UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q








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





For the
quarterly period endedJune 30,
2008





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





For the
transition period from _______ to _______






CHINA DIGITAL MEDIA
CORPORATION


(Exact
name of small business issuer as specified in its charter)








HAIRMAX INTERNATIONAL
CORP.


(Former
name of registrant, if applicable)








Nevada
            
            13-3422912(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)








2505-06, 25/F, Stelux House,
698 Prince Edward Road E. Kowloon, Hong Kong


(Address
of principal executive offices)








(011)
852-2390-8600


(Issuer's
telephone number)








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





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




Large
accelerated filer  ̈     Accelerated
filer  ̈ Non-accelerated filer  ̈ Smaller reporting company x





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





Number of
shares of common stock outstanding as of July 31, 2008: 42,706,363





Number of
shares of preferred stock outstanding as of July 31, 2008: 1,875,000





CHINA
DIGITAL MEDIA CORPORATION


INDEX
TO FORM 10-Q





Page
      No.PART
      IItem
      1. Financial StatementsCondensed
      Consolidated Balance Sheet
              -
      June 30, 2008 (unaudited) and December 31, 2007 (audited)
            3Condensed
      Consolidated Statements of Operations And Comprehensive Income
      (Loss)
              -
      Six Months and Three Months Ended June 30, 2008 and 2007
      (unaudited)
            4Condensed
      Consolidated Statements of Cash Flows
              -
      Six Months Ended June 30, 2008 and 2007 (unaudited)
            5Notes
      to Condensed Consolidated Financial Statements (unaudited)
            6
      - 12Item
      2. Management's Discussion and Analysis of Financial Condition And Results
      of Operations
            13Item
      4. Controls and Procedures
            16PART
      IIItem
      1. Legal Proceedings
            17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            17Item
      3. Defaults Upon Senior Securities
            17Item
      4. Submission of Matters to a Vote of Security Holders
            17Item
      5. Other Information
            17Item
      6. Exhibits
            17Signatures
            18








- 2
-


ITEM 1. FINANCIAL
STATEMENTS





CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30, 2008
            
            
            December
      31, 2007(Unaudited)
            
            
            (Audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            125,331
            
            
            $
            334,410Accounts
      receivable, net of allowances
            
            
            2,020,299
            
            
            
            1,851,193Inventories,
      net
            
            
            1,659,948
            
            
            
            781,561Other
      receivables and prepaid expenses
            
            
            288,454
            
            
            
            500,229Value
      added taxes recoverable
            
            
            138,002
            
            
            
            45,530Total
      Current Assets
            
            
            4,232,034
            
            
            
            3,512,923ACCOUNTS
      RECEIVABLE, long term portion
            
            
            8,226,166
            
            
            
            7,781,997INTANGIBLE
      ASSETS
            
            
            4,321,276
            
            
            
            4,320,924INVESTMENTS
      IN TELEVISION SERIES, NET of impairment of $223,421
            
            
            -
            
            
            
            -PROPERTY
      AND EQUIPMENT, NET
            
            
            14,409,565
            
            
            
            13,193,066DEFERRED
      TAX ASSET
            
            
            -
            
            
            
            123,982OTHER
      ASSETS
            
            
            -
            
            
            
            124,471TOTAL
      ASSETS
            
            $
            31,189,041
            
            
            $
            29,057,363LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESConvertible
      debentures, net of discount
            
            $
            2,965,000
            
            
            $
            2,212,631Accounts
      payable
            
            
            5,122,676
            
            
            
            5,109,728Other
      payables and accrued liabilities
            
            
            1,013,952
            
            
            
            707,932Due
      to directors
            
            
            297,072
            
            
            
            241,239Due
      to a stockholder
            
            
            422,876
            
            
            
            384,581Due
      to related companies
            
            
            670,860
            
            
            
            730,831Business
      and other tax payable
            
            
            2,598
            
            
            
            157,646Value
      added taxes payable
            
            
            -
            
            
            
            -Income
      tax payable
            
            
            1,658,777
            
            
            
            2,082,349Total
      Current Liabilities
            
            
            12,153,811
            
            
            
            11,626,937LONG
      TERM LIABILITIESAccounts
      payable
            
            
            1,649,851
            
            
            
            619,100COMMITMENTS
      AND CONTINGENCIES
            
            
            -
            
            
            
            -STOCKHOLDERS'
      EQUITYSeries
      A convertible preferred stock ($0.001 par value, 40,000,000 shares
      authorized,1,875,000 shares issued and outstanding as of March 31, 2008
      and December 31, 2007)
            
            
            1,875
            
            
            
            1,875Common
      stock ($0.001 par value, 500,000,000 shares authorized, 42,706,363
      shares  and 42,117,057 shares issued and outstanding as of March
      31, 2008 and December 31, 2007 respectively)
            
            
            42,706
            
            
            
            42,117Additional
      paid-in capital
            
            
            14,984,022
            
            
            
            14,836,639Deferred
      stock compensation
            
            
            -
            
            
            
            (21,200
            )Retained
      earningsUnappropriated
            
            
            (1,494,721
            )
            
            
            (970,704
            )Appropriated
            
            
            1,521,997
            
            
            
            1,521,997Accumulated
      other comprehensive income
            
            
            2,329,500
            
            
            
            1,400,602Total
      Stockholders' Equity
            
            
            17,385,379
            
            
            
            16,811,326TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            31,189,041
            
            
            $
            29,057,363





The
accompanying notes are an integral part of these consolidated financial
statements.


- 3
-


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)


(UNAUDITED)





For
      the three months ended
            
            
            For
      the six months endedJune 30
            
            
            June 302008
            
            
            2007
            
            
            2008
            
            
            2007(Restated)
            
            
            
            
            
            (Restated)NET
      SALESRevenue
      from digitalization of television signals
            
            $
            1,710,504
            
            
            $
            1,357,890
            
            
            $
            3,261,976
            
            
            $
            2,757,703Revenue
      from television advertising
            
            
            54,341
            
            
            
            51,218
            
            
            
            144,924
            
            
            
            297,298Revenue
      from software development
            
            
            8,341
            
            
            
            12,760
            
            
            
            18,657
            
            
            
            22,020Government
      grant received
            
            
            -
            
            
            
            333,316
            
            
            
            -
            
            
            
            656,5561,773,186
            
            
            
            1,755,184
            
            
            
            3,425,557
            
            
            
            3,733,577COST
      OF SALESCost
      of Sales - digitalization of television signals
            
            
            (229,559
            )
            
            
            (155,919
            )
            
            
            (376,524
            )
            
