockholders’ equity of
      VMdirect has been retroactively restated for the equivalent number of shares
      received in the exchange after giving effect to any differences in the par
      value
      offset to additional paid in capital. Subsequent to the consummation of this
      transaction, Qorus changed its name to DigitalFX International,
      Inc.




43


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**


On
      August
      1, 2006, the Company affected a 1 for 50 reverse stock split. The effect of
      this
      stock split has been retroactively reflected in the financial statements as
      if
      the stock split occurred at the beginning of the earliest period
      reported.




**Note
      2.**   **Accounting
      Policies**




**Use
      of Estimates and Assumptions**




The
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States of America. Preparing financial
      statements in conformity with generally accepted accounting principles requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities at the date of the financial statements, and the reported
      amounts of revenues and expenses during the reported period. Examples of
      significant estimates used in preparing the accompanying financial statements
      include, but are not limited to: the carrying value of long-lived assets; useful
      lives of property and equipment; revenue recognition; and the valuation
      allowances for receivables, inventories and sales returns, and the value of
      stock options issued for the purpose of determining stock-based compensation.
      Actual results and outcomes may materially differ from management’s estimates
      and assumptions.




**Cash
      and Cash Equivalents**




The
      Company considers all highly liquid investments with remaining maturities of
      three months or less when acquired to be cash equivalents. The Company holds
      its
      cash in what it believes to be credit-worthy financial
      institutions.




At
      December 31, 2007, the Company had $789 of funds held by banks as reserves
      against any possible charge backs and returns on credit card transactions
      related to customer disputes that are not offset against the Company’s daily
      sales deposit activity. These amounts are reflected as Deposit, Merchant
      Processors on the Company’s consolidated balance sheet.




At
      December 31, 2007, the Company had $2,000 of funds held by a bank under a letter
      of credit arrangement pursuant to its Convertible Notes Payable described in
      Notes 5 and 9. These amounts are reflected as Restricted Cash on the Company’s
      consolidated balance sheet.





**Deferred
      Financing Costs**





Deferred
      financing costs related to the Convertible Notes Payable described in Note
      9
      consist of closing costs paid to the placement agent of $518 and the fair value
      of the warrants granted to the placement agent for consideration in the amount
      of $470. The Company amortizes these costs using the effective interest method
      over the term of the notes, which is 3 years.




44


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




**Inventories**




Inventories
      are stated at the lower of cost (determined using the first-in, first-out
      method) or market. As of December 31, 2007, inventories consisted of finished
      goods and raw materials. The Company reviews on hand inventory for obsolete
      and
      excess finished goods on a monthly basis.




**Investments**




The
      Company accounts for its investments in equity securities under SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities.” The Company
      has classified its investments as available for sale securities, and such
      securities are carried at fair value with the unrealized gains or losses, net
      of
      tax, included as a component of accumulated other comprehensive income in
      stockholders’ equity. Realized gains and losses and declines in value considered
      to be other than temporary on available for sale securities are included in
      other income (loss).





The
      fair
      values for marketable equity securities are based on quoted market prices.
      The
      carrying value for non-marketable equity securities investments in private
      companies is based on cost, which approximates fair value .
      In
      determining whether a decline in value of non-marketable equity securities
      investments in private companies is other than temporary, the assessment is
      made
      by considering available evidence including the general market conditions in
      the
      investee’s industry, the investee’s product development status, the investee’s
      ability to meet business milestones and the financial condition of the investee.
      When a decline is considered other than temporary, the Company recognizes an
      impairment loss in the current period’s operating results in the period of
      decline.




**Property
      and Equipment**




Property
      and equipment is stated at cost, less accumulated depreciation and amortization.
      Depreciation is computed using the straight-line method based upon the estimated
      useful lives of the assets or terms of the related lease agreements. Computers,
      equipment and purchased software are depreciated over three years. Depreciation
      of the assets begins in the month following the in-service date, and maintenance
      and repairs are charged to expense as incurred.




**Impairment
      of Long-Lived Assets**




Long-lived
      assets are reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable.
      Recoverability of assets to be held and used is measured by a comparison of
      the
      carrying amount of an asset to future net cash flows expected to be generated
      by
      the asset. If such assets are considered to be impaired, the impairment to
      be
      recognized is measured by the amount by which the carrying amount of the assets
      exceeds the fair value of the assets. Assets to be disposed of are reported
      at
      the lower of the carrying amount or fair value less costs to sell.




**Fair
      Value of Financial Instruments**




The
      carrying values of cash and cash equivalents, accounts receivable, accounts
      payable, accrued expenses, accrued commissions and due to affiliate approximate
      fair value due to the short maturity of these financial instruments. The Company
      believes that the carrying value of its Convertible Notes Payable approximates
      fair value as the interest rate of the notes approximates the Company’s
      incremental borrowing rate. Investments are recorded at fair value.




45


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




**Revenues**




The
      Company generates revenue through (i) sales of Affiliate business packages
      and
      selling aids to Affiliates which include cameras, sales literature, and training
      videos, and the initial month’s subscription to its internet-based suite of
      products which includes a wide spectrum of streaming video content and an
      integrated suite of streaming media applications, including video email, video
      chat, and live web-casting, (ii) sales of monthly subscriptions to retail
      customers and Affiliates with a wide spectrum of streaming video content as
      well
      as an integrated suite of streaming media applications, including video email,
      video chat, and live web-casting, (iii) sales of branded apparel and
      merchandise, and (iv) hosting conferences and events.





*Affiliate
      Business Packages*




The
      Company recognizes revenue from the sales of the cameras and selling aids within
      the business package, including shipping revenue, in accordance with SAB No.
      104, when persuasive evidence of an order arrangement exists, delivery has
      occurred, the sales price is fixed or determinable and collectibility is
      reasonably assured. Generally, these criteria are met at the time the product
      is
      shipped to customers when title and risk of loss have transferred. Sales of
      the
      above products, ranging in price from $79 to $1,999 (pricing not in thousands),
      entail no post-customer support or delivery of any other items. Allowances
      for
      estimated subsequent customer returns are provided when revenues are recorded.
      Costs incurred for the shipping and handling of its products are recorded as
      cost of sales.




The
      Company recognizes revenue from sale of the Affiliate’s initial month’s
      subscription to the internet-based suite of products in accordance with
      generally accepted accounting principles and based on the fair value of such
      suite of products. Fair value is determinable because the subscription fee
      is
      thereafter billed monthly at a fixed rate based on the level of service
      selected. Access to the internet-based studio suite of the products is delivered
      together, and the individual products within the suite cannot be sold
      separately. Access is delivered immediately upon sign up and order
      acceptance.




A
      monthly
      subscription is cancellable at any time. The relevant subscription fee is fully
      refundable if such cancellation is made in writing in accordance with the
      Company’s policies but only for the current month.





*Monthly
      Subscriptions*




The
      Company recognizes revenue from sales of a month’s subscription to retail
      customers and sales to Affiliates for their recurring subscription to the
      internet-based suite of products in accordance with generally accepted
      accounting principles and based on the fair value of such suite of products.
      Fair value is determinable because the subscription fee is billed at a fixed
      rate based on the level of service selected. Funds collected in advance of
      the
      billing period are deferred. A monthly subscription is cancellable at any time.
      The Company records an allowance for potential chargebacks on subscription
      fees
      based on an analysis of historical data for the four months preceding the date
      of measurement. The accuracy of these estimates is dependent on the rate of
      future chargebacks being consistent with the  historical
      rate. Increases or decreases to the sales allowance are charged to
      revenue.




46


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




*Apparel
      and Merchandise*




The
      Company also sells select products to Affiliates to assist them in building
      their businesses and in selling subscriptions to the portal. Revenue for these
      sales including shipping revenue is recognized when all the criteria of SAB
      No.
      104 described above are met, which is generally upon shipment.




*Conferences
      and Events*




The
      Company also earns fees for certain events it hosts such as sales and training
      conferences and seminars. Revenue is recognized when all of the criteria of
      SAB
      No. 104 described above are met, which is generally after the event has
      occurred. Amounts collected prior to the event are reflected as deferred
      revenue, and recognized after the event has occurred. As of December 31, 2007,
      the Company had $0 in deferred revenue related to conferences and
      events.




**Shipping
      and Handling Fees**




Shipping
      and handling fees are billed to customers and included in revenue. The related
      costs are included in cost of goods sold. Shipping and handling costs are
      charged to expense as incurred. Total shipping and handling costs of $426 and
      $349 are included in cost of goods sold for the years ended December 31, 2007
      and 2006, respectively.




**Product
      Returns and Cancellations**




Affiliate
      business packages and merchandise returned within the first 30 days of purchase
      are generally refunded at 90 percent of the sales price. Returned products
      that
      were damaged during shipment to the customer are replaced immediately at the
      Company’s expense.




The
      sales
      allowance is a monthly estimate of refunds to be issued on affiliate business
      packages that have been shipped but are still subject to the Company’s return
      policy at month end. The allowance is based on an analysis of the historical
      rate of credits and refunds, using the latest four months activity. Increases
      or
      decreases to the sales allowance are charged to revenue.




Monthly
      subscription services are provided immediately upon enrollment and continue
      until cancelled. The recurring subscription can be cancelled at any time in
      writing. An allowance is recorded for subscription cancellations based on an
      analysis of historical data for the four months preceding the date of
      measurement.




**Stock-Based
      Compensation**




The
      Company periodically issues stock options and warrants to employees and
      non-employees in non-capital raising transactions for services and for financing
      costs. The Company adopted SFAS No. 123R, “Accounting for Stock-Based
      Compensation” effective January 1, 2006, and is using the modified prospective
      method in which compensation cost is recognized beginning with the effective
      date (a) based on the requirements of SFAS No. 123R for all share-based payments
      granted after the effective date and (b) based on the requirements of SFAS
      No.
      123R for all awards granted to employees prior to the effective date of SFAS
      No.
      123R that remain unvested on the effective date. The Company accounts for stock
      option and warrant grants issued and vesting to non-employees in accordance
      with
      EITF No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and
      EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity
      Instruments Granted to Other Than Employees” whereby the fair value of the stock
      compensation is based on the measurement date as determined at either a) the
      date at which a performance commitment is reached, or b) at the date at which
      the necessary performance to earn the equity instrument is
      complete.




47


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




*Valuation
      Assumptions*




The
      fair
      value of options and warrants were estimated on the date of grant using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions for the years ended December 31, 2007 and 2006:


December
                    31,
                
                December
                    31,2007
                
                2006Dividend
                    yield
                -0-
                
                -0-Risk-free
                    interest rate
                4.50%
                    - 4.64%
                
                4.50%Expected
                    volatility
                42.00%
                    - 68.38%
                
                50.00%Expected
                    life of options
                5
                    years
                
                4-
                    6 years




**Earnings
      (Loss) Per Share**




Statement
      of Financial Accounting Standards No. 128, “Earnings per Share”, requires
      presentation of basic earnings per share. Basic earnings (loss) per share is
      computed by dividing earnings (loss) available to common stockholders by the
      weighted average number of common shares outstanding during the period. The
      weighted average number of shares outstanding have been retroactively restated
      for the equivalent number of shares received by the accounting acquirer as
      a
      result of the Exchange transaction as if these shares had been outstanding
      as of
      the beginning of the earliest period presented. The 964,657 shares issued to
      the
      legal acquirer are in included in the weighted average share calculation from
      June 15, 2006, the date of the Exchange Agreement.




Diluted
      earnings per share reflects the potential dilution, using the treasury stock
      method, that could occur if securities or other contracts to issue common stock
      were exercised or converted into common stock or resulted in the issuance of
      common stock that then shared in the earnings of the Company. In computing
      diluted earnings per share, the treasury stock method assumes that outstanding
      options and warrants are exercised and the proceeds are used to purchase common
      stock at the average market price during the period. Options and warrants will
      have a dilutive effect under the treasury stock method only when the average
      market price of the common stock during the period exceeds the exercise price
      of
      the options and warrants.




48


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




The
      following is a reconciliation of the calculation of basic and diluted earnings
      per share for the years ended December 31, 2007 and 2006.


2007
              
              2006Income
                  (Numerator)
              
              Shares
                  (Denominator)
              
              Per-Share
                  Amount
              
              Income
                  (Numerator)
              
              Shares
                  (Denominator)
              
              Per-Share
                  AmountBasic
                  earnings per share:Income
                  available to common stockholders
              
              
              ($2,579
              )
              
              23,952,916
              
              $
              (.11
              )
              $
              480
              
              
              21,032,218
              
              $
              0.02Effect
                  of Dilutive Securities:Options
                  and warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,799,980
              
              
              -Diluted
                  earnings per share
              
              
              ($2,579
              )
              
              23,952,916
              
              $
              (.11
              )
              $
              480
              
              
              22,832,198
              
              $
              0.02




Options
      and warrants to purchase 1,374,710 and 1,399,706 shares of common stock at
      various prices, respectively, were outstanding during the year ended December
      31, 2007 but were not included in the computation of diluted earnings per share
      for this period because the Company incurred a loss for this period, and their
      effect would be anti-dilutive. Options to purchase 291,500 shares of common
      stock at $7.75 per share were outstanding during the year ended December 31,
      2006 but were not included in the computation of diluted earnings per share
      for
      this period because the options’ exercise price was greater than the average
      market price of the common shares during this period, and their effect would
      be
      anti-dilutive.




**Member
      Incentives**




The
      Company’s commission structure is based on a multi-tiered affiliate program.
      Commissions are recorded for sales, including commissions based on bonus points
      assigned to products which are independent of the product’s price. Commissions
      totaled $10,117 and $10,459 for the years ended December 31, 2007 and 2006,
      respectively, and are included in the accompanying consolidated statements
      of
      operations.




**Income
      Taxes**




VMdirect
      had 11 individual members until June 15, 2006. After the exchange transaction,
      the Company became the sole member of VMdirect. Federal income tax obligations
      for the period through and including June 15, 2006 were passed through to the
      previous members of VMdirect, and the Company recorded no provision for such
      taxes. The Company has agreed with the previous members of VMdirect that the
      Company will not make any distributions to pay tax liabilities, if any, on
      income earned prior to June 15, 2006. Consequently, the taxes, if any, on the
      income of VMdirect through June 15, 2006 are payable individually by each
      member.




49


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




The
      Company accounts for income taxes and related accounts under the liability
      method. Deferred tax liabilities and assets are determined based on the
      difference between the financial statement and tax bases of assets and
      liabilities using enacted rates expected to be in effect during the year in
      which the basis differences reverse.




**Foreign
      Currency Translation**




The
      functional currency of the Company’s UK subsidiary is the pound sterling and the
      functional currency of the Company’s Ireland subsidiary is the Euro. The foreign
      subsidiaries’ asset and liability accounts are translated for consolidated
      financial reporting purposes into U.S. dollar amounts at period end exchange
      rates; investment, revenue and expense accounts are translated at the average
      rates during the period in accordance with SFAS No. 52, “Foreign Currency
      Translation.” The effects of foreign currency translation adjustments are
      included in stockholders’ equity as a component of “Other comprehensive income”
in the accompanying balance sheet.





**Comprehensive
      Income (Loss)**




SFAS
      No.
      130, “Reporting Comprehensive Income,” established rules for the reporting and
      display of comprehensive income and its components. SFAS No. 130 requires
      unrealized gains or losses on the Company’s foreign currency translation
      adjustments to be reported as a separate component (comprehensive income/loss)
      of stockholders’ equity. The components of comprehensive income (loss) are as
      follows:




Years
                ended December 31,2007
            
            2006Net
                Income (Loss)
            
            
            ($2,579
            )
            $
            480Foreign
                Currency Translation
            
            
            8
            
            
            (19
            )Unrealized
                gain (loss) on investment, (net of taxes of $141)
            
            
            (273
            )
            
            -Comprehensive
                Income (Loss)
            
            
            ($2,844
            )
            $
            461




**Recent
      Accounting Pronouncements**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      provides enhanced guidance for using fair
      value to measure assets and liabilities. SFAS No. 157 provides a common
      definition of fair value and establishes a framework to make the measurement
      of
      fair value in generally accepted accounting principles more consistent and
      comparable. SFAS No. 157 also requires expanded disclosures to provide
      information about the extent to which fair value is used to measure assets
      and
      liabilities, the methods and assumptions used to measure fair value, and the
      effect of fair value measures on earnings. SFAS No. 157 is effective for
      financial statements issued in fiscal years beginning after November 15, 2007 and
      for
      interim periods within those fiscal years .
      The
      Company does not believe the adoption of SFAS No. 157 will have a material,
      if
      any, effect on its consolidated results of operations, financial position,
      or
      cash flows.




