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,
2010
 
 [   ]   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)
  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)
  Indicate
by check mark whether the registrant (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xNo 
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).     Yes   No 
 
 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]
 (Do not check if a smaller reporting
company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes No x
 
 Number of
shares of common stock outstanding as of August 3, 2010: 42,706,363
 
 Number of
shares of preferred stock outstanding as of August 3, 2010: 1,875,000
 
 
  CHINA
DIGITAL MEDIA CORPORATION
 INDEX
TO FORM 10-Q
 
 Page
      No.PART
      IItem
      1. Financial StatementsCondensed
      Consolidated Balance Sheet-
      June 30, 2010 (unaudited)
              
              
              3Condensed
      Consolidated Statements of Operations And Comprehensive Income-
      Three and Six months Ended June 30, 2010 and 2009
    (unaudited)
              
              
              4Condensed
      Consolidated Statements of Cash Flows-
      Six months Ended June 30, 2010 and 2009 (unaudited)
              
              
              5Notes
      to Condensed Consolidated Financial Statements (unaudited)
              
              
              6 -
      9Item
      2. Management's Discussion and Analysis of Financial Condition And Results
      of Operations
              
              
              10Item
      4. Controls and Procedures
              
              
              12PART
      IIItem
      1. Legal Proceedings
              
              
              13Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              
              
              13Item
      3. Defaults Upon Senior Securities
              
              
              13Item
      4. Reserved
              
              
              13Item
      5. Other Information
              
              
              13Item
      6. Exhibits
              
              
              13Signatures
              
              
              14
 
 2
 
 ITEM 1. FINANCIAL
STATEMENTS
 
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS
OF JUNE 30, 2010 (UNAUDITED)
 
 ASSETSJune
      30, 2010
                
                
                December
      31, 2009(Unaudited)
                
                
                (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                
                $
                1,248,586
                
                
                $
                1,639,971Restricted
      cash
                
                
                1,598,294
                
                
                
                1,960,612Accounts
      receivable, net of allowances
                
                
                1,619,408
                
                
                
                1,449,800Inventories,
      net
                
                
                672,236
                
                
                
                658,734Other
      receivables and prepaid expenses
                
                
                68,778
                
                
                
                308,519Due
      from a related company
                
                
                154,010
                
                
                
                238,016Deferred
      tax asset
                
                
                1,098,081
                
                
                
                1,064,552Total
      Current Assets
                
                
                6,459,393
                
                
                
                7,320,204INTANGIBLE
      ASSETS, NET of impairment of $3,996,595
                
                
                324,330
                
                
                
                324,330PROPERTY
      AND EQUIPMENT, NET
                
                
                16,039,169
                
                
                
                18,067,189TOTAL
      ASSETS
                
                $
                22,822,892
                
                
                $
                25,711,723LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESConvertible
      debentures, net of discount
                
                $
                950,000
                
                
                $
                2,864,250Bank
      loans
                
                
                2,644,343
                
                
                
                4,149,135Accounts
      payable
                
                
                6,859,048
                
                
                
                7,505,024Other
      payables and accrued liabilities
                
                
                1,370,912
                
                
                
                1,413,979Due
      to directors
                
                
                209,376
                
                
                
                180,157Due
      to a stockholder
                
                
                9,270
                
                
                
                9,270Due
      to related companies
                
                
                481,391
                
                
                
                464,566Business
      and other tax payable
                
                
                12,306
                
                
                
                19,015Income
      tax payable
                
                
                633,702
                
                
                
                620,458Total
      Current Liabilities
                
                
                13,170,348
                
                
                
                17,225,854LONG
      TERM LIABILITIESConvertible
      debentures, net of discount
                
                
                1,914,250
                
                
                
                -Accounts
      payable
                
                
                1,534,209
                
                
                
                2,125,773Total
      Long Term Liabilities
                
                
                3,448,459
                
                
                
                2,125,773COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -MINORITY
      INTERESTS
                
                
                -
                
                
                
                -STOCKHOLDERS'
      EQUITYSeries
      A convertible preferred stock ($0.001 par value, 40,000,000
      sharesauthorized,1,875,000
      shares issued and outstanding as ofJune
      30, 2010 and December 31, 2009)
                
                
                1,875
                
                
                
                1,875Common
      stock ($0.001 par value, 500,000,000 shares authorized,42,706,363
      shares issued and outstanding as of June 30, 2010and
      December 31, 2009)
                
                
                42,706
                
                
                
                42,706Additional
      paid-in capital
                
                
                14,883,894
                
                
                
                14,984,021Retained
      earningsUnappropriated
                
                
                (12,138,314
                )
                