            
            (348,379
            )Depreciation
      - digitalization of television signals
            
            
            (853,030
            )
            
            
            (755,993
            )
            
            
            (1,803,193
            )
            
            
            (1,471,899
            )Cost
      of Sales - television advertising
            
            
            (31,428
            )
            
            
            (24,194
            )
            
            
            (102,009
            )
            
            
            (309,826
            )(1,114,017
            )
            
            
            (936,106
            )
            
            
            (2,281,726
            )
            
            
            (2,130,104
            )GROSS
      PROFIT
            
            
            659,169
            
            
            
            819,078
            
            
            
            1,143,831
            
            
            
            1,603,473OPERATING
      EXPENSESSelling,
      general and administrative expenses
            
            
            (507,475
            )
            
            
            (625,963
            )
            
            
            (1,198,500
            )
            
            
            (1,260,007
            )Amortization
      of convertible debt discount
            
            
            (258,202
            )
            
            
            (516,666
            )
            
            
            (752,369
            )
            
            
            (1,033,332
            )Depreciation
      and amortization
            
            
            (18,375
            )
            
            
            (24,690
            )
            
            
            (42,867
            )
            
            
            (48,096
            )Total
      Operating Expenses
            
            
            (784,052
            )
            
            
            (1,167,319
            )
            
            
            (1,993,736
            )
            
            
            (2,341,435
            )LOSS
      FROM OPERATION
            
            
            (124,883
            )
            
            
            (348,241
            )
            
            
            (849,905
            )
            
            
            (737,962
            )OTHER
      INCOME (EXPENSES)Interest
      income
            
            
            737
            
            
            
            529
            
            
            
            1,945
            
            
            
            870Other
      income
            
            
            21,600
            
            
            
            14,387
            
            
            
            80,505
            
            
            
            23,058Interest
      expenses
            
            
            (79,402
            )
            
            
            (31,518
            )
            
            
            (109,711
            )
            
            
            (63,028
            )Interest
      paid to related companies and directors
            
            
            (9,600
            )
            
            
            (3,014
            )
            
            
            (16,568
            )
            
            
            (5,744
            )Other
      expenses
            
            
            (19,147
            )
            
            
            (27,251
            )
            
            
            (42,590
            )
            
            
            (31,315
            )Total
      Other Expenses , net
            
            
            (85,812
            )
            
            
            (46,867
            )
            
            
            (86,419
            )
            
            
            (76,159
            )NET
      LOSS BEFORE TAXES
            
            
            (210,695
            )
            
            
            (395,108
            )
            
            
            (936,324
            )
            
            
            (814,121
            )Income
      tax (expense) income
            
            
            (66,414
            )
            
            
            (121,668
            )
            
            
            412,307
            
            
            
            (113,950
            )NET
      LOSS FROM CONTINUING OPERATIONS
            
            
            (277,109
            )
            
            
            (516,776
            )
            
            
            (524,017
            )
            
            
            (928,071
            )DISCONTINUED
      OPERATIONSEquity
      loss of affiliates
            
            
            -
            
            
            
            (28,680
            )
            
            
            -
            
            
            
            (34,830
            )Net
      loss from subsidiary
            
            
            -
            
            
            
            34,619
            
            
            
            -
            
            
            
            (136,348
            )Minority
      Interests
            
            
            -
            
            
            
            (16,964
            )
            
            
            -
            
            
            
            66,810LOSS
      FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            
            (11,025
            )
            
            
            -
            
            
            
            (104,368
            )NET
      LOSS
            
            
            (277,109
            )
            
            
            (527,801
            )
            
            
            (524,017
            )
            
            
            (1,032,439
            )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
            
            
            338,530
            
            
            
            26,035
            
            
            
            928,898
            
            
            
            118,579COMPREHENSIVE
      INCOME (LOSS)
            
            $
            61,421
            
            
            $
            (501,766
            )
            
            $
            404,881
            
            
            $
            (913,860
            )Net
      loss per share - basic - two classes method-
      From continuing operations
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.03
            )-
      From discontinued operations
            
            
            0.00
            
            
            
            (0.00
            )
            
            
            0.00
            
            
            
            (0.00
            )Net
      loss per share - diluted-
      From continuing operations
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.03
            )-
      From discontinued operations
            
            
            0.00
            
            
            
            (0.00
            )
            
            
            0.00
            
            
            
            (0.00
            )Weighted
      average number of shares outstanding during the period -
    basic
            
            
            42,681,678
            
            
            
            35,772,551
            
            
            
            42,480,690
            
            
            
            33,519,804Weighted
      average number of shares outstanding during the period -
      diluted
            
            
            42,681,678
            
            
            
            35,772,551
            
            
            
            42,480,690
            
            
            
            33,519,804





The
accompanying notes are an integral part of these consolidated financial
statements.  - 4
-


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007


(UNAUDITED)




2008
              
              
              2007(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss) income from continuing operations
              
              $
              (524,017
              )
              
              $
              (928,071
              )Net
      (loss) income from discontinued operations
              
              
              -
              
              
              
              (104,368
              )Total
      net loss
              
              
              (524,017
              )
              
              
              (1,032,439
              )Adjusted
      to reconcile net loss to cash provided by operating
      activities:Amortization
      - cost of sales
              
              
              -
              
              
              
              -Depreciation-cost
      of sales
              
              
              1,803,193
              
              
              
              1,471,899Depreciation
      and amortization
              
              
              42,867
              
              
              
              48,096Depreciation
      and amortization of discontinued operation
              
              
              -
              
              
              
              11,601Amortization
      of convertible debt discount
              
              
              752,369
              
              
              
              1,033,332Loss
      on disposal of affiliate
              
              
              -
              
              
              
              -Amortization
      on stock compensation
              
              
              21,200
              
              
              
              31,800Minority
      interests - discontinued operation
              
              
              -
              
              
              
              (66,810
              )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
              
              
              (613,275
              )
              
              
              (74,424
              )Other
      receivables and prepaid expenses
              
              
              73,773
              
              
              
              130,186Inventories
              
              
              (878,387
              )
              
              
              98,667Deferred
      tax asset
              
              
              123,982
              
              
              
              (196,576
              )Other
      assets
              
              
              124,471
              
              
              
              147,033Due
      to a related company
              
              
              -
              
              
              
              (192,283
              )Accounts
      payable
              
              
              1,043,699
              
              
              
              (1,466,889
              )Other
      payables and accrued liabilities
              
              
              453,992
              
              
              
              (812,734
              )Business
      tax payable
              
              
              (155,048
              )
              
              
              (139,621
              )Value
      added taxes payable
              
              
              45,530
              
              
              