50


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**


In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — including an amendment of FASB Statement
      No. 115” (FAS 159).  FAS 159, which becomes effective for the
      company on January 1, 2008, permits companies to choose to measure many
      financial instruments and certain other items at fair value and report
      unrealized gains and losses in earnings. Such accounting is optional and is
      generally to be applied instrument by instrument. The company does not
      anticipate that election, if any, of this fair-value option will have a material
      effect on its consolidated financial position, results of operations, cash
      flows
      or disclosures.





In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141 (R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





The
      Company does not believe that the adoption of the above recent pronouncements
      will have a material effect on the Company’s consolidated results of operations,
      financial position, or cash flows.





**Note
      3.**   **Product,
      Customer and Geographic Information**




SFAS
      No.
      131, “Disclosure about Segments of an Enterprise and Related Information,”
establishes standards for the reporting of business enterprises of information
      about operating segments, products and services, geographic areas and major
      customers. The standard for determining what information to report is based
      on
      operating segments within DigitalFX International that are regularly reviewed
      and used by the chief operating decision-maker in evaluating financial
      performance and resource allocation.




51


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




DigitalFX
      International’s chief operating decision-maker is considered to be the chief
      executive officer (CEO). Based on the financial information reviewed by the
      CEO,
      the Company has determined that it operates in a single operating segment,
      specifically, digital web-based communications services.




The
      following table presents net revenue by category for the years ended
      December 31, 2007 and 2006.




**Revenue:**
            
            **December
                31, 2007**
            
            **December
                31, 2006**Subscription
                fees for access plans and administrative tools
            
            $
            17,620
            
            $
            11,848Affiliate
                business packages
            
            
            4,128
            
            
            7,745Upgrades
                to business packages
            
            
            1,074
            
            
            1,552Merchandise
                and Shipping fees
            
            
            419
            
            
            921Event
                and Conference revenue
            
            
            270
            
            
            734Total
                Revenue
            
            $
            23,511
            
            $
            22,800




The
      breakdown of revenues generated by geographic region for the years ended
      December 31, 2007 and 2006 is as follows:




**December
                31, 2007**
            
            **December
                31, 2006**United
                States, Canada & Mexico
            
            
            90
            %
            
            89
            %United
                Kingdom
            
            
            2
            %
            
            3
            %Australia
            
            
            5
            %
            
            7
            %New
                Zealand
            
            
            1
            %
            
            1
            %Europe
            
            
            2
            %
            
            -100
            %
            
            100
            %




Assets
      and liabilities located in countries outside the United States were not material
      at December 31, 2007 or 2006.




The
      breakdown of revenues generated by customer type for the years ended December
      31, 2007 and 2006 is as follows:




**December
                31, 2007**
            
            **December
                31, 2006**Affiliates
            
            
            90
            %
            
            94
            %Retail
                customers
            
            
            10
            %
            
            6
            %100
            %
            
            100
            %





52


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




**Note
      4.**  **Inventories**




At December 31,
      2007, Inventories, net consisted of the following:




Electronic
                parts and components
            
            $
            250Kits,
                cameras and merchandise
            
            
            615Less:
                allowance for obsolete inventory
            
            
            (16
            )$
            849





**Note
      5.**  **Restricted
      Cash**




Pursuant
      to its Convertible Notes Payable agreements described in Note 9, the Company
      was
      required to have letters of credit issued in the aggregate amount of $2,000,000
      (for which the Company provided the collateral) for the benefit of the
      Investors. The letters of credit, which were issued by Wells Fargo Bank, N.A.,
      have an initial term expiring on December 31, 2008 with automatic extensions unless
      Wells Fargo Bank, N.A. delivers written notice of non-renewal, and provide
      that
      the Investors may draw on the letters of credit in the event that (1) the
      Company fails to meet certain equity conditions listed in the Notes (described
      in Note 9), (2) an event of default has occurred and is continuing under the
      Notes, or (3) Wells Fargo Bank, N.A. has provided a notice of non-renewal prior
      to the occurrence of certain conditions set forth in the Notes. At December
      31,
      2007, the Company classified the $2,000,000 as restricted cash on its
      consolidated balance sheet. Subsequent to December 31, 2007, the funds were
      returned to the Investors as part of a restructuring of the Convertible Notes
      Payable (see Note 15).




**Note 6.**   **Convertible
      Secured Promissory Note from Related Party**





On
      June
      8, 2007, the Company entered into a Subscription, Loan and Rights Agreement
      (the
“SaySwap Agreement”) with SaySwap, Inc. (“SaySwap”) pursuant to which the
      Company agreed to purchase a Senior Secured Convertible Promissory Note (the
      “SaySwap Note”) issued by SaySwap in the principal amount of $225, and a warrant
      (the “SaySwap Warrant”) to purchase 26.1 shares of SaySwap’s common stock.
      SaySwap is a company that is 60% owned by the Company’s Chief Operating Officer
      and members of his immediate family.





The
      SaySwap Note accrues interest at a rate of 8% per annum and has a maturity
      date
      of April 24, 2009, provided, however, that if SaySwap consummates a qualified
      financing (as defined in the SaySwap Note), SaySwap is required to repay the
      outstanding principal amount and all accrued interest on the SaySwap Note within
      10 days of the consummation of such qualified financing. The Company may also
      declare the outstanding principal and accrued interest due and payable in the
      event of a default under the SaySwap Note. The SaySwap Note is convertible,
      at
      the Company’s option, into shares of SaySwap’s common stock, at any time prior
      to 30 days before the maturity date or three days before the consummation of
      a
      qualified financing. As security for SaySwap’s obligations under the SaySwap
      Note, SaySwap also granted to the Company a first priority security interest
      in
      all of SaySwap’s assets.





The
      SaySwap Warrant entitles the Company to purchase 26.1 shares of SaySwap’s common
      stock at a per share price of $3,831. The SaySwap Warrant expires on May 31,
      2010.




53


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




Pursuant
      to the terms of the SaySwap Agreement, the Company is entitled to demand that
      SaySwap register the shares of SaySwap’s common stock issuable upon conversion
      of the SaySwap Note or exercise of the SaySwap Warrant (the “Underlying SaySwap
      Shares”) at such time that SaySwap files a registration statement with the
      Securities and Exchange Commission.




**Note
      7.**    **Investments**




Investments
      consist of the following at December 31, 2007:





At
                Cost
            
            Valuation
                Reserve
            
            NetFusion
                Telecommunications Int’l
            
            $
            700
            
            $
            (414
            )
            $
            286CJ
                Vision Enterprises, Inc.
            
            
            816
            
            
            -
            
            
            816Transparensee
                Systems, Inc.
            
            
            175
            
            
            (175
            )
            
            -$
            1,691
            
            $
            (589
            )
            $
            1,102





**Fusion
      Telecommunications Int’l Inc.**




On
      May
      11, 2007, the Company entered into a Subscription and Rights Agreement with
      Fusion Telecommunications International, Inc. (“Fusion”) pursuant to which it
      purchased, for aggregate consideration of $700, 7 units consisting of an
      aggregate of 700 shares of Fusion’s Series A-2 Cumulative Convertible Preferred
      Stock (“Series A-2 Preferred Shares”) and warrants to purchase 421,687 shares of
      Fusion’s common stock. The 700 Series A-2 Preferred Shares are convertible into
      an aggregate of 843,374 shares of Fusion’s common stock. The warrants have a
      term of 7.5 years and are exercisable at the per share price of $0.83. Fusion
      has agreed to register the shares of Fusion’s common stock underlying the Series
      A-2 Preferred Shares and the warrants.





At
      December 31, 2007, the fair value of the Company’s common share equivalents in
      Fusion was $286. As the decline in the fair value of the Company’s investment is
      considered temporary, the Company recorded an unrealized loss on its investment
      of $273 ($141, net of tax), as a component of accumulated other comprehensive
      loss in the accompanying statement of stockholders’ equity.




On
      May
      23, 2007, the Company entered into a Private Label Purchase Agreement (“Private
      Label Agreement”) with Fusion pursuant to which Fusion will, in collaboration
      with the Company, develop customized software solely for the Company to
      facilitate the integration of Fusion’s advanced unified messaging and digital
      telephone service into the Company’s web 2.0 offerings for enterprises and
      individuals, and will provide certain additional services as set forth in the
      Private Label Agreement. The Private Label Agreement has an initial term of
      5
      years and automatically renews for two-year terms thereafter unless terminated
      by either party pursuant to three months written notice prior to the expiration
      of the applicable term. The Company has agreed that customers acquired by the
      Company will be activated on Fusion’s network and will remain on Fusion’s
      network during the term of the Private Label Agreement. The Company is also
      required to pay for services prior to initial delivery and to maintain a
      pre-payment balance. The parties have agreed to pay for the resources they
      contribute to the development of the customized software.




54




**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**


Simultaneously
      with the execution of the Private Label Agreement, Fusion entered into a
      Software Escrow Agreement pursuant to which Fusion deposited with the escrow
      agent all technical information that would be required to permit the Company
      to
      continue to exercise its rights in the event Fusion ceases to operate its
      business, Fusion enters bankruptcy or insolvency proceedings, or Fusion
      materially breaches the Private Label Agreement, and a letter of direction
      authorizing Fusion’s underlying supplier to enter into an agreement with the
      Company to provide the services directly to the Company under the same
      circumstances.




Upon
      the
      occurrence of an event of default, either the Company or Fusion is entitled
      to
      terminate the Private Label Agreement and to exercise all available remedies.
      Upon the Company’s default, Fusion is also entitled to suspend the provision of
      services and to declare all outstanding amounts due and payable. Upon Fusion’s
      default, the Company is also entitled to obtain release of the materials held
      in
      the escrow account.




**CJ
      Vision Enterprises, Inc.**




On
      June
      1, 2007, the Company subscribed to purchase 72 shares of the Series A Redeemable
      Convertible Preferred Stock of C J Vision Enterprises, Inc. (“CJVE”), and
      deposited with CJVE the aggregate purchase price of $216. CJVE’s Series A
      Redeemable Convertible Preferred Stock will be convertible on a one-for-one
      basis into shares of CJVE’s common stock, will accrue dividends at a rate of 8%
      per annum, payable in kind, will be mandatorily redeemable on the fifth
      anniversary of the date of issuance, and will have a liquidation preference
      of
      $3 per share plus accrued and unpaid dividends which will be senior to the
      liquidation preference for CJVE’s common stock. On June 15, 2007, the Company
      purchased from CVJE 20 shares of the common stock of CJVE for aggregate
      consideration of $600.





A
      member
      of the Board of Directors of CJVE, Emanuel Gerard, is also a member of the
      Board
      of Directors of the Company.




At
      December 31, 2007, the Company’s investment in CJVE is carried at cost of $816,
      which approximates its fair value.





**Transparensee
      Systems, Inc.**




On
      June
      8, 2007, the Company purchased a Convertible Promissory Note (the “Transparensee
      Note”) issued by Transparensee in the principal amount of $175. The
      Transparensee Note may not be prepaid, accrues interest at a rate of 4.85%
      per
      annum and has a maturity date of the earlier of May 14, 2008 or when, upon
      or
      after the occurrence of an event of default under the Transparensee Note, such
      amounts are declared due and payable by the Company or made automatically due
      and payable in accordance with the terms of the Transparensee Note. Provided
      that Transparensee obtains the requisite approvals for the creation and
      designation of a new series to be designated Series A Preferred Stock, the
      Transparensee Note is automatically convertible, on the maturity date, into
      shares of Transparensee’s Series A Preferred Stock at a per share price of
      $2.075, or upon the consent of the requisite shareholders of Transparensee.
      In
      addition, upon the consummation of a change in control of Transparensee, the
      Transparensee Note automatically converts into shares of Transparensee’s common
      stock at a per share price of $2.075. In the event that the Transparensee Note
      is automatically converted into shares of Transparensee’s Series A Preferred
      Stock or common stock, the Company has agreed to enter into a lock-up agreement
      for a period of 180 days in connection with Transparensee’s intended initial
      public offering.




55


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**


The
      Transparensee Note is also convertible, at the Company’s option, into shares of
      Transparensee’s common stock, at a per share price of $2.075, and the Company
      has agreed to enter into a lock-up agreement for a period of 180 days in
      connection with such optional conversion upon Transparensee’s intended initial
      public offering.




Transparensee
      agreed to indemnify the Company, up to a maximum of $75 pro rated over the
      initial term of the License Agreement, from infringement claims with respect
      to
      the licensed software and losses arising in connection therewith. The Company
      agreed to indemnify Transparensee in connection with claims with respect to
      any
      modifications made by the Company to the licensed software, and losses in
      connection therewith.





At
      December 31, 2007, the Company assessed its investment for impairment and
      recorded a valuation reserve of $175 which reduced the fair value of its
      investment to $0. No interest income has been recognized for the year ended
      December 31, 2007.





Concurrent
      with the purchase of the Promissory Note, the Company also entered into a
      Software License and Services Agreement (the “Transparensee License Agreement”)
      with Transparensee Systems, Inc. (“Transparensee”), pursuant to which the
      Company acquired a non-exclusive license to use Transparensee’s proprietary
      search engine software and to resell the products derived from such software
      pursuant to the provisions of a separate reseller agreement, and agreed to
      obtain certain integration services from Transparensee. The Company is required
      to pay fees for the license and integration services as set forth in the
      Transparensee License Agreement. The Transparensee License Agreement has a
      term
      of two years from the date on which the Company’s system is activated with
      Transparensee’s software running on it, and is automatically renewed for
      additional two-year terms unless the Company provides notice to Transparensee
      of
      its intention to terminate the Transparensee License Agreement at least 30
      days
      prior to the expiration of any term.




On
      June
      8, 2007, the Company also entered into a Reseller Agreement with Transparensee
      pursuant to which the Company was appointed as an authorized, non-exclusive
      reseller of the licensed software and related documentation. The Company was
      also granted a non-exclusive license to use, install and operate the licensed
      software for the purposes of testing and evaluation, training of the Company’s
      personnel and Affiliates, and demonstrating and promoting the licensed software
      to potential end-users. The Company shall receive a percentage of the gross
      revenue received from product orders. The term of the Reseller Agreement is
      the
      same as the term of the Transparensee License Agreement .





**Note
      8.**   **Property
      and Equipment**




Property
      and equipment at December 31, 2007 consists of the following:




Furniture
                and fixtures
            
            $
            47Computers
                and equipment
            
            
            441Purchased
                software
            
            
            7161,204Less:
                accumulated depreciation and amortization
            
            
            (576
            )$
            628


56
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**


All
      property and equipment above is depreciated over a three year life. Depreciation
      and amortization expense for the years ended December 31, 2007 and 2006 was
      $319
      and $135, respectively.




**Note
      9.**   **Convertible
      Notes Payable**




On
      November 29, 2007, the Company entered into a Securities Purchase Agreement
      (the
“Securities Purchase Agreement”) with Portside Growth and Opportunity Fund,
      Highbridge International, LLC and Iroquois Master Fund, Ltd. (the “Investors”)
      pursuant to which it issued, on November 30, 2007, an aggregate principal amount
      of $7.0 million of three-year senior secured convertible notes (the “Notes”),
      and five-year warrants (“Warrants”) to purchase an aggregate of 875,000 shares
      of the Company’s common stock at $2.93 per share, to the Investors.




The
      Notes
      carry interest at 7.50% per annum on the unpaid/unconverted principal balance,
      payable quarterly in cash, and are secured on a senior basis against all of
      the
      Company’s assets and by the guaranty of the Company’s subsidiaries. Interest on
      the Notes is payable
      quarterly in cash commencing on January 1, 2008 and continuing through the
      maturity date of the Notes.




The
      Notes
      convert to approximately 2,500,000 shares of common stock, based on an initial
      conversion price of $2.80 per share. The Notes are convertible at the option
      of
      the Investors prior to their maturity. Additionally, beginning 12 months after
      closing, and provided that no event of default has occurred subject to the
      satisfaction of certain equity conditions, the Company can require the Investors
      to convert the Notes, at the then applicable conversion price, into shares
      of
      its common stock if the simple average of the daily volume weighted average
      price of the Company’s common stock is $4.90 for twenty (20) consecutive trading
      days.




The
      Notes
      include customary anti-dilution provisions. From November 30, 2007 through
      May
      30, 2009 (provided that the Notes are outstanding), if the Company issues or
      sells, or is deemed to have issued or sold, any shares of its common stock
      (other than certain excluded issuances) for a consideration per share less
      than
      the per share conversion price in effect immediately prior to such issuance
      or
      sale, then immediately after such issuance or sale the per share conversion
      price then in effect pursuant to the Notes shall be reduced to the issuance
      price per share of such newly issued or sold securities.