                
                (12,136,140
                )Appropriated
                
                
                1,521,997
                
                
                
                1,521,997Accumulated
      other comprehensive income
                
                
                1,891,927
                
                
                
                1,945,637Total
      Stockholders' Equity
                
                
                6,204,085
                
                
                
                6,360,096TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                22,822,892
                
                
                $
                25,711,723
 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)
 FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 and 2009
 (UNAUDITED)
  For
      the three months ended
                
                
                For
      the six months endedJune
      30
                
                
                June
      302010
                
                
                2009
                
                
                2010
                
                
                2009NET
      SALESRevenue
      from digitalization of television signals
                
                
                2,146,016
                
                
                $
                2,064,493
                
                
                $
                4,450,398
                
                
                $
                3,807,013Revenue
      from television advertising
                
                
                366,298
                
                
                
                76,752
                
                
                
                461,283
                
                
                
                144,3032,512,314
                
                
                
                2,141,245
                
                
                
                4,911,681
                
                
                
                3,951,316COST
      OF SALESCost
      of Sales - digitalization of television signals
                
                
                (244,700
                )
                
                
                (311,616
                )
                
                
                (490,634
                )
                
                
                (494,327
                )Depreciation
      - digitalization of television signals
                
                
                (1,260,487
                )
                
                
                (1,132,151
                )
                
                
                (2,553,733
                )
                
                
                (2,276,707
                )Cost
      of Sales - television advertising
                
                
                (277,512
                )
                
                
                (50,339
                )
                
                
                (391,075
                )
                
                
                (78,666
                )(1,782,699
                )
                
                
                (1,494,106
                )
                
                
                -(3,435,442
                )
                
                
                (2,849,700
                )GROSS
      PROFIT
                
                
                729,615
                
                
                
                647,139
                
                
                
                1,476,239
                
                
                
                1,101,616OPERATING
      EXPENSESSelling,
      general and administrative expenses
                
                
                (814,995
                )
                
                
                (604,419
                )
                
                
                (1,529,515
                )
                
                
                (1,185,360
                )Depreciation
      and amortization
                
                
                (12,842
                )
                
                
                (21,244
                )
                
                
                (36,198
                )
                
                
                (42,915
                )Total
      Operating Expenses
                
                
                (827,837
                )
                
                
                (625,663
                )
                
                
                (1,565,713
                )
                
                
                (1,228,275
                )(LOSS)
      INCOME FROM OPERATION
                
                
                (98,222
                )
                
                
                21,476
                
                
                
                (89,474
                )
                
                
                (126,659
                )OTHER
      INCOME (EXPENSES)Interest
      income
                
                
                21,037
                
                
                
                -
                
                
                
                21,037
                
                
                
                -Amortization
      of convertible debt discount
                
                
                (3,735
                )
                
                
                606
                
                
                
                -
                
                
                
                924Other
      income
                
                
                153,575
                
                
                
                142,389
                
                
                
                303,848
                
                
                
                282,518Interest
      expense
                
                
                (110,029
                )
                
                
                (87,247
                )
                
                
                (198,209
                )
                
                
                (164,695
                )Interest
      paid to related companies and directors
                
                
                (4,553
                )
                
                
                (5,737
                )
                
                
                (9,353
                )
                
                
                (11,762
                )Other
      expenses
                
                
                (2,630
                )
                
                
                (733
                )
                
                
                (16,775
                )
                
                
                (1,725
                )Total
      Other Income, net
                
                
                53,665
                
                
                
                49,278
                
                
                
                100,548
                
                
                
                105,260NET
      (LOSS) INCOME BEFORE TAXES
                
                
                (44,557
                )
                
                
                70,754
                
                
                
                11,074
                
                
                
                (21,399
                )Income
      tax income (expense)
                
                
                33,770
                
                
                
                (23,376
                )
                
                
                (13,250
                )
                
                
                (47,358
                )NET
      (LOSS) INCOME
                
                
                (10,787
                )
                
                
                47,378
                
                
                
                (2,176
                )
                
                
                (68,757
                )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation income (loss)
                
                
                141,194
                
                
                
                5,433
                
                
                
                (53,710
                )
                
                
                14,634COMPREHENSIVE
      INCOME (LOSS)
                
                
                130,407
                
                
                $
                52,811
                
                
                $
                (55,886
                )
                
                $
                (54,123
                )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 4
  CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010 and 2009
 (UNAUDITED)
  2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIESTotal
      net loss
                
                $
                (2,174
                )
                
                $
                (68,757
                )Adjusted
      to reconcile net loss to cash provided by operating
      activities:Depreciation-cost
      of sales
                