              63,210Income
      tax payable
              
              
              (423,572
              )
              
              
              375,562Other
      tax payable
              
              
              -
              
              
              
              16,028Discontinued
      operation, net
              
              
              -
              
              
              
              109,182Net
      cash provided by operating activities
              
              
              1,890,777
              
              
              
              (46,841
              )Net
      cash inflow from business combination
              
              
              -
              
              
              
              61Investment
      in affiliate
              
              
              -
              
              
              
              195,633Purchase
      of property and equipment
              
              
              (2,068,775
              )
              
              
              (579,394
              )Net
      cash used in investing activities
              
              
              (2,068,775
              )
              
              
              (383,700
              )Due
      to a stockholder
              
              
              38,295
              
              
              
              24,802Due
      to directors
              
              
              55,833
              
              
              
              (51,478
              )Net
      cash provided by financing activities
              
              
              34,157
              
              
              
              329,096EFFECT
      OF EXCHANGE RATE ON CASH
              
              
              (65,238
              )
              
              
              88,968NET
      DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (209,079
              )
              
              
              (12,476
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              334,410
              
              
              
              402,591CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              125,331
              
              
              $
              390,115Continuing
      operations
              
              $
              125,331
              
              
              $
              299,502Discontinued
      operations
              
              $
              -
              
              
              $
              90,613SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
              
              $
              -
              
              
              $
              -Cash
      paid for income tax
              
              $
              -
              
              
              $
              -
  SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
 On
March 4, 2008, the Company issued 528,596 shares of common stock in lieu of cash
for debenture interest payable to a debenture holder.
 On May 8, 2008, the
Company issued 60,710 shares of common stock in lieu of cash for debenture
interest payable to the debenture holders.


The
accompanying notes are an integral part of these consolidated financial
statements.  - 5
-
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS
OF JUNE 30, 2008 (UNAUDITED)








NOTE
1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES





(A) Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.





In the
opinion of management, the unaudited condensed consolidated financial statements
contain all adjustments consisting only of normal recurring accruals considered
necessary to present fairly the Company's consolidated financial position at
June 30, 2008, the consolidated results of operations for the three months and
six months ended June 30, 2008 and 2007, and consolidated statements of cash
flows for the six months ended June 30, 2008 and 2007. The consolidated results
for the three months and six months ended June 30, 2008 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2008. These consolidated financial statement should be read in
conjunction with the consolidated financial statements and notes for the year
ended December 31, 2007 appearing in the Company's annual report on Form 10-KSB
as filed with the Securities and Exchange Commission.





(B)
Principles of Consolidation





The
accompanying unaudited condensed consolidated financial statements for the three
months and six months ended June 30, 2008 include the unaudited financial
statements of China Digital Media Corporation (“CDMC”) and its wholly owned or
controlled subsidiaries, China Digimedia Holding Limited (“CDHL”), Arcotect
(Guangzhou) Limited (“AGL”), Guangdong M-Rider Media Company (“M-Rider”),
Maxcomm Limited (“Maxcomm”), Arable Media Limited (“Arable”), Arable (Guangzhou)
Limited (“Arable GZ”), and its 100% variable interest entity (“VIE”) in
Guangdong HuaGuang DigiMedia Culture Development Limited
(“HuaGuang”),  (collectively, “the Company”).  Because the
Company did not have any business in Shenzhen, Digimedia Service (Shenzhen)
Limited was deregistered on July 7, 2008.





The
accompanying unaudited condensed consolidated financial statements for the three
months and six months ended June 30, 2007 include the unaudited financial
statements of CDMC and its wholly owned or controlled subsidiaries, CDHL, AGL,
M-Rider, Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”), Maxcomm,
Arable, its 100% variable interest entity (“VIE”) in HuaGuang, the 51% owned
subsidiary of HuaGuang, Guizhou Guishi Digimedia Advertising Company Limited
(“Guishi Digimedia”), and its 49% investment held by HuaGuang in Guizhou Guishi
Huaguang Media Company Limited (“Guishi Huaguang”) using the equity method. The
minority interests represent the minority shareholders’ 49% proportionate share
of the results of Guishi Digimedia.





All
significant inter-company balances and transactions have been eliminated in
consolidation.





(C)
Revenue Recognition





Digitalization
of Television Signals





The
Company entered into an agreement with Nanhai Network Company to assist its
subscribers on the conversion of television signals from analog into digital by
providing set-top-box (“STB”) and smart cards to the subscribers in Nanhai City
on a lease basis. The Company is entitled to a portion of fees payable by the
existing subscribers under a subscription agreement entered into between the
subscribers and the Nanhai Network Company. Revenue is recognized on a straight
line basis in accordance with the terms of the subscription agreement. The
Company also sells STB and smart cards to new subscribers. Revenue arising from
these services is recognized when the subscriber is invoiced for the STB and
smart cards upon the completion of installation works.





In
addition, the Company is entitled to be reimbursed for its operating expenses
from Network Company in accordance to the subscription agreement. Revenue
arising from costs reimbursement is recognized when the amounts are duly agreed
upon between the Company and Network Company.





Government
Grant





The local
government of Nanhai City also approved a grant of Rmb10,000,000 each year for
five years from 2004 to finance the purchase of STB and smart cards for sale and
lease to subscribers. Such grant is received through the Nanhai Network Company
and is recognized as revenue on a straight line basis once
received.  The Company has not received any of such grant for the six
months ended June 30, 2008 as the Company is entitled to a higher income split
of DTV subscription fee effective from June 1, 2008.  Since the local
government may not be able to release government grant to the Nanhai Network
Company starting from 2008, the Nanhai Network Company has agreed to pay a
higher income split of DTV subscription fee to the Company once the upward price
adjustment of DTV subscription fee is effective as a compensation to the loss of
government grant.





- 6
-


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2008 (UNAUDITED)






Television
Advertising Sales





The
Company acts as an advertising agent for certain television channels by selling
advertising air time spaces and television program backdrops to customers. The
Company's advertising services revenue is derived from billings that are earned
when the advertisements are placed and revenue is recognized as the media
placements appear.





Software
Development





The
Company provides various information technology professional services to its
customers based on a negotiated fixed-price time and materials contract. The
Company recognizes services-based revenue from all of its contracts when the
services have been performed, the customers have approved the completion of the
services and invoices have been issued and collectibility is reasonably
assured.