From
      and
      after May 31, 2009 (provided that the Notes are outstanding), if the Company
      issues or sells, or is deemed to have issued or sold, any shares of its common
      stock (other than certain excluded issuances) for a consideration per share
      less
      than the per share conversion price in effect immediately prior to such issuance
      or sale, then immediately after such issuance or sale the per share conversion
      price then in effect pursuant to the Notes shall be reduced to an amount equal
      to the product of (A) the conversion price in effect immediately prior to such
      issuance or sale and (B) the quotient determined by dividing (1) the sum of
      (I)
      the product derived by multiplying the conversion price in effect immediately
      prior to such issuance or sale and the number of shares of the Company’s common
      stock deemed outstanding immediately prior to such issuance or sale plus (II)
      the consideration, if any, the Company receives upon such issuance or sale,
      by
      (2) the product derived by multiplying (I) the conversion price in effect
      immediately prior to such issuance or sale by (II) the number of shares of
      its
      common stock deemed outstanding immediately after such issuance or
      sale.




The
      maturity date of the Notes is November 30, 2010. The Investors will be entitled
      to accelerate the maturity date of the Notes in the event that an event a
      default occurs under the Notes, including, without limitation, if the Company
      fails to register for resale the shares underlying the Notes and Warrants within
      the time periods specified in the Registration Rights Agreement (as described
      below), if the Company fails to pay any amount under the Notes when due, if
      a
      judgment is rendered against the Company in an amount set forth in the Notes,
      if
      the Company breaches any representation or warranty under the Securities
      Purchase Agreement or other transaction documents, or if the Company fails
      to
      comply with the specified covenants set forth in the Notes.  57
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




Upon
      the
      occurrence of an event of default under the Notes, the Investors may require
      the
      Company to redeem all or any portion of the Notes by delivering written notice
      thereof to the Company. The portion of the Notes being redeemed shall be
      redeemed by the Company at a price equal to the
      greater of (i) the product of (A) the amount being redeemed and (B) the
      applicable redemption premium (between 100% and 125%) and (ii) the product
      of
      (A) the number of shares of the Company’s common stock issuable upon the
      conversion of such amount and (B) the greater of (I) the closing sale price
      of
      the Company’s common stock on the date immediately preceding such event of
      default, (II) the closing sale price of the Company’s common stock on the date
      immediately after such event of default and (III) the closing sale price of
      the
      Company’s common stock on the date the Investor delivers a redemption notice in
      connection with an event of default.




On
      May
      30, 2008, if the Company fails to meet certain equity conditions listed in
      the
      Notes, the Investors shall have the right to require the Company to redeem, by
      delivering written notice thereof to it, an
      amount equal to each Investor’s pro rata amount of the lesser of (x)
      the
      aggregate principal amount of the Notes outstanding as of such date and (y)
      either (i)
      if on
      such date the arithmetic average of the weighted average price of the Company’s
      common stock during the five (5) trading day period ending on the trading day
      immediately preceding such date is less than $2.6412, $2,000 or (ii) if on
      such
      date the arithmetic average of the weighted average price of the Company’s
      common stock during the five (5) trading day period ending on the trading day
      immediately preceding such date is not less than $2.6412, the lesser of (x)
      $2,000 and (y) the principal amount of the Notes equal to the number of shares
      excluded from the registration statement filed by the Company as may be required
      by the SEC pursuant to Rule 415 promulgated under the Securities Act of 1933,
      as
      amended (the “Securities Act”), up to a maximum of $2,000 .
      The
      portion of the Notes subject to redemption under these provisions shall be
      redeemed by the Company in cash at a price equal to the amount being redeemed
      or, at the Investor’s sole option, by such Investor drawing such amount from the
      letter of credit issued for the benefit of such Investor.




The
      letters of credit were issued by Wells Fargo Bank, N.A. in the aggregate amount
      of $2,000 (for which the Company provided the collateral) for the benefit of
      the
      Investors, have an initial term expiring on December 31, 2008 with automatic extensions unless
      Wells Fargo Bank, N.A. delivers written notice of non-renewal, and provide
      that
      the Investors may draw on the letters of credit in the event that (1) the
      Company fails to meet certain equity conditions listed in the Notes, (2) an
      event of default has occurred and is continuing under the Notes, or (3) Wells
      Fargo Bank, N.A. has provided a notice of non-renewal prior to the occurrence
      of
      certain conditions set forth in the Notes. As described in Note 4, the $2,000
      is
      reflected as Restricted Cash in the accompanying balance sheet.




The
      Company is required to achieve specified EBITDA and revenue targets in each
      of
      the fiscal quarters during which the Notes are outstanding. The Company is
      also
      required to maintain available cash equal to four times the quarterly cash
      burn
      rate (as set forth in the Notes) in each of the fiscal quarters during which
      the
      Notes are outstanding. Any failure by the Company to achieve an EBITDA, revenue
      or available cash target in any fiscal quarter will be considered a breach
      of
      the financial covenant. The Company is also prohibited from paying dividends
      until the Notes are converted, redeemed or otherwise satisfied.  58
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




Upon
      the
      exercise of the Warrants, the Company is currently obligated to sell up to
      an
      aggregate of 875,000 shares of the Company’s common stock to the Investors at a
      per share exercise price of $2.93. Except for Warrants to purchase the Company’s
      common stock issued to the Investors in connection with this transaction, the
      Investors do not own any other securities issued by the Company.




The
      Warrants include customary anti-dilution provisions. From November 30, 2007
      through May 30, 2009 (provided that the Warrants are outstanding), if the
      Company issues or sells, or is deemed to have issued or sold, any shares of
      the
      Company’s common stock (other than certain excluded issuances) for a
      consideration per share less than the per share exercise price in effect
      immediately prior to such issuance or sale, then immediately after such issuance
      or sale the per share exercise price then in effect pursuant to the Warrants
      shall be reduced to the issuance price per share of such newly issued or sold
      securities, and the number of shares purchasable upon exercise of the Warrants
      shall be adjusted to that number determined by multiplying the exercise price
      in
      effect immediately prior to such adjustment by the number of shares of the
      Company’s common stock acquirable upon exercise of the Warrants immediately
      prior to such adjustment and dividing the product thereof by the new exercise
      price resulting from such adjustment.




From
      and
      after May 31, 2009 (provided that the Warrants are outstanding), if the Company
      issues or sells, or is deemed to have issued or sold, any shares of its common
      stock (other than certain excluded issuances) for a consideration per share
      less
      than the per share exercise price in effect immediately prior to such issuance
      or sale, then immediately after such issuance or sale the per share exercise
      price then in effect pursuant to the Warrants shall be reduced to an amount
      equal to the product of (A) the exercise price in effect immediately prior
      to
      such issuance or sale and (B) the quotient determined by dividing (1) the sum
      of
      (I) the product derived by multiplying the exercise price in effect immediately
      prior to such issuance or sale and the number of shares of its common stock
      deemed outstanding immediately prior to such issuance or sale plus (II) the
      consideration, if any, the Company receives upon such issuance or sale, by
      (2)
      the product derived by multiplying (I) the exercise price in effect immediately
      prior to such issuance or sale by (II) the number of shares of the Company’s
      common stock deemed outstanding immediately after such issuance or sale, and
      the
      number of shares purchasable upon exercise of the Warrants shall be adjusted
      to
      that number determined by multiplying the exercise price in effect immediately
      prior to such adjustment by the number of shares of the Company’s common stock
      acquirable upon exercise of the Warrants immediately prior to such adjustment
      and dividing the product thereof by the new exercise price resulting from such
      adjustment.




The
      Company is not permitted to enter into any merger, consolidation, change of
      control, asset sale or similar transaction unless the successor entity is a
      publicly traded corporation and such successor entity assumes in writing all of
      the Company’s obligations under the Notes, Warrants and the other related
      transaction documents. Upon the occurrence of a change of control the Investors
      may require the Company to redeem all or any portion of the Notes by delivering
      written notice thereof to the Company. The portion of the Notes being redeemed
      shall be redeemed by the Company at a price equal to the
      greater of (i) the product of (x) the amount being redeemed and (y) the quotient
      determined by dividing (A) the greater of the closing sale price of its common
      stock immediately prior to the consummation of the change of control, the
      closing sale price of the its common stock immediately following the public
      announcement of such proposed change of control and the closing sale price
      of
      its common stock immediately prior to the public announcement of such proposed
      change of control by (B) the conversion price and (ii) 125% of the amount being
      redeemed.  59
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




If
      at any
      time the Company grants, issues or sells any options, convertible securities
      or
      rights to purchase stock, warrants, securities or other property pro rata to
      the
      record holders of any class of the Company’s common stock, then the Investors
      will be entitled to acquire, upon the terms applicable to such purchase rights,
      the aggregate purchase rights which the Investors could have acquired if they
      had held the number of shares of the Company’s common stock acquirable upon
      complete conversion of the Notes and exercise of the Warrants immediately before
      the date on which a record is taken for the grant, issuance or sale of such
      purchase rights, or, if no such record is taken, the date as of which the record
      holders of the Company’s common stock are to be determined for the grant, issue
      or sale of such purchase rights.




At
      the
      closing, the Company entered into a Registration Rights Agreement (the
“Registration Rights Agreement”) with the Investors pursuant to which, among
      other things, the Company agreed to provide registration rights with respect
      to
      the shares of the Company’s common stock underlying the Notes and Warrants under
      the Securities Act and applicable state securities laws. The Registration Rights
      Agreement provides that the Company must register for resale 130% of the sum
      of
      (i) the aggregate number of shares of the Company’s common stock issued or
      issuable upon conversion of the Notes as of the trading day immediately
      preceding the date the registration statement is initially filed with the SEC
      and (ii) the aggregate number of shares of the Company’s common stock issued or
      issuable upon exercise of the Warrants as of the trading day immediately
      preceding the date the registration statement is initially filed with the
      SEC.




The
      Registration Rights Agreement also provides that if (i) the Company does not
      file a registration statement on or before December 30, 2007, (ii) a
      registration statement is not declared effective on or prior to a certain
      required effectiveness date, or (iii) after its effective date, such
      registration statement ceases to remain continuously effective and available
      to
      the Investors at any time prior to the expiration of a certain effectiveness
      period subject to certain grace periods, then the Company must pay the
      Investors, as a result of the event and for each month thereafter that such
      event continues, an amount in cash as partial damages equal to 1% of the
      aggregate purchase price paid by the Investors pursuant to the Securities
      Purchase Agreement for the shares underlying the Notes and Warrants then held
      by
      the Investors. Pursuant to this agreement, the Company filed a registration
      statement on Form S-3 with the SEC to register for resale the shares of the
      Company’s common stock underlying the Notes and Warrants held by the selling
      stockholders.




Under
      the
      Registration Rights Agreement, the Company is also required to indemnify the
      Investors and their affiliates against any losses, claims or damages incurred
      in
      investigating, preparing or defending any action, claim or administrative
      proceeding, whether pending or threatened, to which any of them may become
      subject insofar as such claims arise out of or are based upon: (i) any untrue
      statement or alleged untrue statement of a material fact in a registration
      statement or any post-effective amendment thereto or in any filing made in
      connection with the qualification of the offering under the securities or other
      “blue sky” laws of any jurisdiction in which registrable securities are offered,
      or the omission or alleged omission to state a material fact required to be
      stated therein or necessary to make the statements therein not misleading,
      (ii)
      any untrue statement or alleged untrue statement of a material fact contained
      in
      any preliminary prospectus if used prior to the effective date of such
      registration statement, or contained in the final prospectus (as amended or
      supplemented, if the Company files any amendment thereof or supplement thereto
      with the SEC) or the omission or alleged omission to state therein any material
      fact necessary to make the statements made therein, in the light of the
      circumstances under which the statements therein were made, not misleading,
      (iii) any violation or alleged violation by the Company of federal securities
      laws, any other law, including, without limitation, any state securities law,
      or
      any rule or regulation thereunder relating to the offer or sale of the
      registrable securities pursuant to a registration statement or (iv) any
      violation of the Registration Rights Agreement. The Company is also required
      to
      file with the SEC in a timely manner all reports and other documents required
      under federal securities laws so long as the Company remains subject to such
      requirements and the filing of such reports and other documents is required
      for
      the applicable provisions of Rule 144 under the Securities Act.  60
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




Maxim
      Group L.L.C. acted as placement agent in connection with the transaction. For
      their services as placement agent, the Company was required to pay Maxim an
      aggregate commission in cash equal to 8% of the gross proceeds from the sale
      of
      the Notes and Warrants, a non-accountable expense allowance of 1% of the gross
      proceeds from the sale of the Notes and Warrants, plus a warrant to purchase
      7%
      of the shares underlying the Notes and Warrants issuable to the Investors.
      The
      Company issued a warrant to purchase 236,250 shares of the Company’s common
      stock with an exercise price of $2.93 and a term of 5 years to Maxim and paid
      Maxim a fee of $460 (with additional amounts to be paid upon the expiration
      of
      certain letters of credit). The warrant the Company issued to Maxim contains
      the
      same anti-dilution provisions as the Warrants issued to the
      Investors.




The
      initial fair value of the conversion feature was $370 and the initial fair
      value
      of the warrants was $1,070 based upon the relative value of the Black Sholes
      valuation of the warrants and the underlying debt amount. For the Black Sholes
      calculation, the Company assumed no dividend yield, a risk free interest rate
      of
      4.63%, expected volatility of 68.38% and an expected term of the warrants of
      5
      years.




Deferred
      financing costs, which consist of cash paid at closing of the Notes and the
      fair
      value of the warrants issued to the placement agent totaled $961, have been
      reflected as deferred financing fees on the accompanying balance sheet as of
      December 31, 2007.




The
      fair
      value of warrants and the beneficial conversion of the notes have been reflected
      by the Company as a valuation discount and offset to the carrying value of
      the
      Notes, are amortized over the term of the Notes. For the year ended December
      31,
      2007, the Company amortized $111 related to these transactions and is reflected
      as financing costs in the Company’s consolidated statements of
      operations.




As
      described in Note 15, on March 26, 2008, the Company substantially amended
      the
      terms of the Securities Purchase Agreement. Pursuant to EITF 96-19, *Debtor’s
      Accounting for a Modification or Exchange of Debt Instruments* ,
      a
      substantial modification in terms of an existing debt, should be reported a
      debt
      extinguishment. Thus, the Company’s modification in terms is expected to result
      in a loss on extinguishment of debt, which will be reflected in the Company’s
      consolidated statements of operations for the three months ended March 31,
      2008.




61


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**


**Note
      10.** **Equity
      Transactions**




*Merger
      and Stock Split*




As
      described in Note 1, on June 15, 2006, Qorus issued to the members of VMdirect
      1,014,589 shares of Series A Convertible Preferred Stock, par value $0.01 per
      share, of Qorus which were converted into 1,057,547,456 shares of Qorus’ common
      stock. The number of shares of Preferred Stock issued to the Members and the
      number of Conversion Shares gives effect to the issuance of 361,603 membership
      units by VMdirect for an aggregate purchase price of $625, a transaction that
      was completed immediately prior to the Closing, resulting in net proceeds to
      the
      Company of $594,000.




On
      August
      1, 2006, the Company affected a 1 for 50 reverse stock split. The effect of
      this
      stock split has been retroactively reflected in the financial statements as if
      the stock split occurred at the beginning of the earliest period reported.
      The
      stock split converted the 1,057,547,456 shares of Qorus’ common stock into
      approximately 21,150,959 shares of common stock of the Company, of which
      1,519,780 shares relate to the sale of membership units by VMdirect consummated
      immediately prior to the closing and the remaining 19,631,179 shares represent
      the converted shares outstanding as of December 31, 2005.




*Sale
      of Common Stock*




On
      December 22, 2006, the Company entered into a Securities Purchase Agreement
      pursuant to which the Company sold 1,000,000 shares of its common stock at
      a per
      share price of $4.75 gross proceeds of $4,750. The Company paid placement and
      other closing costs of $405 resulting in net proceeds to the Company of
      $4,345.




In
      connection with the Closing, on December 27, 2006, the Company also entered
      into
      a Registration Rights Agreement (the “Registration Rights Agreement”) with the
      Investors, pursuant to which, among other things, the Company agreed to register
      the resale of the Shares by the Investors and to keep the registration statement
      effective until the earlier of the date on which all Shares have been sold
      by
      the Investors and the date that all of the Shares may be sold by the Investors
      pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended
      (the “Effectiveness Period”). The Registration Rights Agreement provides that if
      (i) the Company does not file a registration statement on or before January
      31,
      2007, (ii) a registration statement is not declared effective on or prior to
      March 27, 2007, which date may be extended to May 1, 2007 in the event that
      the
      registration statement is reviewed by the Securities and Exchange Commission,
      or
      (iii) after its effective date, such registration statement ceases to remain
      continuously effective and available to the holders of the Shares at any time
      prior to the expiration of the Effectiveness Period for an aggregate of more
      than 30 consecutive trading days or for more than an aggregate of 60 trading
      days in any 12-month period (which need not be consecutive), then the Company
      must pay each holder of Shares on the date of such event, and for each month
      thereafter that such event continues, an amount in cash as partial liquidated
      damages equal to 1% of the aggregate Purchase Price paid by such Investor
      pursuant to the Securities Purchase Agreement for any Shares then held by such
      Investor, up to a maximum of 18% of the aggregate Purchase Price paid by such
      Investor in any 12-month period, unless, as a result of the liquidated damages
      provision of the Registration Rights Agreement, generally accepted accounting
      principles of the United States require the Shares to be treated as derivative
      securities, or as any other financial component other than stockholders equity,
      in which case, the maximum amount payable under the liquidated damages
      provisions of the Registration Rights Agreement will not exceed 18% of the
      aggregate Purchase Price paid by such Investor.  62
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




The
      Registration Rights Agreement provides for anti-dilution provisions that state
      if the Company issues or sells any shares of its common stock or common stock
      equivalents at a price lower than $4.75 per share at any time during the one
      year period following the Closing, the Company is obligated to issue to the
      Investors a compensating amount of shares. In December 2007, the Company issued
      696,429 shares of common stock to the Investors pursuant to these
      anti-dilution provisions, which were triggered by the issuance of shares to
      the
      Investors of the Convertible Notes Payable described in Note 9. The issuance
      of
      these shares has been reflected as a stock dividend in the accompanying
      financial statements.