Supplier
rebate





Rebate or
refund received by the Company from its supplier, either in cash or trade
discount, will be considered as an adjustment of the prices of the supplier’s
products purchased by the Company. Therefore, it will be characterized as (a) a
reduction of cost of sales for subsequent selling of the products by the
Company; or (b) a reduction of Property and Equipment for products booked as
fixed assets of the Company and subject to deprecation in line with the
depreciable life of the relevant products; or (c) a reduction of Inventories for
products maintained in stock.





(D)
Property and Equipment





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





Depreciation
of STB





As
required by SAB11:B, depreciation and amortization for property and equipment
directly attributed to the generation of revenue are classified under “Cost of
Sales”. Accordingly, depreciation of STB and smart cards of the Company is
included in “Cost of Sales”.





(E)
Valuation of Financial Instruments





Statement
of Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," requires certain disclosures regarding the fair value of
financial instruments. Fair value of financial instruments is made at a specific
point in time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in nature,
involving uncertainties and matters of significant judgment, they cannot be
determined with precision. Changes in assumptions can significantly affect
estimated fair values.





The
carrying value of cash and cash equivalents, accounts receivables (trade and
others), accounts payables (trade and related parties) and accrued liabilities
approximate their fair value because of the short-term nature of these
instruments. The Company places its cash and cash equivalents with what it
believes to be high credit quality financial institutions. The Company controls
credit risk related to accounts receivable through credit approvals, credit
limit and monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit risk,
establishes an allowance, if required, for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowance is limited.




The
Company’s major operation is in the PRC, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility of foreign
exchange rates between the United States dollars (“US$”) and the Chinese
Renminbi (“RMB”). Nevertheless, the Company does not believe that its foreign
currency exchange rate fluctuation risk is significant, especially if the PRC
government allows only gradual currency fluctuation so as to maintain the
relative stability of RMB.




The
Company accounts for non-hedging contracts that are indexed to, and potentially
settled in, its own common stock in accordance with the provisions of Emerging
Issues Task Force 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”).
These non-hedging contracts are accounted for in accordance with EITF 00-19
include freestanding warrants to purchase the Company’s common stock as well as
embedded conversation features that have been bifurcated from the host contract
in accordance with the requirements of SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”). Under certain circumstances
that could require the Company to settle these equity items in cash or stock,
and without regard to probability, EITF 00-19 could require the classification
of all or part of the item as a liability and the adjustment of that
reclassified amount to fair value at each reporting period, with such
adjustments reflected in the line item of change in valuation of derivative as
other income (expenses) in the statements of operations.




- 7
-


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2008 (UNAUDITED)







The
Company has issued 4% secured convertible debentures in a face amount of
US$3,100,000 which are due and payable in full in 18 months from their issuance.
As fixed prices are set for the conversion prices of such convertible debentures
and the attached warrants, the Company is in a position to be sure it had
adequate authorized shares for the future conversion of convertible debentures
and warrants. Therefore, no embedded derivatives and warrants are required to be
recorded at fair value and marked-to-market at each reporting
period.





(F)
Restatement of Financial Statements





As stated
in the Form 8-K filed on March 27, 2008, the Company has decided to restate
certain financial statements previously reported to record the debenture
interest costs and discount of the convertible feature of the debentures issued
in November and December of 2006 and to reclassify the debentures as long-term
liabilities.  The accounting treatment and reclassification resulting
in this restatement is in accordance with SFAS No. 107 and 133.





(I)
Recent Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The
objective of SFAS 157 is to increase consistency and comparability in fair value
measurements and to expand disclosures about fair value measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company's future reported financial position or results of
operations.





In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, “The Fair Value Option
for Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115 ”. This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments
in Debt and Equity Securities” applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, “Fair Value Measurements”. The
adoption of this statement is not expected to have a material effect on the
Company's financial statements.





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
160, “Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51”. This
statement improves the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require; the ownership interests in subsidiaries held by parties other than the
parent and 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, changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently, when a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value, entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 affects 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. Early adoption is prohibited. The adoption of this statement is not
expected to have a material effect on the Company's financial
statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133”(SFAS161). This statement is intended
to improve transparency in financial reporting by requiring enhanced disclosures
of an entity’s derivative instruments and hedging activities and their effects
on the entity’s financial position, financial performance, and cash flows.SFAS161 applies to all derivative
instruments within the scope of SFAS 133, “Accounting for Derivative Instruments
and Hedging Activities” (SFAS 133) as well as related hedged items, bifurcated
derivatives, and nonderivative instruments that are designated and qualify as
hedging instruments. Entities with instruments subject toSFAS161 must provide more robust qualitative disclosures
and expanded quantitative disclosures.SFAS 161 is
effective prospectively for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
permitted. We are currently evaluating the disclosure implications of this
statement.





In May
2008, the FASB released SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that presented
in conformity with generally accepted accounting principles in the United States
of America. SFAS No. 162 will be effective 60 days following the SEC’s approval
of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not believe SFAS 162 will have a significant impact on the Company’s
consolidated financial statements.




In May
2008, the FASB issued SFAS No. 163, “Accounting
for Financial Guarantee Insurance Contracts,”an interpretation of FASB
Statement No. 60. The scope of this Statement is limited to financial guarantee
insurance (and reinsurance) contracts, as described in this Statement, issued by
enterprises included within the scope of Statement 60. Accordingly, this
Statement does not apply to financial guarantee contracts issued by enterprises
excluded from the scope of Statement 60 or to some insurance contracts that seem
similar to financial guarantee insurance contracts issued by insurance
enterprises (such as mortgage guaranty insurance or credit insurance on trade
receivables). This Statement also does not apply to financial guarantee
insurance contracts that are derivative instruments included within the scope of
FASB Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The Company does not
believe SFAS 163 will have a significant impact on the Company’s consolidated
financial statements.