*Distributions*




Prior
      to
      the merger transaction described above, members of VMdirect received
      distributions of $265 for the year ended December 31, 2006.




**Other**





On
      February 22, 2007, the Company issued 10,000 shares of its common stock valued
      at $32 ($3.20 per share) to a consultant for services provided.




On
      November 6, 2007, the Company entered into an agreement with Richard J. Milham,
      Jr. and Blue Trident Enterprises, LLC pursuant to which the Company granted
      50,000 shares of its common stock valued at $154 ($3.08 per share) in exchange
      for services provided. The effective date of this agreement
      was September 30, 2007.





**Note
      11.** **Stock
      Options and Warrants**




**Options**




The
      Company’s 2006 Stock Incentive Plan was adopted by its board of directors and
      became effective in August, 2006. The total number of shares reserved for
      issuance under this plan was 1,537,501. The number of shares reserved for
      issuance under the 2006 Stock Incentive Plan is subject to an annual increase
      on
      the first day of each fiscal year during the term of the 2006 Stock Incentive
      Plan, beginning January 1, 2007, in each case in an amount equal to the lesser
      of (i) 1,000,000 shares of common stock, (ii) 5% of the outstanding shares
      of
      common stock on the last day of the immediately preceding year, or (iii) an
      amount determined by the Company’s board of directors. Any shares of common
      stock subject to an award, which for any reason expires or terminates
      unexercised, are again available for issuance under the 2006 Stock Incentive
      Plan. The Company’s board of directors did not increase the total number of
      shares reserved for issuance under the 2006 Stock Incentive Plan for the fiscal
      year beginning January 1, 2007.




The
      2006
      Stock Incentive Plan will terminate after 10 years from the effective date,
      unless it is terminated earlier by the Company’s board of directors. The plan
      authorizes the award of stock options, stock purchase grants, stock appreciation
      rights and stock units.




The
      2006
      Stock Incentive Plan provides for the grant of both incentive stock options
      that
      qualify under Section 422 of the Internal Revenue Code and nonqualified stock
      options. Incentive stock options may be granted only to the Company’s employees
      or to employees of any of the Company’s parents or subsidiaries. All awards
      other than incentive stock options may be granted to the Company’s employees,
      officers, directors, consultants, independent contractors and advisors or
      employees, officers, directors, consultants, independent contractors and
      advisors of any of the Company’s parents or subsidiaries. The exercise price of
      incentive stock options must be at least equal to the fair market value of
      the
      Company’s common stock on the date of grant. The exercise price of incentive
      stock options granted to 10% shareholders must be at least equal to 110% of
      that
      value. The exercise price of nonqualified stock options will be determined
      by
      the administrator of the plan when the options are granted. The term of options
      granted under the Company’s 2006 Stock Incentive Plan may not exceed 10 years
      and typically vest over four years, with 25% of the options vesting after 12
      months and 75% vesting monthly over the remaining three years.  63
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




As
      of
      December 31, 2007, 550,246 shares were available for grant under the 2006 Stock
      Incentive Plan.




The
      following is a summary of option activity (including plan and non-plan options)
      for the years ended December 31, 2007 and 2006 (in thousands, except per share
      data):




Shares
            
            Range
                of Exercise Prices
            
            Weighted
                Average Exercise PriceOutstanding
                at January 1, 2006
            
            
            818
            
            $
            0.26
            
            $
            0.26Granted
            
            
            560
            
            $
            0.33-$7.75
            
            $
            5.47Exercised
            
            
            -
            
            
            -
            
            
            -Cancelled
            
            
            (200
            )
            $
            0.26-$7.75
            
            $
            3.89Outstanding
                at December 31, 2006
            
            
            1,178
            
            $
            0.26-$7.75
            
            $
            2.12Granted
            
            
            557
            
            $
            3.08-$4.20
            
            $
            3.73Exercised
            
            
            (169
            )
            $
            .26-$.33
            
            $
            .27Cancelled
            
            
            (192
            )
            $
            .26-$7.75
            
            $
            1.10Outstanding
                at December 31, 2007
            
            
            1,374
            
            $
            0.26-$7.75
            
            $
            3.14Exercisable
                at December 31, 2007
            
            
            514
            
            $
            0.26-$7.75
            
            $
            1.98




64


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**




The
      following table summarizes information regarding options outstanding at December
      31, 2007:




Shares
            
            Exercise
                Price
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Term
              (months)
            
            Aggregate
                Intrinsic ValueShares
                Granted Quarter Ended December 31, 2005
            
            
            534
            
            $
            0.26
            
            $
            0.26
            
            
            14
            
            
            607Shares
                Granted Quarter Ended March 31, 2006
            
            
            22
            
            $
            0.33
            
            $
            0.33
            
            
            2
            
            
            23Shares
                Granted Quarter Ended September 30, 2006
            
            
            277
            
            $
            7.75
            
            $
            7.75
            
            
            21
            
            
            -Shares
                Granted Quarter Ended March 31, 2007
            
            
            66
            
            $
            3.50
            
            $
            3.50
            
            
            5
            
            
            -Shares
                Granted Quarter Ended June 30, 2007
            
            
            131
            
            $
            3.65-$4.20
            
            $
            3.90
            
            
            11
            
            
            -Shares
                Granted Quarter Ended September 30, 30, 2006
            
            
            344
            
            $
            3.08-$3.80
            
            $
            3.71
            
            
            30
            
            
            -Outstanding
                at December 31, 2007
            
            
            1,374
            
            $
            0.26-$7.75
            
            $
            3.32
            
            
            83
            
            $
            631Exercisable
                at December 31, 2007
            
            
            514
            
            $
            0.26-$7.75
            
            $
            1.98
            
            
            83
            
            
            -




There
      were 168,817 stock options exercised during the year ended December 31, 2007
      from which the Company received $47 in cash proceeds. The Company recognized
      compensation expense from vesting of stock options of $563 and $305 for the
      years ended December 31, 2007 and 2006, respectively, and had estimated future
      compensation expense from these stock options of $1,604 at December 31, 2007
      which will be recognized over the remaining estimated weighted useful life
      of 85
      months.




**Warrants**




On
      December 31, 2005, the Company granted warrants to purchase 1,551,535 shares
      of
      common stock at an exercise price of $0.26 in connection with professional
      services performed by various consultants. The warrants were granted under
      Individual Stock Purchase Warrant Agreements which expire on December 31, 2010.
      The warrants vested immediately at the grant date, with the exception of 378,664
      shares, of which 48,380 shares vested and 330,284 shares were cancelled during
      the year ended December 31, 2006. No warrants were granted during the year
      ended
      December 31, 2006.




On
      November 30, 2007, the Company entered into a Securities Purchase Agreement
      (the
“Securities Purchase Agreement”) with Portside Growth and Opportunity Fund,
      Highbridge International, LLC and Iroquois Master Fund, Ltd. (the “Investors”)
      pursuant to which the Company agreed to issue an aggregate principal amount
      of
      $7.0 million of three-year senior secured convertible notes (the “Notes”), and
      five-year warrants (“Warrants”) to purchase an aggregate of 875,000 shares of
      the Company’s common stock at an exercise price of $2.93, subject to certain
      resets as discussed in Note 9, to the Investors. The warrants vested immediately
      at the grant date.  65
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




Additionally
      on November 30, 2007, the Company granted warrants to purchase 236,250 shares
      of
      common stock at an exercise price of $2.93, subject to certain resets, to Maxim
      Group, LLC. Maxim Group LLC acted as placement agent in connection with the
      notes. The warrants vested immediately at the grant date.




The
      fair
      value of these warrants will be expensed over the life of the debt as a part
      of
      interest expense.




During
      the year ended December 31, 2007, 768,374 warrants were exercised to obtain
      713,901 shares of common stock. The Company recognized compensation expense
      from
      warrants of $0 and $175 during the years ended December 31, 2007 and 2006,
      respectively.




The
      following is a summary of stock purchase warrant activity for the years ended
      December 31, 2007 and 2006 (in thousands, except per share
      data):




Shares
            
            Range
                of Exercise Prices
            
            Weighted
                Average Exercise PriceOutstanding
                at December 31, 2005
            
            
            1,552
            
            $
            0.26
            
            $
            0.26Granted
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (165
            )
            
            0.26
            
            
            0.26Cancelled
            
            
            (330
            )
            
            0.26
            
            
            0.26Outstanding
                at December 31, 2006
            
            
            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
            
            $
            2.38Exercisable
                at December 31, 2006
            
            
            1,400
            
            $
            2.38
            
            $
            2.38




The
      following table summarizes information regarding warrants outstanding at
      December 31, 2007:




Shares
            
            Exercise
                Price
            
            Weighted
                Average Remaining Contractual Term
              (months)
            
            Aggregate
                Intrinsic ValueOutstanding
                at December 31, 2007
            
            
            1,400
            
            $
            0.26-$2.93
            
            
            55
            
            $
            328Exercisable
                at December 31, 2007
            
            
            1,400
            
            $
            0.26-$2.93
            
            
            55
            
            $
            328


66
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




**Note
      12.** **Related
      Parties**




*RazorStream,
      LLC*





On
      January 29, 2007, the Company entered into an Amended and Restated License,
      Hosting and Services Agreement (the “Amended Agreement”) with RazorStream. The
      Amended Agreement amends and restates the Licensing, Hosting and Services
      Agreement effective May 1, 2005, between the Company and
      RazorStream.




Pursuant
      to the terms of the Amended Agreement, RazorStream will provide hosting,
      maintenance and support services for each individual website operated by the
      Company or any third party authorized by the Company. While the initial term
      of
      the Amended Agreement ended on January 15, 2008, the Amended Agreement remains
      operative thereafter unless terminated by either party upon 60 days prior
      written notice. Under the terms of the Amended Agreement, for each individual
      website operated by the Company or any third party authorized by the Company,
      RazorStream (a) charges the Company $5 per new subscriber account exceeding
      20,000 accounts (purchasable in 20,000 account increments); (b) is entitled
      to
      (1) ten percent (10%) of the Company’s total gross revenue from all active
      subscriber accounts, with a minimum amount of $0.69 per each such subscriber
      account per month, and (2) some portion of revenue to be mutually agreed upon
      by
      the parties for all advertising-based “free” subscriber accounts (which the
      Company does not currently provide), provided, however that such terms will
      provide for a minimum amount of $0.25 per each such subscriber account per
      month
      (which cost the Company will account for as marketing expense); and (c)
      effective February 1, 2007, is entitled to a minimum guarantee of $50,000 per
      month that is non-refundable but that will be credited against the above fees.
      The Company may, from time to time, engage RazorStream for non-recurring
      engineering services at a rate of $200 per hour. The fees above apply
      independently to each individual website operated by the Company or any third
      party authorized by the Company, and no fees charged with respect to any
      individual website, and no subscriber account applied with respect to any
      individual website, shall be aggregated with any fees or subscriber accounts,
      respectively, applied to any other website.




In
      connection with the services discussed above, the Company incurred expenses
      of
      $2,029 and $1,554 during the years ended December 31, 2007 and 2006,
      respectively. At December 31, 2007, the accompanying consolidated balance sheet
      reflects prepaid bandwidth charges, affiliates of $51, which represents amounts
      paid in advance to RazorStream for services discussed above.




In
      addition, the Company, in conjunction with RazorStream, is in process of
      developing a unique internet appliance (“Set Top Box”) which will allow users
      the ability to access their DigitalFX Studio features, stream high resolution
      on
      demand audio and video content and participate in the social network, all from
      their television. During the year ended December 31, 2007, the Company made
      payments to RazorStream of $225 for development costs in association with the
      Set Top Box project.




*Other
      Related Party Transactions*




As
      described in Note 6, the Company has a convertible note receivable with SaySwap
      totaling $225. SaySwap
      is a Company that is 60% owned by the Company’s Chief Operating Officer and
      members of his immediate family.




As
      described in Note 7, the Company has an investment in CJVE totaling $816. A
      member
      of the Board of Directors of CJVE, Emanuel Gerard, is also a member of the
      Board
      of Directors of the Company.




67


**Digital
        FX International, Inc. and Subsidiaries**
 
 **Notes
        to Consolidated Financial Statements**
 **In
        Thousands, Except for Share and Per Share Data**
 **Years
        Ended December 31, 2007 and 2006**


During
      the year ended December 31, 2007, the Company made payments to Vayan Marketing
      Group, LLC totaling $225 under an agreement to provide auto-responder services
      to the Company. The agreement expired in December, 2007 and has been renewed
      on
      a month to month basis by the Company at a monthly rate of $5. An officer of
      Vayan Marketing Group, LLC is an immediate family member of one of the managers
      of our majority shareholder, of VM Investors, LLC.




**Note
      13.** **Income
      Taxes**




The
      Company’s income tax provision was computed based on the federal statutory rate,
      as adjusted for permanent items. No tax provision was recorded prior to June
      16,
      2006 because the income tax obligations for this period were passed through
      to
      the members of VMdirect. Deferred taxes were recorded as the result of a change
      in the Company’s tax status based on temporary differences existing at June 16,
      2006. The provision (benefit) for income taxes consists of the following for
      the
      years ended December 31, 2007 and 2006:





**December
                31, 2007**
            
            **December
                31, 2006**Current
                tax provision - federal
            
            $
            912
            
            $
            231-
                foreign
            
            
            0
            
            
            58Deferred
                tax provision - federal
            
            
            (1,693
            )
            
            (176
            )-
                foreign
            
            
            (31
            )
            
            0Income
                tax provision (benefit)
            
            $
            (812
            )
            $
            113




A
      reconciliation of the statutory federal income tax rate to the effective tax
      rate is as follows for the years ended December 31, 2007 and 2006:


**December
                  31, 2007**
              
              **December
                  31, 2006**Income
                    before income tax provision
              
              $
              (3,391
              )
              $
              593Expected
                  tax (federal statutory rate 34%)
              
              
              (1,152
              )
              
              202Permanent
                  differences
              
              
              194
              
              
              259Foreign
                  tax rate difference
              
              
              94
              
              
              (17
              )Change
                  in valuation allowance
              
              
              41Other:Income
                  not taxed at company level
              
              
              -
              
              
              (208
              )Tax
                  provision due to change in tax status
              
              
              -
              
              
              (71
              )Other
                  differences
              
              
              11
              
              
              (52
              )Income
                  tax provision
              
              $
              (812
              )
              $
              113


The
      Company recorded a valuation allowance of $41 against deferred tax assets
      related to the Company’s Ireland Subsidiary at December 31, 2007. Management has
      determined, based on the Company’s history and expectations for the future, that
      operating income of the Company will more likely than not be sufficient to
      fully
      recognize the deferred tax assets in excess of the $41 valuation allowance.
      In
      the year ended December 31, 2007, the Company recorded as an addition to
      paid-in-capital a tax benefit of $904 for the tax effect of tax deductions
      in
      excess of recorded compensation expense related to stock based compensation.  68
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**





The
      Company’s provision for income taxes at December 31, 2006 was based on income
      for the period from June 16, 2006 to December 31, 2006 as adjusted for timing
      differences outstanding at the date that DigitalFX became the sole member of
      VMdirect. The Company’s income tax provision was computed based on the net
      income taxes and proforma net income below reflect the effect as if the Company
      had been taxed in accordance with Subchapter C of the Internal Revenue code
      (a
“C” Corporation) for the year ended December 31, 2006.





**December
                31, 2006**Income
                taxes:As
                reported
            
            $
            113Proforma
            
            $
            392Net
                incomeAs
                reported
            
            $
            480Proforma
            
            $
            201Net
                income per share
            
            $
            0.01





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      net deferred tax asset at December 31, 2007 are as follows:




**December
                31, 2007**Stock
                based compensation
            
            $
            19Depreciation
                and amortization
            
            
            31Allowance
                for sales returns
            
            
            23Inventory
                reserve
            
            
            6Accrued
                vacation
            
            
            17Net
                operating loss carryforward
            
            
            1,845Other
                comprehensive income
            
            
            140Valuation
                allowance
            
            
            (41
            )Net
                deferred income tax asset
            
            $
            2,040




The
      Company had a total federal net operating loss carryforward of approximately
      $5,216 to offset future taxable income. If not used to offset future taxable
      income, the net operating loss will expire in 2027.




Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN
      48”) *—an
      interpretation of FASB Statement No. 109, Accounting for Income
      Taxes* .
      The
      Interpretation addresses the determination of whether tax benefits claimed
      or
      expected to be claimed on a tax return should be recorded in the financial
      statements. Under FIN 48, the Company may recognize the tax benefit from an
      uncertain tax position only if it is more likely than not that the tax position
      will be sustained on examination by the taxing authorities, based on the
      technical merits of the position. The tax benefits recognized in the financial
      statements from such a position should be measured based on the largest benefit
      that has a greater than fifty percent likelihood of being realized upon ultimate
      settlement. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties on income taxes, accounting in interim periods and
      requires increased disclosures. At the date of adoption, and as of December
      31,
      2007, the Company does not have a liability for unrecognized tax benefits.  69
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




The
      Company files income tax returns in the U.S. federal jurisdiction. The Company
      is subject to U.S. federal income tax examinations by tax authorities for
      periods after June 16, 2006, the date at which the Company completed its reverse
      merger transaction. In addition, the Company files income tax returns in the
      United Kingdom and Ireland for the foreign subsidiaries located in these
      jurisdictions. The Company is subject to tax examinations by tax authorities
      in
      these jurisdictions, however, as of December 31, 2007, there are no open foreign
      tax audits or inquiries relating to the Company’s foreign
      subsidiaries.




The
      Company’s policy is to record interest and penalties on uncertain tax provisions
      as income tax expense. As of December 31, 2007, the Company has no accrued
      interest or penalties related to uncertain tax positions.




**Note
      14.** **Commitments
      and Contingencies**




**Legal
      Proceedings**




From
      time
      to time, the Company may be involved in litigation relating to claims arising
      out of its operations in the normal course of business. Except as is described
      below, the Company is not currently party to any legal proceedings, the adverse
      outcome of which, in management’s opinion, individually or in the aggregate,
      would have a material adverse effect on the Company’s results of operations or
      financial position.




On
      February 7, 2007, VMdirect and DigitalFX Solutions jointly filed a lawsuit
      in
      the Superior Court of the State of California for the County of Los Angeles
      against a former Affiliate of VMdirect alleging a number of complaints including
      unfair business practice, misappropriation of trade secrets, slander,
      intentional interference with contractual relationship, intentional interference
      with prospective economic advantage and breach of contract, and seeking
      compensatory and punitive damages in amounts to be proved at trial, injunctive
      relief and attorneys’ fees and costs. The defendant became an Affiliate of
      VMdirect in May 2006 and agreed to adhere to VMdirect’s Code of Ethics for
      Affiliates. Upon signing up as an Affiliate, defendant represented that he
      was
      capable of bringing a substantial number of new Affiliates to VMdirect, and
      in
      reliance on this representation, VMdirect agreed to provide certain privileges
      to defendant including posting of training materials on VMdirect’s website.
      VMdirect also agreed to work with defendant to develop training materials.
      Although VMdirect paid for all of the costs of developing the materials and
      its
      personnel actively participated in the development of such materials, defendant
      demanded aggregate compensation of $300,000 for creating the training and
      motivational materials after they were completed. After VMdirect did not pay
      this fee to defendant, defendant requested that VMdirect stop using the
      materials, began disparaging VMdirect and its officers, and engaged in
      cross-recruiting Affiliates from other VMdirect networks, a practice prohibited
      by VMdirect’s Code of Ethics for its Affiliates. VMdirect then terminated
      defendant’s distribution network and believes that defendant continues to use
      VMdirect’s proprietary trade secrets to recruit Affiliates to join other network
      marketing companies that compete with VMdirect.  70
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**




On
      March
      6, 2007, the Company, along with VMdirect and DigitalFX Solutions, was served
      with a cross complaint for damages filed in the Superior Court of California
      for
      the County of Los Angeles, by this same former Affiliate for alleged breach
      of
      contract, fraud-intentional misrepresentation, fraud-intentional
      concealment/omission, fraud-false promises, negligent misrepresentation and
      infringement of the rights of publicity and privacy, and seeking general,
      exemplary and punitive damages in amounts to be determined at trial and an
      order
      enjoining the Company’s use of his name, image, photograph and likeness for any
      purpose without his written consent. This former Affiliate alleges that the
      officers of VMdirect agreed to grant him 60,000 shares of the Company’s common
      stock, agreed to pay him a percentage of sales to small businesses and
      enterprises in connection with his creation of certain training materials,
      agreed to pay for the costs of all training materials created by him and agreed
      that all training materials which contained his likeness would remain his
      intellectual property. This former Affiliate also alleges that it was expressly
      agreed that a copy of such materials would be made available to him for posting
      as promotional materials on his own website and that his consent for VMdirect
      to
      use his image and likeness on its websites would be revocable at any
      time.




On
      March
      6, 2007, legal counsel for the same former Affiliate filed a Notice of Removal
      of Action with the United States District Court of the Central District of
      California seeking to remove the case from the Superior Court of California
      to
      the United States District Court. The Company’s legal counsel filed a motion to
      remand the case back to the Superior Court of California which motion was
      granted.




On
      August
      31, 2007, the former Affiliate unsuccessfully applied for a temporary
      restraining order (“TRO”) to enjoin VMdirect from using on its website the
      training materials featuring the former Affiliate. As a result of this
      unsuccessful application, the Court ordered VMdirect and DigitalFX Solutions
      to
      qualify to do business in
      California if they wished to proceed with their complaint against the former
      Affiliate. On December 10, 2007, DigitalFX Solutions qualified to do business
      in
      California. On December 14, 2007, VMdirect qualified to do business in
      California. VMdirect and DigitalFX Solutions complied with the Court order
      for
      the purpose of pursuing their litigation against the former
      Affiliate.




Management
      believes there exists no basis for the former Affiliate's claims and intends
      to
      defend this matter vigorously .  In
      the
      event management’s assessment of the case is incorrect, the economic impact
      on the Company would be insignificant and would not materially affect its
      operations.




**Operating
      Leases**




The
      Company leased two adjacent facilities under non-cancelable operating leases
      that expired on January 31 2007. In February, 2007, the Company subsequently
      consolidated these leases into one and renewed for twelve months at a monthly
      rental of $17. In December 2007, the Company renewed this lease for an
      additional term of one year at a monthly rental of $18.




On
      January 1, 2007 the Company entered into a lease for lodging space in New York
      City for a term of nine months, ending September 30, 2007 at a monthly rental
      of
      $10. In August 2007, the lease was renegotiated. The new term is for one year
      commencing September 1, 2007 through August 31, 2008 at a monthly rental of
      $6.
      On July 1, 2007 the Company entered into a lease for office space in Westlake
      Village, CA for a term of three years, ending June 30, 2010 at a monthly rental
      of $3. At December 31, 2007, future minimum lease payments total $300, $36,
      and
      $36 for 2008, 2009 and 2010, respectively.  71
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**





Rent
      expense for the years ended December 31, 2007 and 2006 was $338 and $93,
      respectively.




**Note
      15.** **Subsequent
      Events**




On
      March
      24, 2008, the Company entered into an Amendment and Exchange Agreement with
      each
      of the institutional investors (“Investors”) signatory to that certain
      Securities Purchase Agreement dated November 29, 2007 (“Securities Purchase
      Agreement”), pursuant to which, among other things, the Investors purchased from
      the Company (i) senior secured convertible notes in the aggregate principal
      amount of $7,000 (the “Existing Notes”), which are convertible into shares of
      the Company’s common stock, par value $0.001 per share (the “Common Stock”), in
      accordance with the terms thereof and (ii) warrants (the “Existing Warrants”),
      which are exercisable into shares of Common Stock.





Under
      the
      terms of the Amendment and Exchange Agreements, the Company and each Investor
      have agreed to restructure the financing consummated under the Securities
      Purchase Agreement to reduce the amount of the financing to $3,000, with each
      Investor receiving repayment of its pro-rata share of $4,000, including $2,000
      held in a collateral account for certain letters of credit, through the exchange
      of Existing Notes for a combination of amended and restated senior secured
      convertible notes (“Amended and Restated Notes”) and an aggregate of 1,000,000
      shares of Common Stock (the “Common Shares”), and through the exchange of
      Existing Warrants for amended and restated warrants (“Amended and Restated
      Warrants”). The Amended and Restated Notes will have an aggregate principal
      amount of $3,000 and a term of three years commencing from November 30, 2007.
      The Amended and Restated Warrants will have a term of five years commencing
      from
      November 30, 2007 and will entitle the Investors to initially purchase an
      aggregate of 750,002 shares of Common Stock (subject to adjustment as provided
      in the Amended and Restated Warrants, including pursuant to economic
      anti-dilution adjustments). The Amended and Restated Notes will carry interest
      at 7.50% per annum on the unpaid/unconverted principal balance, payable
      quarterly in cash, and will be secured on a senior basis against all of the
      assets of the Company. The Company will also be required to make aggregate
      monthly principal payments of $25, plus accrued interest thereon, beginning
      July
      1, 2008.





The
      Amended and Restated Notes will convert into approximately 1,500,000 shares
      (subject to adjustment as provided in the Amended and Restated Warrants,
      including pursuant to economic anti-dilution adjustments), based on a conversion
      price equal to $2.00 per share (subject to adjustment as provided in the Amended
      and Restated Notes, including pursuant to economic anti-dilution adjustments),
      which shall reset on March 26, 2009 to the greater of (i) 105% of the arithmetic
      average of the dollar weighted average price of the Common Stock over each
      of
      the five (5) consecutive trading days ending on the trading day immediately
      prior to March 26, 2009 and (ii) $1.00 (as adjusted for any stock splits, stock
      dividends, recapitalizations, combinations, reverse stock splits or other
      similar events); provided however, that in no event shall the adjusted
      conversion price be greater than $3.00 (as adjusted for any stock splits, stock
      dividends, recapitalizations, combinations, reverse stock splits or other
      similar events). The Amended and Restated Warrants will have an exercise price
      of $0.959 per share (subject to adjustment as provided in the Amended and
      Restated Warrants, including pursuant to economic anti-dilution
      adjustments).





The
      Amended and Restated Notes will be convertible at the option of the Investors
      prior to their maturity. Additionally, beginning November 30, 2008, and provided
      that the Company has complied with certain equity conditions, the Company will
      be able to require the Investors to convert the Amended and Restated Notes
      to
      Common Stock if the dollar volume weighted average price of the Common Stock
      is
      $2.75 (as adjusted for any stock splits, stock dividends, recapitalizations,
      combinations, reverse stock splits or other similar events) for twenty (20)
      out
      of thirty (30) consecutive trading days.  72
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**





The
      maturity date of the Amended and Restated Notes will be three years following
      the issuance date of November 30, 2007. The Investors will be entitled to
      accelerate the maturity in the event that there occurs an event of default
      under
      the Amended and Restated Notes, including, without limitation, if the Company
      fails to register for resale the shares underlying the Amended and Restated
      Notes and Amended and Restated Warrants, if the Company fails to pay any amount
      under the Amended and Restated Notes when due, if a judgment is rendered against
      the Company in an amount set forth in the Amended and Restated Notes, if the
      Company breaches any representation or warranty under the Securities Purchase
      Agreement or other transaction documents, or if the Company fails to comply
      with
      the specified covenants set forth in the Amended and Restated Notes. Among
      the
      other covenants, the Amended and Restated Notes contain financial covenants
      whereby the Company will be required to achieve specified EBITDA (earnings
      before interest, tax, depreciation and amortization) and revenue targets in
      each
      of the fiscal quarters during which the Amended and Restated Notes are
      outstanding. Any failure by the Company to achieve an EBITDA or revenue target
      will be considered a breach of the financial covenant.





Pursuant
      to the Amendment and Exchange Agreements, the Registration Rights Agreement
      dated November 30, 2007 (the “Registration Rights Agreement”) will be amended to
      provide that the Company must register for resale 100% of the sum (i) the
      aggregate number of shares of common stock issued or issuable upon conversion
      of
      the Amended and Restated Notes as of the trading day immediately preceding
      the
      date the registration statement is initially filed with the Securities and
      Exchange Commission (the “SEC”), (ii) the aggregate number of shares of common
      stock issued or issuable upon exercise of the Amended and Restated Warrants
      as
      of the trading day immediately preceding the date the registration statement
      is
      initially filed with the SEC, and (iii) the Common Shares, and to remove
      provisions related to payments to the Investors in connection with the Company’s
      failure to effectuate a registration statement or maintain its
      effectiveness.





In
      addition, under the terms of the Amendment and Exchange Agreements, if a
      registration statement is not available for the resale of the Common Shares
      and
      the shares of Common Stock underlying the Amended and Restated Notes and the
      Amended and Restated Warrants and the Company fails to satisfy the current
      public information requirement under Rule 144 promulgated under the Securities
      Act, the Company has agreed to pay the Investors as a result of the event and
      for each month thereafter that such event continues (or until such time such
      information is no longer required under the rule), an amount in cash as partial
      liquidated damages equal to 1.5% of the aggregate purchase price of the
      Investors’ Amended and Restated Notes.





Under
      the
      terms of the Amendment and Exchange Agreements, so long as the Amended and
      Restated Notes are outstanding, each Investor is not permitted to sell a number
      of Common Shares exceeding more than two-thirds (2/3) of the number of shares
      previously issued, or required to have been issued, to such Investor upon
      conversion of such Investor's Amended and Restated Notes.





The
      restructuring transaction closed on March 26, 2008. The net proceeds of
      approximately $2,100 after the payment of aggregate transaction expenses, will
      be used for strategic initiatives and general working capital purposes.  73
 **Digital
          FX International, Inc. and Subsidiaries**
 
 **Notes
          to Consolidated Financial Statements**
 **In
          Thousands, Except for Share and Per Share Data**
 **Years
          Ended December 31, 2007 and 2006**





In
      connection with the restructuring transaction, VM Investors, LLC, the Company’s
      majority shareholder (whose members include Craig Ellins, the Company’s Chief
      Executive Officer, Amy Black, the President of VMdirect, and Richard Kall,
      the
      Chairman of VMdirect), will enter into an Amended and Restated
      Lock-Up  Letter
      Agreement in favor of the Investors pursuant to which VM Investors, LLC will
      agree not to offer, sell, pledge or otherwise dispose of any shares of common
      stock of the Company until
      the
      date that none of the Amended and Restated Notes remain outstanding ,
      subject
      to specified limited exceptions including the transfer of 1,000,000 shares
      of
      Common Stock to the Company in connection with the restructuring transaction.
      Each of the Investors and the Company’s affiliates (including its officers and
      directors) has also agreed not to engage in any transactions in the Company’s
      securities during the thirty (30) trading day period ending on the one-year
      anniversary of the closing of the restructuring transaction.





Also
      in
      connection with the restructuring transaction, the Company agreed to reimburse
      the fund manager of one of the Investors for its out-of-pocket expenses incurred
      in connection with the transactions contemplated by the Securities Purchase
      Agreement, including the actual and reasonable fees and disbursements of the
      fund manager’s legal counsel, up to an aggregate amount of $20.




74





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




None.




**ITEM
                8A.**
            **Controls
                and Procedures**




**Disclosure
      Controls and Procedures**




As
      of
      December 31, 2007, the end of the period covered by this report, we conducted
      an
      evaluation, under the supervision and with the participation of our Chief
      Executive Officer and Acting Chief Financial Officer, of our disclosure controls
      and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this
      evaluation, our Chief Executive Officer and Acting Chief Financial Officer
      concluded that, as of December 31, 2007, our disclosure controls and procedures
      were effective.




**Financial** **Statements**




Our
      management is responsible for the preparation, integrity, and fair presentation
      of our financial statements as of December 31, 2007, and for the year then
      ended, which are included in our 2007 consolidated financial statements. Our
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America and,
      as
      such, include some amounts that are based on judgments and estimates of
      management.




**Internal
      Control over Financial Reporting**





Management
      is responsible for establishing and maintaining effective internal control
      over
      financial reporting presented in conformity with accounting principles generally
      accepted in the United States of America and presented in conformity with such
      accounting principles. The system contains monitoring mechanisms and actions
      are
      taken to correct deficiencies identified.




There
      are
      inherent limitations in the effectiveness of any internal control including
      the
      possibility of human error and the circumvention or overriding of controls.
      Accordingly, even effective internal control can provide only
      reasonable assurance with respect to financial statement preparation. Further,
      because of changes in conditions, the effectiveness of internal control may
      vary
      over time.