- 8
-


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2008 (UNAUDITED)





NOTE
2 - SEGMENT INFORMATION





The
Company operates in four reportable segments; digitalization of television
signals, television advertising sales, software development, and investment in
television series. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. The Company
evaluates segment performance based on income from operations. All inter-company
transactions between segments have been eliminated on consolidation. As a
result, the components of operating income for one segment may not be comparable
to another segment. The following is an unaudited summary of our segment
information for the six months ended June 30, 2008 and 2007:





Digitalization
            
            
            
            
            
            
            
            
            Investmentsof
      Television
            
            
            Television
            
            
            Software
            
            
            in
      TelevisionSignals
            
            
            Advertising
            
            
            Development
            
            
            Series
            
            
            Total2008Revenues
            
            $
            3,261,976
            
            
            $
            144,924
            
            
            $
            18,657
            
            
            $
            -
            
            
            $
            3,425,557Gross
      profit
            
            
            1,082,258
            
            
            
            42,916
            
            
            
            18,657
            
            
            
            -
            
            
            
            1,143,831Net
      Income (loss)
            
            
            436,694
            
            
            
            26,076
            
            
            
            224,089
            
            
            
            (12,260
            )
            
            
            674,599Total
      assets
            
            
            26,211,732
            
            
            
            656,137
            
            
            
            4,213,517
            
            
            
            107,655
            
            
            
            31,189,041Capital
      expenditure
            
            
            1,846,138
            
            
            
            11,673
            
            
            
            93,514
            
            
            
            117,450
            
            
            
            2,068,775Depreciation
      and amortization
            
            $
            1,828,925
            
            
            $
            -
            
            
            $
            10,153
            
            
            $
            6,982
            
            
            $
            1,846,0602007
      (Restated)Revenues
            
            $
            3,414,258
            
            
            $
            297,299
            
            
            $
            22,020
            
            
            $
            -
            
            
            $
            3,733,577Gross
      profit (loss)
            
            
            1,593,981
            
            
            
            (12,528
            )
            
            
            22,020
            
            
            
            -
            
            
            
            1,603,473Net
      Income (loss)
            
            
            822,393
            
            
            
            12,467
            
            
            
            (92,420
            )
            
            
            (4,479
            )
            
            
            737,961Total
      assets
            
            
            21,389,751
            
            
            
            2,910,193
            
            
            
            802,744
            
            
            
            685,278
            
            
            
            25,787,966Capital
      expenditure
            
            
            488,365
            
            
            
            82,839
            
            
            
            8,190
            
            
            
            -
            
            
            
            579,394Depreciation
      and amortization
            
            $
            1,497,079
            
            
            $
            11,601
            
            
            $
            3,856
            
            
            $
            19,061
            
            
            $
            1,531,597





A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.





2008
            
            
            2007Total
      net income for reportable segments
            
            $
            674,599
            
            
            $
            737,961Unallocated
      amounts relating to corporate operationsInterest
      expenses
            
            
            108,744
            
            
            
            28,576Amortization
      of convertible debt discount
            
            
            752,369
            
            
            
            1,033,332Interest
      paid to related companies and directors
            
            
            16,568
            
            
            
            5,744Loss
      from discontinued operations
            
            
            -
            
            
            
            104,368Administration
      expenses
            
            
            287,171
            
            
            
            575,715Professional
      fees
            
            
            17,092
            
            
            
            21,150Others
            
            
            16,673
            
            
            
            1,514Total
      net loss
            
            $
            (524,017
            )
            
            $
            (1,032,439
            )





NOTE
3 - EARNINGS PER SHARE





As of
June 30, 2008, the Company has outstanding:





-
            42,706,363
      shares of common stock;-
            1,875,000
      shares of preferred stock;-
            6,888,882
      shares of common stock to be issued upon conversion of convertible
      debenture;-
            warrants
      to purchase 6,888,882 shares of common stock at an exercise price of $0.80
      per share, expire in November 2012;-
            warrants
      to purchase 6,888,882 shares of common stock at an exercise price of $1.20
      per share, expire in November 2012; and-
            warrants
      to purchase 3,444,441 shares of common stock at an exercise price of $2.25
      per share, expire in November 2012.




- 9
-
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2008 (UNAUDITED)





In
accordance with paragraph 40 and 41 of SFAS 128 and EITF 03-6, basic
and diluted earnings per share on a two classes method for the six months ended
June 30, 2008 and 2007 are calculated as follows:





2008
            
            
            2007(Restated)Net
      Loss
            
            $
            (524,017
            )
            
            $
            (1,032,439
            )Basic
      - 2 classes methodLoss
      available to common stockholders
            
            $
            (524,017
            )
            
            $
            (1,032,439
            )Weighted-average
      common stock outstanding
            
            
            42,480,690
            
            
            
            33,519,804Basic
      earnings per share - Common Stock-
      From continuing operations
            
            $
            (0.01
            )
            
            $
            (0.03
            )-
      From discontinuing operations
            
            $
            0.00
            
            
            $
            (0.00
            )DilutedLoss
      available to common stockholders
            
            $
            (524,017
            )
            
            $
            (1,032,439
            )Diluted
      weighted-average common stock outstanding
            
            
            42,480,690
            
            
            
            33,519,804Diluted
      earnings per share-
      From continuing operations
            
            $
            (0.01
            )
            
            $
            (0.03
            )-
      From discontinuing operations
            
            $
            0.00
            
            
            $
            (0.00
            )





Warrants
to purchase 6,888,882 shares of common stock at $0.80 per share, 6,888,882
shares of common stock at $1.20 per share and 3,444,441 shares of common stock
at $2.25 per share were outstanding as of June 30, 2008 but were not included in
the computation of diluted earnings per share because the warrants’ exercise
price was greater than the market price of the common shares.





NOTE
4 - COMMITMENTS AND CONTINGENCIES





Contingencies





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





The
Company contests the allegations of the Plaintiffs and has retained counsel
admitted to practice in the U.S. District Court for the Southern District of New
York to vigorously defend the action. The Company did not hire a stock promoter
or a spammer to distribute the alleged e-mails, and the alleged emails
themselves recite that they were not paid for by the Company or an
affiliate. We also do not believe that United States District Court for the
Southern District of New York has jurisdiction over us to even hear this case.
We believe we have no liability in this matter.





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





The
Company has made a settlement offer to the plaintiff of an amount equal to
$9,000, and is awaiting the plaintiff’s response. As part of any settlement, the
Company will insist upon the execution and delivery of a binding release of all
claims in favor of the Company. The Company has accrued $9,000 as at June 30,
2008.


- 10
-
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2008 (UNAUDITED)







NOTE
5 - COMMON STOCK





During
the quarter ended June 30, 2008, the Company issued 60,710 restricted shares to
two debenture holders as payment for the debenture interest. The shares were
issued at a price of $0.18 per share, and the issuance is exempt from
registration pursuant to Regulation D under the Securities Act of 1933, as
amended.





NOTE
6 - CONVERTIBLE DEBENTURE





The
following is a summary of the Company’s outstanding debentures as at June 30,
2008 and December 31, 2007.