Management assessed
      our internal control over financial reporting presented in conformity with
      accounting principles generally accepted in the United States of America, as
      of
      December 31, 2007. This assessment was based on criteria for effective internal
      control over financial reporting described in “Internal Control - Integrated
      Framework” published by the Committee of Sponsoring Organizations of the
      Treadway Commission. Based on this assessment, management believes that we
      maintained effective internal control over financial reporting presented in
      conformity with accounting principles generally accepted in the United States
      of
      America, as of December 31, 2007.




This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only management’s report in this annual
      report.  75


During
      the year ended December 31, 2007, there were no changes in our internal control
      over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
      that have materially affected, or are reasonably likely to materially affect,
      our internal control over financial reporting.




**ITEM
                8B.**
            **Other
                Information**




None.




76


**PART
      III**




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




The
      following table sets forth the names, positions and ages of our current
      executive officers and directors. All directors serve until the next annual
      meeting of shareholders or until their successors are elected and qualified.
      Officers are appointed by our board of directors and their terms of office
      are,
      except to the extent governed by an employment contract, at the discretion
      of
      our board of directors.




**Name**
            
            **Age**
            
            **Position**Craig
                Ellins(1),
                (2)
            
            56
            
            Chairman
                of the Board, Chief Executive Officer and PresidentMickey
                Elfenbein(3)
            
            60
            
            Chief
                Operating Officer and SecretaryTracy
                Sperry(4)
            
            38
            
            Acting
                Chief Financial OfficerAmy
                Black(1),
                (2)
            
            48
            
            President
                of VMdirect, L.L.C.Jerry
                Haleva(1)
            
            61
            
            DirectorKevin
                R. Keating(5)
            
            68
            
            DirectorEmanuel
                Gerard(6)
            
            75
            
            Director




(1)
            These
                persons were appointed to their respective positions effective June
                15,
                2006.


(2)
            Craig
                Ellins and Amy Black arehusbandand wife.


(3)
                Mr.
                    Elfenbein was appointed to his position on August 24, 2007 and
                    commenced
                    service as of September 17,
                    2007.


(4)
            Ms.
                Sperry was appointed to her position on February 1,
                2008.


(5)
            Mr.
                Keating was elected as a director on June 22,
                2004.


(6)
            Mr.
                Gerard was elected as a director on June 29,
                2007.




**Craig
      Ellins** .
      Mr.
      Ellins currently serves as our Chairman of the Board, Chief Executive Officer
      and President, and has served as the Chief Executive Officer of VMdirect since
      November 2001. Prior to his employment with VMdirect, Mr. Ellins provided
      consulting services to various companies related to their direct marketing
      activities.




**Mickey
      Elfenbein** .
      Mr.
      Elfenbein currently serves as our Chief Operating Officer and was appointed
      as
      our Secretary on February 1, 2008. From and after 2005 Mr. Elfenbein served
      as
      President of SaySwap, Inc., a business focused on internet peer to peer trading
      of console games. Prior thereto, from 2000 to 2005 Mr. Elfenbein served as
      the
      Chief Executive Officer of Tundershot, LLC where he expanded marketing and
      distribution channels, built a financial services agency with direct sales,
      and
      gained experience as a distributor in a multi-level marketing business. From
      1996 to 2000, as Chief Executive Officer of Simitar Entertainment, Inc., Mr.
      Elfenbein lead the company into a growth oriented global entertainment product
      and marketing enterprise. Prior thereto, Mr. Elfenbein served as the Chief
      Executive Officer and President of K-tel International, Inc. from 1992 to 1996,
      and as its President from 1985 to 1992. Mr. Elfenbein graduated from the
      University of Manitoba with a Bachelor of Commerce (Honors) degree.




Prior
      to
      his appointment our Chief Operating Officer, on June 8, 2007, we entered into
      a
      Subscription, Loan and Rights Agreement with SaySwap, Inc. (“SaySwap”), a
      company co-founded by Mr. Elfenbein and for which he served as President,
      pursuant to which we agreed to purchase a Senior Secured Convertible Promissory
      Note issued by SaySwap in the principal amount of $225,000, and a warrant to
      purchase 26.1 shares of SaySwap’s common stock. Mr. Elfenbein had no other
      material relationship with us prior to his appointment as our Chief Operating
      Officer.




77




**Tracy
      Sperry** .
      Ms.
      Sperry currently serves as our Acting Chief Financial Officer and has served
      as
      our Director of Finance since 2006. From 2002 to 2006, Ms. Sperry worked as
      a
      Controller and Financial Reporting Manager for Aristocrat Technologies, Inc.,
      an
      international gaming manufacturer and Australian public company. Prior thereto,
      Ms. Sperry spent eight years as an auditor, most recently with McGladrey &
Pullen, LLP, where she was employed from 1997 to 2002. Ms. Sperry is a Certified
      Public Accountant and member of the AICPA.




**Amy
      Black** .
      Ms.
      Black has served as the President of VMdirect since November 2001. Ms. Black
      was
      a founder of helloNetwork, Inc. in 1996 and served as its Vice President of
      Public Relations and Advertising. From 1992 to 1996, Ms. Black was President
      of
      Academic Connections.




**Jerry
      Haleva** .
      Mr.
      Haleva is President of Sergeant Major Associates, Inc., which he founded in
      1990. Mr. Haleva also serves on numerous charitable and issue-based boards
      and
      commissions, including the Executive Committees of both the Yosemite National
      Institute (YNI) and the American Israel Public Affairs Committee (AIPAC), as
      well as on the California International Relations Foundation. Mr. Haleva is
      a
      20-year veteran as a professional staff person with the California Legislature,
      and has held appointments on the Capitol Area Committee, as Chief Counsel to
      the
      Governor’s Blue Ribbon Fire Commission, the Long-range Planning Committee of the
      FCC, the Safety Belt Task Force and, most recently, as Chairman of the
      California Highway Patrol Citizens’ Oversight Committee. Beginning as a Ford
      Foundation Fellow, he served both houses and both parties during his public
      service career. From 1972 through 1974, he served as the Legislature’s chief
      consultant on the state prison system. In 1976, as Chief of Staff to the Senate
      Minority Leader, he helped create and supervised the Joint Committee on Fire,
      Police, Emergency and Disaster Services. Additionally, he oversaw the Select
      Committee on Business Development and the Joint Legislative Budget Committee.
      Mr. Haleva holds a B.A. in Government and a general secondary teaching
      credential from California State University at Sacramento.




**Kevin
      R. Keating** .
      Mr.
      Keating, our former President, Secretary and Treasurer from June 22, 2004
      through June 15, 2006, is
      the
      Managing Member of Vero Management, LLC, which provides managerial,
      administrative, and financial consulting services for micro-cap public
      companies. For more than 40 years he has been engaged in various aspects of
      the
      investment business. Mr. Keating began his Wall Street career with the First
      Boston Corporation in New York in 1965. From 1967 through 1974, he was employed
      by several institutional research boutiques where he functioned as Vice
      President Institutional Equity Sales. From 1974 until 1982, Mr. Keating was
      the
      President and Chief Executive Officer of Douglas Stewart, Inc., a New York
      Stock
      Exchange member firm. From 1982 through 2006, he was associated with a variety
      of securities firms as a registered representative servicing the investment
      needs of high net worth individual investors .
      Mr.
      Keating also
      serves on the board of directors of Blue Holdings, Inc., Catalyst Lighting
      Group, Inc., Wentworth IV, Inc. and Wentworth V, Inc. Wentworth VI, Inc.,
      Wentworth VII, Inc. Wentworth VIII, Inc., Frezer, Inc., Quikbyte, Inc., and
      Bonds.com Group, Inc.




**Emanuel
      Gerard** .
      Mr.
      Gerard currently serves as an advisor to and investor in several private
      enterprises. From 2003 to 2006, Mr. Gerard served as the Vice Chairman of BMO
      Capital Markets. Prior thereto Mr. Gerard served as the chairman of Gerard
      Klauer Mattison & Co., an investment banking firm he founded in
      1989.




78




None
      of
      our officers or directors, nor any of their affiliates, beneficially owned
      any
      of our equity securities or rights to acquire any of our securities prior to
      the
      closing of the transactions contemplated under the Exchange Agreement, and
      no
      such persons have been involved in any transaction with us or any of our
      directors, executive officers or affiliates that is required to be disclosed
      pursuant to the rules and regulations of the SEC, other than with respect to
      the
      transactions that have been described herein. None of our officers and directors
      have been convicted in a criminal proceeding, excluding traffic violations
      or
      similar misdemeanors, nor have they been a party to any judicial or
      administrative proceeding during the past five years, except for matters that
      were dismissed without sanction or settlement, that resulted in a judgment,
      decree or final order enjoining the person from future violations of, or
      prohibiting activities subject to, federal or state securities laws, or a
      finding of any violation of federal or state securities laws.




**Identification
      of Audit Committee**




Our
      board
      of directors has a separately designated standing audit committee. Our audit
      committee currently consists of Messrs. Gerard, Haleva and Keating. Our audit
      committee is responsible for selecting and engaging our independent accountant,
      establishing procedures for the confidential, anonymous submission by our
      employees of, and receipt, retention and treatment of concerns regarding
      accounting, internal controls and auditing matters, reviewing the scope of
      the
      audit to be conducted by our independent public accountants, and periodically
      meeting with our independent public accountants and our chief financial officer
      to review matters relating to our financial statements, our accounting
      principles and our system of internal accounting controls. Our audit committee
      reports its recommendations as to the approval of our financial statements
      to
      our board of directors. The role and responsibilities of our audit committee
      are
      more fully set forth in a written charter adopted by our board of directors
      in
      August 2006. Our audit committee reviews and reassesses the Audit Committee
      Charter annually and recommends any changes to our board of directors for
      approval. We have determined that each member of our audit committee is
“independent” as that term is defined in Section 803(A)(2) of the AMEX Company
      Guide as required by AMEX.




**Audit
      Committee Financial Expert**




Our
      board
      of directors has determined that our audit committee does not include a person
      who is an “audit committee financial expert” within the meaning of the rules and
      regulations of the SEC. Our board of directors has further determined that
      each
      member of the audit committee is able to read and understand fundamental
      financial statements and has substantial business experience that results in
      such member’s financial sophistication. Accordingly, our board of directors
      believes that each member of our audit committee has sufficient knowledge and
      experience necessary to fulfill such member’s duties and obligations on our
      audit committee.




**Code
      of Ethical Conduct**




Our
      Board
      of Directors has adopted a Code of Ethical Conduct (the “Code of Conduct”). We
      require all employees, directors and officers, including our Chief Executive
      Officer and Chief Financial Officer, to adhere to the Code of Conduct in
      addressing legal and ethical issues encountered in conducting their work. The
      Code of Conduct requires that these individuals avoid conflicts of interest,
      comply with all laws and other legal requirements, conduct business in an honest
      and ethical manner and otherwise act with integrity and in our best interest.
      The Code of Conduct contains additional provisions that apply specifically
      to
      our Chief Financial Officer and other financial officers with respect to full
      and accurate reporting. We will provide to any person without charge, upon
      written request sent to our executive offices and addressed to our corporate
      secretary, a copy of the Code of Conduct.




79




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




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
      and executive officers and the holders of more than 10% of our Common Stock
      to
      file with the Securities and Exchange Commission initial reports of ownership
      and reports of changes in ownership of our equity securities. Based solely
      on
      our review of the copies of the forms received by us and written representations
      from certain reporting persons that they have complied with the relevant filing
      requirements, we believe that, during the year ended December 31, 2007, all
      of
      our executive officers, directors and the holders of 10% or more of our Common
      Stock complied with all Section 16(a) filing requirements, except for Emanuel
      Gerard, who did not timely file a Form 4 reporting one transaction, Jerry
      Haleva, who did not timely file a Form 4 reporting one transaction, Kevin
      Keating, who did not timely file a Form 4 reporting one transaction, and Lorne
      Walker, our former Chief Executive Officer, who did not timely file two Form
      4s
      reporting three transactions.




**ITEM
                10.**
            **Executive
                Compensation**




**Summary
      Compensation Table**




The
      following table sets forth, as to our named executive officers, information
      concerning all compensation paid to our named executive officers for services
      rendered during our fiscal years ended December 31, 2007 and 2006. No other
      executive officers received total compensation in excess of $100,000 for the
      fiscal year ended December 31, 2007.




**Name
                and Principal Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Option
                Awards ($)**
            
            **Total
                ($)**Craig
                Ellins
              Chairman,
                Chief Executive
              Officer
                and President(1)
            
            
            2007
              2006
            
            $
              $
            125,000
              83,467
            
            $
            —
              15,478
            
            
            —
              —
            
            $
              $
            125,000
              98,945Mickey
                Elfenbein
              Chief
                Operating Officer
              and
                Secretary(2)
            
            
            2007
              2006
            
            $
            59,119
              —
            
            $
            6,000
              —
            
            $
            76,691
              —
            
            $
            141,810
              —Lorne
                Walker
              Chief
                Financial Officer
              and
                Secretary(3)
            
            
            2007
              2006
            
            $
              $
            116,562
              101,922
            
            $
              $
            6,000
              13,898
            
            $
            39,772
              —
            
            $
              $
            162,334
              115,820Amy
                Black
              President
                of VMdirect, L.L.C.(4)
            
            
            2007
              2006
            
            $
              $
            125,000
              107,628
            
            $
            —
              15,246
            
            
            —
              —
            
            $
              $
            125,000
              122,874




(1)  Mr.
      Ellins became our Chairman, Chief Executive Officer and President on June 15,
      2006 upon the closing of the Exchange Transaction with VMdirect. The
      compensation disclosed for Mr. Ellins in the table above for the year ended
      December 31, 2006 includes $22,476 paid as salary for services rendered by
      Mr.
      Ellins to VMdirect as its Chief Executive Officer during the period from January
      1 through June 15, 2006. Mr. Ellins’ current annual salary is $100,000 and he
      may also receive a discretionary bonus as determined by the compensation
      committee of our board of directors. Mr. Ellins does not have an employment
      agreement with us.




(2)  Mr.
      Elfenbein was appointed as our Chief Operating Officer on August 24, 2007 and
      commenced service as of September 17, 2007.  Mr.
      Elfenbein was appointed as our Secretary on February 1. 2008. Mr. Elfenbein
      was
      granted an option to purchase 300,000 shares of our common stock at a per share
      price of $3.80. The
      other
      material terms of the option are discussed below. 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: risk-free interest rate of 4.64%; expected
      dividend yield of zero percent; expected option life of five years; and current
      volatility of 68.38%. Mr. Elfenbein is party to an employment agreement with
      us
      pursuant to which Mr. Elfenbein will receive base compensation for the first
      six
      months of the term at an annual rate of no less than $200,000, and thereafter,
      will receive compensation at an annual rate of no less than $250,000. The
      employment agreement has a term of three years subject to automatic one-year
      renewals unless either party provides 120 days prior written notice to the
      other
      of non-renewal. Mr. Elfenbein is also entitled to participate in our bonus
      pool
      at the discretion of our board of directors. Mr. Elfenbein is also 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 has agreed to relocate from his current residence
      to
      Las Vegas, Nevada and in connection with such relocation, we have agreed to
      pay
      to Mr. Elfenbein an amount of up to $55,000 to be applied to costs related
      to
      his relocation. 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 option will vest
      with respect to an additional 50,000 shares of our common stock.




80




(4)  Ms.
      Walker served as our Chief Financial Officer and Secretary from June 15, 2006
      through February 1, 2008. The compensation disclosed for Ms. Walker in the
      table
      above for the year ended December 31, 2006 includes $47,499 paid as salary
      for
      services rendered by Ms. Walker to VMdirect as its Chief Financial Officer
      during the period from January 1 through June 15, 2006. Ms. Walker’s annual
      salary was $125,000 and she was eligible to receive a discretionary bonus as
      determined by the compensation committee of our board of directors. Ms. Walker
      was granted an option by VMdirect which we assumed and which currently entitle
      Ms. Walker to purchase 376,419 shares of our common stock at a per share
      exercise price of $0.26. 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: risk-free
      interest rate of 4.5%; expected dividend yield of zero percent; expected option
      life of four years; and current volatility of 50%. Ms. Walker was also granted
      an additional option to purchase 30,000 shares of our common stock at a per
      share exercise price of $3.65. 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: risk-free
      interest rate of 4.64%; expected dividend yield of zero percent; expected option
      life of five years; and current volatility of 42%. The other material terms
      of
      the options are discussed below. Ms. Walker did not have an employment agreement
      with us.




(5)  Ms.
      Black’s annual salary is $100,000 and she may receive a discretionary bonus as
      determined by the compensation committee of our board of directors. Ms. Black
      does not have an employment agreement with us.




Except
      as
      previously disclosed, we have no agreements with our named executive officers
      that provide for payments to such named executive officers at, following or
      in
      connection with the resignation, retirement or other termination of such named
      executive officers, or a change in control of our company or a change in the
      responsibilities of such named executive officers following a change in
      control.




81




**Outstanding
      Equity Awards at Fiscal Year-End Table**




The
      following table presents information regarding outstanding options held by
      our
      named executive officers as of the end of our fiscal year ending December 31,
      2007.




**Name**
            
            **Number
                of Securities Underlying Unexercised Options (#)
                Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options (#)
                Unexercisable**
            
            **Option
                Exercise Price ($)**
            
            **Option
                Expiration Date**Craig
                Ellins
            
            
            —
            
            
            —
            
            
            —
            
            
            —Mickey
                Elfenbein(1)
            
            
            —
            
            
            300,000
            
            $
            3.80
            
            
            8/23/2017Lorne
                Walker(2)
            
            
            274,472
            
            
            101,947
            
            $
            0.26
            
            
            12/31/2015Lorne
                Walker(3)
            
            
            7,500
            
            
            22,500
            
            $
            3.65
            
            
            06/28/2017Amy
                Black
            
            
            —
            
            
            —
            
            
            —
            
            
            —




(1)
            Consists
                of options issued in conjunction with Mr. Elfenbein’s employment
                agreement. The options entitle Mr. Elfenbein to purchase an aggregate
                of
                300,000 shares of common stock at a per share exercise price of $3.80.
                These options, which were granted on August 24, 2007, vest over three
                years as follows: 33.4% on September 17, 2008, 33.3% on each of the
                second
                and third anniversaries of the grant
                date.




(2)
            Consists
                of options originally issued by VMdirect and assumed by us in the
                Exchange
                Transaction with VMdirect which currently entitle Ms. Walker to purchase
                an aggregate of 376,419 shares of common stock at a per share exercise
                price of $0.26. These options vest as follows: 25% on December 31,
                2005,
                and 25% on December 31, 2006, and the remainder monthly thereafter
                on a
                ratable basis for 24 months.




(3)
            Consists
                of options issued to Ms. Walker on June 29, 2007. The options entitle
                Ms.
                Walker to purchase an aggregate of 30,000 shares of common stock
                at a per
                share exercise price of $3.65. The options vest as follows: 25% on
                June
                29, 2007 and 25% on June 29, 2008 and the remainder monthly thereafter
                on
                a ratable basis for 24 months.




82




**Director
      Compensation**




The
      following table details the total compensation earned by our non-employee
      directors in 2007.


**Name**
              
              **Fees
                  Earned or Paid in Cash**
                **($)**
              
              **Option
                  Awards**
                **($)****(1)**
              
              **Total**
                **($)**Emanuel
                  Gerard(2)
              
              $
              5,000
              
              $
              53,677
              
              $
              58,677Jerry
                  Haleva(3)
              
              $
              22,000
              
              $
              44,840
              
              $
              66,840Kevin
                  Keating(4)
              
              $
              22,000
              
              $
              44,840
              
              $
              66,840




(1)  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; dividend
      yield of 0; risk free interest rate of 4.5%; expected volatility of 42.0-68.38%
      and an expected life of 5 years .




(2)  Mr.
      Gerard had 30,000 options outstanding at December 31, 2007, of which 7,500
      were
      exercisable at an exercise price of $3.45 .
      The
      remaining options vest in equal annual installments over a three-year period
      from the date of grant, which was September 30, 2007.




(3)  Mr.
      Haleva had 30,000 options outstanding at December 31, 2007, of which 7,500
      were
      exercisable at an exercise price of $4.20. The remaining options vest in equal
      annual installments over a three-year period from the date of grant, which
      was
      April 27, 2007.




(4)  Mr.
      Keating had 30,000 options outstanding at December 31, 2007, of which 7,500
      were
      exercisable at an exercise price of $4.20. The remaining options vest in equal
      annual installments over a three-year period from the date of grant, which
      was
      April 27, 2007.




The
      general policy of our board of directors is that compensation for independent
      directors should be a mix of cash and equity-based compensation. We do not
      pay
      management directors for board service in addition to their regular employee
      compensation. The compensation committee of our board of directors, which
      consists of Messrs Gerard, Haleva and Keating, all of whom are “independent”
      as that term is defined in Section 803(A)(2) of the AMEX Company Guide as
      required by AMEX ,
      has the
      primary responsibility for reviewing and considering any revisions to director
      compensation. The Board reviews the committee’s recommendations and determines
      the amount of director compensation. The committee can engage the services
      of
      outside advisers, experts, and others to assist the committee in determining
      director compensation. During 2007, the committee did not use an outside adviser
      to aid in setting director compensation.




During
      2007 the committee recommended and our board of directors approved the payment
      of $10,000 as compensation to our independent directors for services rendered
      during fiscal 2006, and the following compensation for services rendered or
      to
      be rendered during fiscal 2007:




·
            quarterly
                cash retainer of $2,500;




·
            in
                person attendance fee of $1,000;




·
            telephonic
                attendance fee of $500; and




·
            stock
                option grant of 30,000 shares.




Directors’
      options vest in equal annual installments over a three-year period from the
      date
      of grant.




83




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




The
      following table sets forth certain information regarding our common stock
      beneficially owned on March 28, 2008 for (i) each shareholder known to be the
      beneficial owner of more than 5% of our outstanding common stock, (ii) each
      executive officer and director, and (iii) all executive officers and directors
      as a group. In general, a person is deemed to be a “beneficial owner” of a
      security if that person has or shares the power to vote or direct the voting
      of
      such security, or the power to dispose or to direct the disposition of such
      security. A person is also deemed to be a beneficial owner of any securities
      of
      which the person has the right to acquire beneficial ownership within 60
      days.




Under
      the
      terms of the Amended and Restated Notes and the Amended and Restated Warrants
      described in the section captioned “Private Placement of Convertible Notes and
      Warrants,” a holder of such securities may not convert or exercise such
      securities to the extent such conversion or exercise would cause such holder,
      together with its affiliates, to beneficially own a number of shares of our
      common stock which would exceed 4.99% of our then outstanding shares of common
      stock following such conversion or exercise, excluding for purposes of such
      determination shares of our common stock issuable upon conversion of the Amended
      and Restated Notes which have not been converted and upon exercise of the
      Amended and Restated Warrants that have not been exercised. The shares of our
      common stock and percentage ownership listed in the following table for Portside
      Growth & Opportunity Fund do not reflect these contractual limitations on a
      holder’s ability to acquire shares of our common stock upon conversion of its
      Amended and Restated Note or exercise of its Amended and Restated
      Warrant.




Unless
      otherwise indicated, to our knowledge, each person in the table has sole voting
      and investment power with respect to the shares shown. The following table
      assumes a total of 25,927,710 shares of common stock outstanding as of March
      28,
      2008.




**Shares
                Beneficially Owned****Name
                of Beneficial Owner**(1)
            
            **Number**
            
            **Percent
                of Class**Craig
                Ellins(2)
            
            
            17,560,669
            
            
            67.7
            %Mickey
                Elfenbein
            
            
            500
            
            
            *Tracy
                Sperry(3)
            
            
            3,750
            
            
            *Lorne
                Walker(4)
            
            
            332,493
            
            
            1.3
            %Amy
                Black(5)
            
            
            17,560,669
            
            
            67.7
            %Kevin
                R. Keating(6)
            
            
            57,500
            
            
            *Jerry
                Haleva(7)
            
            
            20,000
            
            
            *Emanuel
                Gerard(8)
            
            
            10,000
            
            
            *All
                Executive Officers and Directors as a Group (8 persons)(9)
            
            
            17,984,912
            
            
            68.5
            %**5%
                Shareholders**VM
                Investors, LLC(10)
            
            
            17,558,169
            
            
            67.7
            %Richard
                Kall(11)
            
            
            17,563,169
            
            
            67.7
            %Portside
                Growth and Opportunity Fund(12)
              c/o
                Ramius Capital Group, L.L.C.
              666
                Third Avenue, 26th Floor
              New
                York, NY 10017
            
            
            2,321,430
            
            
            8.4
            %




*
      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.
            Includes
                17,558,169 shares of common stock held by VM Investors, LLC. Craig
                Ellins
                is a member and one of the managers of VM Investors, LLC and disclaims
                beneficial ownership of the shares of common stock held by VM Investors,
                LLC except to the extent of his pecuniary interest therein. Mr. Ellins
                currently serves as our Chairman, Chief Executive Officer and President,
                and as a manager of VMdirect.




3.
            Consists
                of 3,750 shares of common stock that may be acquired from us within
                60
                days of March 28, 2008 upon the exercise of outstanding stock options.
                Tracy Sperry currently serves as our Acting Chief Financial
                Officer.




4.
            Includes
                289,814 shares of common stock that may be acquired from us within
                60 days
                of March 28, 2008 upon the exercise of outstanding stock options.
                Lorne
                Walker served as our Chief Financial Officer and Secretary from June
                2006
                through February 1, 2008, and previously served as the Chief Financial
                Officer of VMdirect from September 2005 through June
                2006.




5.
            Consists
                of 17,558,169 shares of common stock held by VM Investors, LLC and
                2,500
                shares of common stock held by Craig Ellins. Amy Black is a member
                of VM
                Investors, LLC and is the spouse of Craig Ellins, one of the managers
                of
                VM Investors, LLC. Amy Black disclaims beneficial ownership of the
                shares
                of common stock held by VM Investors, LLC except to the extent of
                her
                pecuniary interest therein. Ms. Black currently serves as the President
                of
                VMdirect.




6.
            Includes
                15,000 shares of common stock that may be acquired from us within
                60 days
                of March 28, 2008 upon the exercise of outstanding stock options.
                Kevin R.
                Keating, one of our directors, is the father of Timothy Keating,
                the
                principal member of Keating Investments, LLC. Keating Investments,
                LLC is
                the managing member of Keating Reverse Merger Fund, LLC, one of our
                shareholders. Keating Investments, LLC is also the managing member
                and 90%
                owner of Keating Securities, LLC, a registered broker-dealer. Kevin
                R.
                Keating is not affiliated with and has no equity interest in Keating
                Investments, LLC, Keating Reverse Merger Fund, LLC or Keating Securities,
                LLC and disclaims any beneficial interest in the shares of our common
                stock owned by Keating Reverse Merger Fund, LLC. Similarly, Keating
                Investments, LLC, Keating Reverse Merger Fund, LLC and Keating Securities,
                LLC disclaim any beneficial interest in the shares of our common
                stock
                currently owned by Kevin R. Keating. Kevin R. Keating served as our
                President, Secretary and treasurer from June 2004 through June 2006.
                Kevin
                R. Keating is an investment executive and the Branch Manager of the
                Vero
                Beach, Florida, office of Brookstreet Securities Corporation, a registered
                broker-dealer. Kevin R. Keating also has an immediate family member,
                Timothy Keating, who is an affiliate of a registered broker-dealer.
                Kevin
                R. Keating purchased or otherwise acquired his shares in the ordinary
                course of business and, at the time of such purchase/acquisition,
                had no
                agreements or understandings, directly or indirectly, with any person,
                to
                distribute the securities to be
                resold.




7.
            Includes
                15,000 shares of common stock that may be acquired from us within
                60 days
                of March 28, 2008 upon the exercise of outstanding stock options.
                Jerry
                Haleva currently serves as one of our
                directors.




8.
            Includes
                7,500 shares of common stock that may be acquired from us within
                60 days
                of March 28, 2008 upon the exercise of outstanding stock options.
                Emanuel
                Gerard currently serves as one of our
                directors.




9.
            Includes
                331,064 shares of common stock that may be acquired from us within
                60 days
                of March 28, 2008 upon the exercise of outstanding stock
                options.




84




10.
            Craig
                Ellins and Richard Kall, the managers of VM Investors, LLC, exercise
                voting and investment authority over the shares of common stock held
                by VM
                Investors, LLC.




11.
            Includes
                17,558,169 shares of common stock held by VM Investors, LLC. Craig
                Ellins
                is a member and one of the managers of VM Investors, LLC and disclaims
                beneficial ownership of the shares of common stock held by VM Investors,
                LLC except to the extent of his pecuniary interest therein. Mr. Kall
                currently serves as the Chairman of
                VMdirect.




12.
            Includes
                1,071,429 shares of common stock issuable upon the conversion of
                an
                Amended and Restated Note and 535,715 shares of common stock issuable
                upon
                the exercise of an Amended and Restated Warrant. Ramius Capital Group,
                LLC
                (“Ramius Capital”) is the investment adviser of Portside Growth and
                Opportunity Fund (“Portside”) and consequently has voting control and
                investment discretion over securities held 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, Messrs. Cohen, Stark, Strauss and Solomon
                may
                be considered beneficial owners of any shares deemed to be beneficially
                owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon
                disclaim beneficial ownership of these
                shares.




**Changes
      in Control**




Under
      the
      terms of the Amended and Restated Notes and Amended and Restated Warrants,
      we
      provided to the Investors anti-dilution protection whereby in the event we
      issue
      securities (other than certain exempt securities) for a consideration per share
      less than the per share conversion price or exercise price (as applicable)
      in
      effect immediately prior to such issuance, immediately after such issuance
      the
      per share conversion price or exercise price (as applicable) then in effect
      will
      be reduced to the issuance price per share of such newly issued securities.
      This
      anti-dilution protection could result in a change in control to the extent
      that
      we are required to issue a large enough number of shares of our common stock
      upon the conversion of the Amended and Restated Notes or exercise of the Amended
      and Restated Warrants at a low enough per share conversion price or exercise
      price (as applicable).




**Equity
      Compensation Plan Information**




The
      following table sets forth information concerning our equity compensation plans
      as of December 31, 2007.




**Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              **(a)**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
              **(b)**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))**
              **(c)**Equity
                compensation plans approved by security holders
            
            
            1,374,710
            (1)
            $
            3.14
            
            
            550,246Equity
                compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —**Total**
            
            
            1,374,710
            
            $
            3.14
            
            
            550,246




(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 534,090 shares at a per share exercise price of $0.26 expiring
      on
      December 31, 2015; and an aggregate of 21,782 shares at a per share exercise
      price of $0.33 expiring from January 3, 2016 through March 27,
      2016.




85




**2006
      Stock Incentive Plan**




Our
      2006
      Stock Incentive Plan was adopted and became effective in August 2006. A total
      of
      1,368,684 shares of common stock remain reserved for issuance upon exercise
      of
      awards granted under the 2006 Stock Incentive Plan. The number of shares
      reserved for issuance under the 2006 Stock Incentive Plan is subject to an
      annual increase on the first day of each fiscal year during the term of the
      2006
      Stock Incentive Plan, beginning January 1, 2007, in each case in an amount
      equal
      to the lesser of (i) 1,000,000 shares of common stock, (ii) 5% of the
      outstanding shares of common stock on the last day of the immediately preceding
      year, or (iii) an amount determined by our board of directors. Any shares of
      common stock subject to an award, which for any reason expires or terminates
      unexercised, are again available for issuance under the 2006 Stock Incentive
      Plan.




Our
      2006
      Stock Incentive Plan will terminate after 10 years from the effective date,
      unless it is terminated earlier by our board of directors. The plan authorizes
      the award of stock options, stock purchase grants, stock appreciation rights
      and
      stock units.




Our
      2006
      Stock Incentive Plan is administered by the compensation committee of our board
      of directors. The compensation committee has the authority to construe and
      interpret the plan, grant awards and make all other determinations necessary
      or
      advisable for the administration of the plan.




Our
      2006
      Stock Incentive Plan provides for the grant of both incentive stock options
      that
      qualify under Section 422 of the Internal Revenue Code and nonqualified stock
      options. Incentive stock options may be granted only to our employees or to
      employees of any of our parents or subsidiaries. All awards other than incentive
      stock options may be granted to our employees, officers, directors, consultants,
      independent contractors and advisors or employees, officers, directors,
      consultants, independent contractors and advisors of any of our parents or
      subsidiaries. The exercise price of incentive stock options must be at least
      equal to the fair market value of our common stock on the date of grant. The
      exercise price of incentive stock options granted to 10% shareholders must
      be at
      least equal to 110% of that value. The exercise price of nonqualified stock
      options will be determined by the administrator of the plan when the options
      are
      granted. The term of options granted under our 2006 Stock Incentive Plan may
      not
      exceed 10 years.




Awards
      granted under our 2006 Stock Incentive Plan may not be transferred in any manner
      other than by will or by the laws of descent and distribution or as determined
      by the administrator of the plan. Unless otherwise restricted by such
      administrator, nonqualified stock options may be exercised during the lifetime
      of the optionee only by the optionee, the optionee’s guardian or legal
      representative or a family member of the optionee who has acquired the option
      by
      a permitted transfer. Incentive stock options may be exercised during the
      lifetime of the optionee only by the optionee or the optionee’s guardian or
      legal representative. Options granted under our 2006 Stock Incentive Plan
      generally may be exercised for a period of three months (twelve months in the
      event of death, disability or retirement) after the termination of the
      optionee’s service with us or any parent or subsidiary of ours. Options will
      generally terminate immediately upon termination of employment for
      cause.