June
      30,
              
              
              December
      31,2008
              
              
              2007(Unaudited)
              
              
              (Audited)(In
      default)$2,150,000
      Convertible Debentures, net of $135,000 conversions as of June 30, 2008
      and December 31, 2007 and unamortized discount of $0 and $511,350 as of
      June 30, 2008 and December 31, 2007 respectively at 4% interest per annum
      due May 2008, in default
              
              $
              2,015,000
              
              
              $
              1,503,650$500,000
      Convertible Debentures, net of unamortized discount of $0 and $126,852 as
      of June 30, 2008 and December 31, 2007 respectively at 4% interest per
      annum due May 2008, in default
              
              
              500,000
              
              
              
              373,148$200,000
      Convertible Debentures, net of unamortized discount of $0 and $50,741 as
      of June 30, 2008 and December 31, 2007 respectively at 4% interest per
      annum due May 2008, in default
              
              
              200,000
              
              
              
              149,259$150,000
      Convertible Debentures, net of unamortized discount of $0 and $38,056 as
      of June 30, 2008 and December 31, 2007 respectively at 4% interest per
      annum due May 2008, in default
              
              
              150,000
              
              
              
              111,944$100,000
      Convertible Debentures, net of unamortized discount of $0 and $25,370 as
      of June 30, 2008 and December 31, 2007 respectively at 4% interest per
      annum due June 2008, in default
              
              
              100,000
              
              
              
              74,630$
              2,965,000
              
              
              $
              2,212,631


For the
fiscal quarter ended June 30, 2008, the Company has convertible debentures with
total value of $2.965 million outstanding. The aforesaid convertible debentures
were issued pursuant to the private equity financing where the Company sold a
total 31 units of securities. Each unit consists of (i) an eighteen-month 4%
interest bearing convertible debenture in the principal amount of $100,000,
convertible at $0.45 per share, (ii) a six-year Class A warrant to purchase
222,222 shares of the Company’s common stock, par value $0.001 per share at an
exercise price of $0.80 per share, a (iii) six-year Class B warrant to purchase
222,222 shares of the Company’s common stock at an exercise price of $1.20 per
share, and (iv) a six-year Class C warrant to purchase 111,111 shares of the
Company’s common stock at an exercise price of $2.25 per share. The securities
issuable upon conversion of the debenture and exercise of the warrants are
eligible for certain registration rights.





The
Company has recorded a cost of $3.1 million for the convertible feature granted
to the debenture holders.  The convertible feature is reflected as a
discount on the debenture and is being amortized as over the term of the
debenture.





The
debentures matured in May 2008, but due to the Company’s current financial
situation with most of the Company’s cash being utilized to make upfront
investments in connection with its DTV Migration, the Company did not have
enough cash to repay the debentures. The Company is negotiating with the largest
debenture holder to refinance or otherwise satisfy the debentures. However, as
of the date of this report, the Company does not have any agreements or
understandings in place with the debenture holders, and there is no assurance
that the Company will be able to refinance or otherwise satisfy the
debentures.





Discount
amortized for the six months ended June 30, 2008 and June 30, 2007 was $752,369
and $1,033,332 respectively. Debenture interest accrued for the six months ended
June 30, 2008 and June 30, 2007 was $44,501 and $61,490
respectively.





The
default interest expense on convertible debenture for the six months ended June
30, 2008 is $64,243.


- 11
-
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2008 (UNAUDITED)







NOTE
7 - RELATED PARTY TRANSACTIONS





As of
June 30, 2008, the Company owed two directors $297,072 for short-term advances.
Interest is charged at 6% per annum on the amount owed.





As of
June 30, 2008, the Company owed to related companies $670,860 for short-term
unsecured advances made. Interest is charged at 6% per annum on the amount
owed.





As of
June 30, 2008, the Company owed to a stockholder $422,876 for short-term
advances made. Interest is charged at 6% per annum on the amount
owed.





NOTE
8 - GOING CONCERN





As
reflected in the accompanying consolidated financial statements, the Company has
an accumulated deficit of $1,494,721 at June 30, 2008 that includes a net loss
of $524,017 for the period ended June 30, 2008. The Company’s total current
liabilities exceed its total current assets by $7,921,777. These factors raise
substantial doubt about its ability to continue as a going concern. In view of
the matters described above, recoverability of a major portion of the recorded
asset amounts shown in the accompanying consolidated balance sheet is dependent
upon continued operations of the company, which in turn is dependent upon the
Company’s ability to raise additional capital, obtain financing and succeed in
its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.





Management
has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. The Company is actively pursuing
additional funding and potential merger or acquisition candidates and strategic
partners, which would enhance stockholders’ investment. Management believes that
the above actions will allow the Company to continue operations through the next
fiscal year.












- 12
-




ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





We are
hereby providing cautionary statements identifying important factors that could
cause our actual results to differ materially from those projected in forward
looking statements made in this quarterly report on Form 10-Q. Any statements
that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
through the use of words or phrases such as "likely will result", "are expected
to", "will continue", "is anticipated", "estimated", "intends", "plans" and
"projection") are not historical facts and may be forward-looking statements and
involve estimates and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements.





We
caution that the factors described herein, as well as the factors described
generally in our Form 10-KSB for the year ended December 31, 2007, and
specifically the factors described in such Form 10-KSB in the section entitled
“Item 1. Business - Risk Factors”-, could cause actual results to differ
materially from those expressed in any forward-looking statements and that the
investors should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events or circumstances. Consequently, no forward-looking statement can be
guaranteed.





There
have not been any material changes in the risk factors previously disclosed in
our Form 10-KSB for the year ended December 31, 2007 filed with the SEC on April
16, 2008.





New
factors emerge from time to time, and it is not possible for us to predict all
such factors. Further, we cannot assess the impact of each such factor on our
results of operations or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.





Overview





China
Digital Media Corporation (”CDMC”) was previously known as HairMax
International, Inc. (“Hairmax”), a Nevada corporation incorporated in 1987.
Arcotect Digital Technology Limited, a corporation organized under the laws of
Hong Kong, consummated a reverse merger with Hairmax in March, 2005, and Hairmax
subsequently changed its name to China Digital Media Corporation. With the
termination of the original businesses of Hairmax, all of China Digital Media
Corporation’s businesses are now located in the People’s Republic of China (the
“PRC” or ‘China”). Arcotect Digital Technology Limited has changed its name to
China Digimedia Holdings Limited (“CDHL”), and is a wholly-owned subsidiary of
CDMC.





We are
engaged in the business of providing services to the television broadcasting and
media industry in China through operations, partnerships and investments. The
two main businesses of CDMC are:





·
            Through
      a subsidiary, Arcotect (Guangzhou) Limited (“AGL”), converting digital
      cable television subscribers to digital television and providing various
      value added and broadband services to the digital
    subscribers;


·
            Television
      advertising sales.





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





Cable TVoperational support servicesand digital broadcast
technology development





AGL, a
wholly owned foreign subsidiary of CDMC incorporated in China, is the sole
contractor for providing digital television (“DTV”) operational supporting
services in Nanhai, Guangdong Province, a city with over 410,000 residential and
commercial cable television subscribers.





On
February 6, 2004, we signed a 20-year Co-operative Agreement for Total Migration
into DTV System for the Nanhai District and subsequently signed a supplementary
agreement on July 8, 2005 (collectively, the “Co-operative Agreements”) with
Nanhai Network Company, a city-owned cable network operator in Guangdong
Province. Pursuant to the Co-operative Agreements, the Company is responsible
for migrating all cable television subscribers in Nanhai from an analog to a
digital system (“Migration”) by the end of 2007. Owing to certain technical
issues of the local network upgrade of the Nanhai Network Company, the Migration
completion date has been re-scheduled to the end of 2008. The Company entered
into two supplementary agreements with the Nanhai Network Company in May and
December 2007, pursuant to the Co-operative Agreements, for re-scheduling the
Migration completion date to the end of 2008.  As of June 30, 2008,
the Company has migrated about 276,000 subscribers into the digital system and
the migration program is on schedule.





According
to the Co-operative Agreements, AGL is entitled to share the subscription fees
paid by all cable television subscribers as well as paid by DTV subscribers for
additional services, including pay-TV services, and to receive the subscription
fee for any additional STBs.





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Under the
Co-operative Agreement, the Company is a sole contractor for providing digital
TV operational support in Nanhai. The Company is responsible for supplying all
subscribers with a digital set-top-box on a lease basis to subscribers. If
subscribers want an additional set-top-box, they must purchase the set-top-box
from the Company. The Company is also responsible for providing operational
support services including migration planning, marketing and sales, software
development, customer service and logistics administration. The Company’s
proprietary operating support system automates many of the processes, such as
database management, billing, work orders and inventory control, and assists in
the operation of a 24/7 call center for technical support and customer care. The
city-owned cable company retains management of the broadcasting system and the
fiber-optic network and is responsible for compliance with national broadcasting
policies.





The
broadcast system that decrypts the signal with the Company’s set-top-box and
appropriate smart cards can carry up to 800 digital channels of pay-TV programs
and value added multimedia services. Currently, the services consist of 151
channels, including a 68-channel basic package , 80 pay channels and 3 high
definition TV channels bundled into various value added packages, such as Life
& Leisure, World Sports, News, Drama and Family.





The
Company has deployed an IP (Internet Protocol) based set-top-box which is
developed by its subsidiary, Arable Media Limited, a software developer
specialised in middleware products and applications for digital TV set-top box
and broadcasting technologies. The Company believes the advanced set-top-box
will enable the Company to provide additional value added services which can be
deployed in the future; such as targeted advertising, interactive TV programs,
online shopping and console games, as well as interactive education
services.





On June
1, 2008, there was an upward price adjustment on the basic monthly subscription
fee of digital TV in effect which was approved by the Government. Although the
monthly subscription fee for the additional STB was reduced, such change in
pricing is expected to improve the profitability and cashflow of the Company in
the coming periods.





TV advertising
sales





M-Rider,
a company incorporated in China and 100% owned by the Company under a trust
arrangement, is an advertising sales company engaged in the distribution of
television commercials. The Company is responsible for reselling commercial
airtime to international and local advertising customers, either directly or
through agents and receiving agency fees and services fee. The Company has many
years of experience in providing consultancy and media planning services to
clients, and assisting them to deliver their messages precisely and
professionally to their targeted audiences efficiently. In addition, the Company
believes that it can manage advertising resources more effectively to enhance
value of the advertising space.





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





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





The
Company relied a supplier for approximately 89% of its purchases in the second
quarter of 2008 for the Nanhai digitalization of TV system in the Nanhai
project. As of June 30, 2008, accounts payable to this supplier amounted to
$5,681,809 for the Nanhai project.





At
present, some of our targeted businesses are subject to certain governmental
restrictions in the PRC. In order to enable us to invest in certain media
sectors such as TV advertising and content productions before government
regulations and policies in this field are opened to foreign investors, one of
our directors holds the equity interest of HuaGuang while HuaGuang holds the
equity interest of M-Rider on behalf of the Company. We are therefore not the
direct owner of the programming and advertising operations. We anticipate that
this arrangement will be continued until further relaxation of the broadcasting
policy in China.





RESULTS OF
OPERATIONS





Statements
of Operations Items:





Sales





Total net
sales for the three months ended June 30, 2008 decreased by $18,002 or 1% to
$1,773,186 from $1,755,184  for the same period ended June 30, 2007.
For the six months ended June 30, 2008, we recorded total revenue of $3,425,557,
or 8% decrease compared to total revenue of $3,733,577 for the same period last
year. The decrease in total net sales was due to the decrease in installation
service income and government grant received, which was offset by the increase
in sales of additional STBs. In addition, revenue generated from TV
digitalization business has increased as compared with the same period of last
year. The basic and additional STBs registered increased from about 460,391 as
of June 30, 2007 to 510,346 as of June 30, 2008.





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Gross
Profit





Gross
Profit for the three months ended June 30, 2008 decreased by $159,909 or 20%,
and for the six months ended June 30, 2008 decreased by $459,642 or 29% as
compared with the same period last year because of the increase in depreciation
of STBs purchased for the DTV migration, decrease in installation service
income, reduction in TV advertising sales, and that no revenue was received from
government grants during the first and second quarter of 2008.





Expenses





Selling,
general, administrative and depreciation and amortization (not related directly
to generation of revenue) expenses for the three months ended June 30, 2008
decreased by $383,267 or 33% to $784,052, and for the six months ended June 30,
2008 decreased by  $347,699 or 15% to $1,993,736 in comparison with
the same periods ended June 30, 2007. The decrease is mainly due to the
reduction in amortization of the convertible debt discount where the instrument
ceased to be amortized in May and June this year.





Net
Loss





Net loss
after tax was $277,109 for the three months and $524,017 for the six months
period ended June 30, 2008, compared to a net loss of $527,801 and $1,032,439
respectively for the same period ended June 30, 2007. The decrease in net loss
was because of the downward adjustment for income tax provision, reduction in
amortization of convertible debt discount and because the Company received
payment on an account receivable where bad debt provision had been previously
made.





Balance
Sheet Items:





Current
Assets





Current
Assets of the Company increased by $0.7 million to $4.2 million during the first
six months of 2008. As the Company utilized most of its cash on DTV migration,
it has maintained a low level of cash balance of $0.1 million. The increase was
due to the higher inventory level from the increased purchases of STBs for the
DTV migration process at the end of June 2008 compared to the same period last
year.