The
      purchase price for restricted stock will be determined by the administrator
      of
      the plan at the time of grant. Stock bonuses may be issued for past services
      or
      may be awarded upon the completion of services or performance
      goals.




If
      we are
      subject to a change in control transaction, the administrator would determine,
      in its sole discretion, whether to accelerate any
      vested or unvested portion of any award. Additionally, if a change in control
      were to occur, any agreement between us and any other party to the change in
      control could provide for (1) the continuation of any outstanding awards, (2)
      the assumption of the 2006 Stock Incentive Plan or any awards by the surviving
      entity or any of its affiliates, (3) cancellation of awards and substitution
      of
      other awards with substantially the same terms or economic value as the
      cancelled awards, or (4) cancellation of any vested or unvested portion of
      awards, subject to providing notice to the option holder.




86




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




**Related
      Party Transactions**




Other
      than the transactions described below, since January, 2007 there has not been,
      nor is there currently proposed, any transaction or series of similar
      transactions to which we were or will be a party:




·
            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 three 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.




On
      January 29, 2007, we entered into an Amended and Restated License, Hosting
      and
      Services Agreement (the “Amended Agreement”) with RazorStream, a company
      controlled by VM Investors, LLC, our majority shareholder, which is in turn
      managed by Craig Ellins, our Chairman, Chief Executive Officer and President,
      and Richard Kall, the Chairman of VMdirect. The Amended Agreement amends and
      restates the Licensing, Hosting and Services Agreement effective May 1, 2005
      with RazorStream.




Pursuant
      to the terms of the Amended Agreement, RazorStream will provide hosting,
      maintenance and support services for each individual website operated by us
      or
      any third party authorized by us. While the initial term of the Amended
      Agreement ended on January 15, 2008, the Amended Agreement remains operative
      thereafter unless terminated by either party upon 60 days prior written notice.
      Under the terms of the Amended Agreement, for each individual website operated
      by us or any third party authorized by us, RazorStream (a) charges us $5 per
      new
      subscriber account exceeding 20,000 accounts (purchasable in 20,000 account
      increments); (b) is entitled to (1) ten percent (10%) of our total gross revenue
      from all active subscriber accounts, with a minimum amount of $0.69 per each
      such subscriber account per month, and (2) terms to be mutually agreed upon
      by
      the parties for all advertising-based “free” subscriber accounts, provided,
      however that such terms will provide for a minimum amount of $0.25 per each
      such
      subscriber account per month; and (c) effective February 1, 2007, is entitled
      to
      a minimum guarantee of $50,000 per month that is non-refundable but that will
      be
      credited against the above fees. We may, from time to time, engage RazorStream
      for non-recurring engineering services at a rate of $200 per hour. The fees
      above apply independently to each individual website operated by us or any
      third
      party authorized by us, and no fees charged with respect to any individual
      website, and no subscriber account applied with respect to any individual
      website, shall be aggregated with any fees or subscriber accounts, respectively,
      applied to any other website. In connection with the services discussed above,
      we incurred expenses of $2,029,000 during the year ended December 31,
      2007.




In
      addition, in conjunction with RazorStream, we are in process of developing
      the
      Set Top Box which will allow users the ability to access their DigitalFX Studio
      features, stream high resolution on demand audio and video content and
      participate in the social network, all from their television. During the year
      ended December 31, 2007, we made payments to RazorStream of $225,000 for
      development costs associated with the Set Top Box.




87




On
      June
      8, 2007, we entered into a Subscription, Loan and Rights Agreement (the “SaySwap
      Agreement”) with SaySwap, Inc. (“SaySwap”) pursuant to which we agreed to
      purchase a Senior Secured Convertible Promissory Note (the “SaySwap Note”) issued by SaySwap in the
      principal amount of $225,000 and a warrant (the “SaySwap Warrant”) to purchase
      26.1 shares of SaySwap’s common stock. SaySwap is a company that is 60% owned by
      Mickey Elfenbein, our Chief Operating Officer, and members of his immediate
      family.




The
      SaySwap Note accrues interest at a rate of 8% per annum and has a maturity
      date
      of April 24, 2009, provided, however, that if SaySwap consummates a qualified
      financing (as defined in the SaySwap Note), SaySwap is
      required to repay the outstanding principal amount and all accrued interest
      on
      the SaySwap Note within 10 days of the consummation of such qualified financing.
      We may also declare the outstanding principal and accrued interest due and
      payable in the event of a default under the SaySwap Note. The SaySwap Note
      is
      convertible, at our option, into shares of SaySwap’s common stock, at any time
      prior to 30 days before the maturity date or three days before the consummation
      of a qualified financing. As security for SaySwap’s obligations under the
      SaySwap Note, SaySwap also granted to us a first priority security interest
      in
      all of SaySwap’s assets.




The SaySwap Warrant
      entitles us to purchase 26.1 shares of SaySwap’s common stock at a per share
      price of $3,831. The SaySwap Warrant expires on May 31, 2010.




During
      the year ended December 31, 2007, we made payments to Vayan Marketing, LLC
      totaling $225,000 under an agreement to provide auto-responder services to
      us.
      The agreement expired in December, 2007 and has been renewed on a month to
      month
      basis by us at a monthly rate of $5,000. Laura Kall, an officer of Vayan
      Marketing Group, LLC is an immediate family member of Richard Kall, the Chairman
      of VMdirect.




**Director
      Independence**




Since
      June 29, 2007, the majority of our board of directors has been comprised of
      “independent” directors as that term is defined in Section 803(A)(2) of the AMEX
      Company Guide as required by AMEX. During 2007, our board of directors
      determined that each of Emanuel Gerard, Jerry Haleva and Kevin Keating were
      independent.




88




**ITEM
                13.**
            **Exhibits**




See
      attached Exhibit Index.


**ITEM
                14.**
            **Principal
                Accountant Fees and Services******




**Audit
      Fees**




Weinberg
      & Company, P.A., our independent registered public accounting firm
      (“Weinberg”) billed us an aggregate of approximately $131,000 and $116,000 in
      fees for professional services rendered during 2007 and 2006, respectively,
      for
      the audit of our annual financial statements for the fiscal years ended December
      31, 2007 and 2006 and for the reviews of the financial statements included
      in
      our Form 10QSB for each quarter of Fiscal 2007 and 2006.




**Audit-Related
      Fees**




Weinberg
      billed us an aggregate of approximately $26,000 and $29,000 in fees for
      assurance and related services performed in 2007 and 2006, respectively related
      to the audit of our annual financial statements for the fiscal years ended
      December 31, 2007 and 2006.




Our
      Audit
      Committee is directly responsible for interviewing and retaining our independent
      registered public accounting firm, considering the accounting firm’s
      independence and effectiveness, and pre-approving the engagement fees and other
      compensation to be paid to, and the services to be conducted by, the independent
      registered public accounting firm. The Audit Committee does not delegate these
      responsibilities. During the fiscal year ended December 31, 2007, our Audit
      Committee pre-approved 100% of the services described above for
      Weinberg.




89


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




DIGITALFX
                INTERNATIONAL, INC.By:
            /s/ Craig EllinsCraig Ellins
              Chief
                  Executive Officer and
                President


Date:
                March 31, 2008




POWER
      OF
      ATTORNEY




The
      undersigned directors and officers of DigitalFX International, Inc. do hereby
      constitute and appoint Craig Ellins and Tracy Sperry with full power of
      substitution and resubstitution, as their true and lawful attorney and agent,
      to
      do any and all acts and things in their name and behalf in their capacities
      as
      directors and officers and to execute any and all instruments for them and
      in
      their names in the capacities indicated below, which said attorney and agent,
      may deem necessary or advisable to enable said corporation to comply with the
      Securities Exchange Act of 1934, as amended and any rules, regulations and
      requirements of the Securities and Exchange Commission, in connection with
      this
      Annual Report on Form 10-KSB, including specifically but without limitation,
      power and authority to sign for them or any of them in their names in the
      capacities indicated below, any and all amendments (including post-effective
      amendments) hereto, and they do hereby ratify and confirm all that said
      attorneys and agents, or either of them, shall do or cause to be done by virtue
      hereof.




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the Company and in the capacities and on the
      dates indicated.




Signature
            
            Title
            
            Date/s/
Craig
              EllinsCraig
                  Ellins
            
            Chairman,
                Chief Executive Officer and President
              (Principal
                Executive Officer)
            
            March
                31, 2008/s/
Tracy
              SperryTracy
                  Sperry
            
            Acting
                Chief Financial Officer
              (Principal
                Financial and Accounting Officer)
            
            March
                31, 2008/s/
Emanuel
              GerardEmanuel
                  Gerard
            
            Director
            
            March
                31, 2008/s/
Jerry
              HalevaJerry
                  Haleva
            
            Director
            
            March
                31, 2008/s/
Kevin
              R. KeatingKevin
                  R. Keating
            
            Director
            
            March
                31, 2008







EXHIBIT
      INDEX




**Exhibit**
              **Number**
            
            **Exhibit
                Title**2.1
            
            Exchange
                Agreement by and between the Company, VMdirect, L.L.C. and the members
                of
                VMdirect, L.L.C. owning a majority of the membership interests thereof,
                dated May 23, 2006. (1)3.1.1
            
            Articles
                of Incorporation of the Company effective January 23, 1991.
                (2)3.1.2
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                December 23, 1995. (2)3.1.3
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                May 4,
                1999. (2)3.1.4
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                June 7,
                2006. (3)3.1.5
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                August
                1, 2006. (4)3.2
            
            Bylaws
                of the Company. (5)4.1
            
            Articles
                of Incorporation of the Company effective January 23, 1991.
                (2)4.2
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                December 23, 1995. (2)4.3
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                May 4,
                1999. (2)4.4
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                June 7,
                2006. (3)4.5
            
            Articles
                of Amendment of Articles of Incorporation of the Company effective
                August
                1, 2006. (4)4.6
            
            Bylaws
                of the Company. (5)10.1
            
            Lease
                Agreement dated September 15, 2005, by and between Patrick Airport
                Business Center, LLC and VMdirect, L.L.C. (6)10.2
            
            Sublease
                dated August 8, 2005, by and between Public Market Ventures, Inc.
                and
                VMdirect, L.L.C. (7)10.3
            
            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. (8)10.4
            
            2006
                Stock Incentive Plan. (9)**10.5
            
            Form
                of Membership Interest Purchase Agreement. (10)10.6
            
            Form
                of VMdirect, L.L.C. Warrant. (11)10.7
            
            Form
                of Warrant Assignment and Assumption Agreement. (12)10.8
            
            Voting
                Agreement dated June 15, 2006, among Keating Reverse Merger Fund,
                LLC,
                Craig Ellins, Amy Black, The Richard Kall Family Trust and Lizanne
                Kall.
                (13)









**Exhibit**
              **Number**
            
            **Exhibit
                Title**10.9
            
            Securities
                Purchase Agreement by and among the Company and the purchasers identified
                on the signature pages thereto, dated December 22, 2006.
                (14)10.10
            
            Registration
                Rights Agreement by and among the Company and the purchasers identified
                on
                the signature pages thereto, dated December 27, 2006.
                (15)10.11
            
            Form
                of Lock-Up Letter Agreement. (16)10.12
            
            Form
                of Amended and Restated License, Hosting and Services Agreement with
                RazorStream LLC. (17)10.13
            
            Lease
                Agreement dated February 7, 2007, between Patrick Airport Business
                Center,
                LLC and the Company. (18)10.14
            
            Professional
                Services Agreement dated February 22, 2007, between Bolsover Endeavours
                and the Company. (19)10.15
            
            Form
                of Subscription and Rights Agreement between DigitalFX International,
                Inc.
                and Fusion Telecommunications International, Inc. (20)10.16
            
            Private
                Label Purchase Agreement dated May 23, 2007, between DigitalFX
                International, Inc. and Fusion Telecommunications International,
                Inc.*
                (21)10.17
            
            Subscription,
                Loan and Rights Agreement dated June 8, 2007, between DigitalFX
                International, Inc. and SaySwap, Inc. (22)10.18
            
            Promissory
                Note dated June 8, 2007, issued by SaySwap, Inc. in favor of DigitalFX
                International, Inc. (23)10.19
            
            Software
                License and Services Agreement dated June 8, 2007, between DigitalFX
                International, Inc. and Transparensee Systems, Inc.*
                (24)10.20
            
            Reseller
                Agreement dated June 8, 2007, between DigitalFX International, Inc.
                and
                Transparensee Systems, Inc.* (25)10.21
            
            Promissory
                Note dated June 8, 2007, issued by Transparensee Systems, Inc. in
                favor of
                DigitalFX International, Inc. (26)10.22
            
            Employment
                Agreement dated August 24, 2007, between DigitalFX International,
                Inc. and
                Mickey Elfenbein. (27)**10.23
            
            Membership
                Interest Purchase Agreement dated November 6, 2007, among DigitalFX
                International, Inc., Richard J. Milham, Jr. and Blue Trident Enterprises,
                LLC.10.24
            
            Securities
                Purchase Agreement dated November 29, 2007, by and between the Registrant
                and the Buyers listed on the Schedule of Buyers attached thereto.
                (28)10.25
            
            Form
                of Senior Secured Convertible Note. (29)10.26
            
            Form
                of Warrant. (30)10.27
            
            Form
                of Registration Rights Agreement. (31)10.28
            
            Form
                of Security Agreement. (32)10.29
            
            Form
                of Pledge Agreement. (33)10.30
            
            Form
                of Guaranty. (34)10.31
            
            Letter
                Agreement dated June 1, 2007 and executed December 3, 2007, between
                DigitalFX International, Inc. and C J Vision Enterprises,
                Inc.









**Exhibit**
              **Number**
            
            **Exhibit
                Title**10.32
            
            Subscription
                Agreement dated June 18, 2007 and executed December 3, 2007, between
                DigitalFX International, Inc. and C J Vision Enterprises,
                Inc.10.33
            
            Separation
                Agreement and Release of All Claims dated February 4, 2008, between
                DigitalFX International, Inc. and Lorne Walker.10.34
            
            Form
                of Amendment and Exchange Agreement dated March 24, 2008.
                (35)10.35
            
            Form
                of Amended and Restated Senior Secured Convertible Note.
                (36)10.36
            
            Form
                of Amended and Restated Warrant. (37)21.1
            
            List
                of Subsidiaries.24.1
            
            Power
                of Attorney (included as part of the Signature Page of this Annual
                Report
                on Form 10-KSB).31.1
            
            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.





(1)
            Filed
                previously as Exhibit 2.1 to the Company’s Current Report on Form 8-K
                (File #: 000-27551), filed with the Securities and Exchange Commission
                on
                May 25, 2006, and incorporated herein by this
                reference.


(2)
            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)
            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.


(4)
            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.


(5)
            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.


(6)
            Filed
                previously as Exhibit 10.2 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.


(7)
            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.


(8)
            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.


(9)
            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)
            Filed
                previously as Exhibit 10.6 to the Company’s Registration Statement on Form
                SB-2 (File #: 333-136855), filed with the Securities and Exchange
                Commission on August 23, 2006, and incorporated herein by this
                reference.












(11)
            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.


(12)
            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.


(13)
            Filed
                previously as Exhibit 10.11 to Amendment No. 2 to the Company’s
                Registration Statement on Form SB-2 (File #: 333-136855), filed with
                the
                Securities and Exchange Commission on November 2, 2006, and incorporated
                herein by this reference.


(14)
            Filed
                previously as Exhibit 10.12 to the Company’s Registration Statement on
                Form SB-2 (File #: 333-140047), filed with the Securities and Exchange
                Commission on January 17, 2007, and incorporated herein by this
                reference.


(15)
            Filed
                previously as Exhibit 10.13 to the Company’s Registration Statement on
                Form SB-2 (File #: 333-140047), filed with the Securities and Exchange
                Commission on January 17, 2007, and incorporated herein by this
                reference.


(16)
            Filed
                previously as Exhibit 10.14 to the Company’s Registration Statement on
                Form SB-2 (File #: 333-140047), filed with the Securities and Exchange
                Commission on January 17, 2007, and incorporated herein by this
                reference.


(17)
            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.


(18)
            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.


(19)
            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.


(20)
            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.


(21)
            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.


(22)
            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.


(23)
            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.


(24)
            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.


(25)
            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.


(26)
            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.


(27)
            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.


(28)
            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.


(29)
            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.


(30)
            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.












(31)
            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.


(32)
            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.


(33)
            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.


(34)
            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.


(35)
            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.


(36)
            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.


(37)
            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.