Property
and Equipment, Net





The net
increase in property and equipment of the Company of $1.2 million represented an
increase in purchases of STBs during the first six months of 2008.





Other
Asset





Other
assets represent deferred finance costs related to commission, legal and
financial advisory fees directly attributable to the issuance of the convertible
debenture by the Company in 2006 totaling $620,480. Deferred finance costs are
amortized over the life of the debenture of 18 months from November 2006. For
the three months ended June 30, 2008, such expenses amortized were
$31,555.





Current
Liabilities





Current
liabilities of the Company increased by $0.5 million to $12.1 million during the
first six months of 2008. The increase was mainly attributable to the increase
in debenture, net of discount.





Liquidity
and Capital Resources





On June
30, 2008, we had cash of $125,331 and a working capital deficit of $7,921,777.
This compares with cash of $334,410 and a working capital deficit of $8,114,014
at December 31, 2007. The decrease in cash was mainly due to the increase in
purchases of STBs for the Nanhai project as compared with the same period of
last year.





Operating
activities had a net generation of cash in the amount of $1,890,777 during the
six months ended June 30, 2008 (2007: used in operating activities $46,841)
reflecting an excess of revenues over expenditure.





Net cash
used in investing activities for the six months ended June 30, 2008 was
$2,068,775 as compared with net cash used in investing activities of $383,700
for the six months ended June 30, 2007. The increase in net cash used in
investing activities was due to the increase in purchases of STBs in the first
six months of this year.





Net cash
provided by financing activities for the six months ended June 30, 2008 was
$34,157 representing directors funding activities (2007: provided by financing
activities $329,096 of which $355,772 represented inter group funding activities
).





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We
continued to receive cash from Nanhai Network Company according to the project
schedule and plan of television digitalization migration. The Company's
investment in STBs and smart cards remained the substantial accounts payable at
June 30, 2008. For further business expansion and acquisition, the Company is
considering various financing methods for funding, although there is no
assurance that the Company will be able to raise additional funding on favorable
terms, if at all.





On a
long-term basis, liquidity is dependent on continuation and expansion of
operations, receipt of revenues, additional infusions of capital and debt
financing. Our current capital and revenues are not sufficient to fund further
acquisition and business expansion.  The Company is planning to raise
capital through debt financing and equity raising from banks, potential
investors and partners. However, if the Company is unable to raise additional
capital, its growth potential is more likely to be affected.





The
Company issued a total of $3.1 million in convertible debentures in November and
December 2006, which debentures amounted to $2.965 million, and which debentures
already matured in May 2008. Due to the Company’s current financial situation
with most of the Company’s cash being utilized to make the upfront investment
for the Migration, the Company does not have enough cash to repay the
debentures. The Company has been negotiating with the largest debenture holder
to refinance or otherwise satisfy the debentures. However, as of the date of
this report, the Company does not have any agreements or understandings in place
with the debenture holders, and there is no assurance that the Company will be
able to refinance or otherwise satisfy the debentures.





Off-Balance
Sheet Transactions





The
Company does not engage in material off-balance sheet transactions.





Foreign
Currency Translation Risk





The
Company’s major operation is in the PRC, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility of foreign
exchange rates between the United States dollars (“US$”) and the Chinese
Renminbi (“RMB”). Provided that the RMB exchange rate against the US$ maintains
at a low degree of volatility, the Company does not believe that its foreign
currency exchange rate fluctuation risk is significant.





The
financial statements of the subsidiaries (whose functional currency is HK$ or
RMB) are translated into US$ using the closing rate method. The balance sheet
items are translated into US$ using the exchange rates at the respective balance
sheet dates. The capital and various reserves are translated at historical
exchange rates prevailing at the time of the transactions while income and
expenses items are translated at the average exchange rate for the year. All
exchange differences on currency translations are recorded within equity.
Translation gain for the six months ended June 30, 2008 was
$928,898.





Risk
Factors





There
have not been any material changes in the risk factors previously disclosed in
our Form 10-KSB for the year ended December 31, 2007 filed with the SEC on April
16, 2008.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





The
Company’s chief executive officer and chief financial officer have reviewed and
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Exchange Act Rules a13d-15(e) and 15d-15(e)) as of the end of the
period covered by this quarterly report. Based on that evaluation, the chief
executive officer and chief financial officer have concluded that the Company’s
current disclosure controls and procedures are adequate and effective to ensure
that material information relating to the Company was made known to them by
others, particularly during the period in which this Quarterly Report on Form
10-Q was being prepared.





Changes
in Internal Control





There
were no changes in our internal control over financial reporting, identified in
connection with the evaluation of such internal control that occurred during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





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PART
II. OTHER INFORMATION





Item
1. Legal Proceedings





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





The
Company contests the allegations of the Plaintiffs and has retained counsel
admitted to practice in the U.S. District Court for the Southern District of New
York to vigorously defend the action. The Company did not hire a stock promoter
or a spammer to distribute the alleged e-mails, and the alleged emails
themselves recite that they were not paid for by the Company or an affiliate. We
also do not believe that United States District Court for the Southern District
of New York has jurisdiction over us to even hear this case. We believe we have
no liability in this matter.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





During
the quarter ended June 30, 2008, the Company issued 60,710 restricted shares of
common stock to a debenture holder for payment of debenture interest. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) and Regulation D under the Securities
Act.





Item
3. Defaults Upon Senior Securities





As
discussed above, the Company did not pay the amounts due under its convertible
debentures in the amount of $2.965 million plus accrued interest. The Company
has been negotiating with the largest debenture holder to refinance or otherwise
satisfy the debentures. However, as of the date of this report, the Company does
not have any agreements or understandings in place with the debenture holders,
and there is no assurance that the Company will be able to refinance or
otherwise satisfy the debentures. The Company offered to issue common stock to
the debenture holders in lieu of the payment of debenture interests in the first
quarter of 2008. All the debenture holders except for one have accepted such
offer.





Item
4. Submission of Matters to a Vote of Security Holders





None.





Item
5. Other Information





None.





Item
6. Exhibits





EXHIBIT
      NO
            
            DESCRIPTION
      OF EXHIBIT31.1
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





- 17
-


SIGNATURES








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








CHINA
DIGITAL MEDIA CORPORATION


(Registrant)








Date:
      August 13, 2008
              
              /s/
      Ng Chi Shing
              -----------------------------
              Ng
      Chi Shing
              Chief
      Executive Officer
              
              Date:
      August 13, 2008
              
              /s/
      Ng Chi Shing
              -----------------------------
              Ng Chi
Shing
              Chief
      Financial Officer










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