                
                2,553,733
                
                
                
                2,276,707Depreciation
      and amortization
                
                
                36,198
                
                
                
                42,915Provision
      for doubtful debts
                
                
                (138,413
                )
                
                
                -Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                
                
                (31,195
                )
                
                
                (695,792
                )Other
      receivables and prepaid expenses
                
                
                206,212
                
                
                
                (637,173
                )Due
      from a related company
                
                
                84,006
                
                
                
                -Inventories
                
                
                470,264
                
                
                
                265,256Increase
      (decrease) in:Accounts
      payable
                
                
                (1,237,540
                )
                
                
                928,455Other
      payables and accrued liabilities
                
                
                (143,194
                )
                
                
                (177,616
                )Business
      tax payable
                
                
                (6,709
                )
                
                
                (1,646
                )Income
      tax payable
                
                
                13,244
                
                
                
                47,285Net
      cash provided by operating activities
                
                
                1,804,432
                
                
                
                1,979,634CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                
                
                (1,035,991
                )
                
                
                (1,856,677
                )Net
      cash used in investing activities
                
                
                (1,035,991
                )
                
                
                (1,856,677
                )CASH
      FLOWS FROM FINANCING ACTIVITIESDue
      to related companies
                
                
                16,825
                
                
                
                66,098Bank
      loans drawn down
                
                
                (1,504,792
                )
                
                
                -Due
      to a stockholder
                
                
                -
                
                
                
                (387,061
                )Due
      to directors
                
                
                29,219
                
                
                
                187Net
      cash used in financing activities
                
                
                (1,458,748
                )
                
                
                (320,776
                )EFFECT
      OF EXCHANGE RATE ON CASH
                
                
                (63,396
                )
                
                
                13,327NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (753,703
                )
                
                
                (184,492
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                3,600,583
                
                
                
                436,062CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                2,846,880
                
                
                $
                251,570SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest
                
                $
                114,075
                
                
                $
                247,650Cash
      paid for income tax
                
                $
                -
                
                
                $
                -SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
      ACTIVITIES:No
      non-cash financing actiivities were noted during the
period
 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, 2010 (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, 2010, the consolidated results of operations for the six months ended
June 30, 2010 and 2009, and consolidated statements of cash flows for the six
months ended June 30, 2010 and 2009. The consolidated results for the six months
ended June 30, 2010 are not necessarily indicative of the results to be expected
for the entire fiscal year ending December 31, 2010. These consolidated
financial statement should be read in conjunction with the consolidated
financial statements and notes for the year ended December 31, 2009 appearing in
the Company's annual report on Form 10-K as filed with the Securities and
Exchange Commission.
 
 (B)
              Principles
      of Consolidation
 
 The
accompanying unaudited condensed consolidated financial statements for the six
months ended June 30, 2010 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”), its 100% variable
interest entity (“VIE”) in Guangdong HuaGuang DigiMedia Culture Development
Limited (“HuaGuang”), and Arable Media Limited (“Arable”) and Arable (Guangzhou)
Limited (“Arable GZ”) (collectively, “the Company”).
 
 The
accompanying unaudited condensed consolidated financial statements for the six
months ended June 30, 2009 include the financial statements of CDMC and its
wholly owned subsidiaries, CDHL, AGL, M-Rider, Arable, Arable GZ and its 100%
VIE in HuaGuang.
 
 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.
 
 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.
  (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 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.
 
 The
Company has issued 4% secured convertible debentures in a face amount of
US$3,100,000 which were 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.
  6
  CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2010 (UNAUDITED)
  (F)
              Recent
      Accounting Pronouncements
 
 FASB Accounting Standards
Codification(Accounting Standards Update (“ASU”) 2009-01)
 
 In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s financial statements
or disclosures as a result of implementing the Codification during the quarter
ended September 30, 2009.
 
 As a
result of the Company’s implementation of the Codification during the quarter
ended June 30, 2010, previous references to new accounting standards and
literature are no longer applicable. In the current quarter financial
statements, the Company will provide reference to both new and old guidance to
assist in understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification. The adoption of this standard did not have
any impact on the Company's results of operations, cash flows or financial
positions for the year ended June 30, 2009.
 
 Subsequent Events
 (Included
in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously
SFAS No. 165 “Subsequent Events”)
 
 SFAS
No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the financial
statements are issued or available to be issued (“subsequent events”). An entity
is required to disclose the date through which subsequent events have been
evaluated and the basis for that date. For public entities, this is the date the
financial statements are issued. SFAS No. 165 does not apply to subsequent
events or transactions that are within the scope of other GAAP and did not
result in significant changes in the subsequent events reported by the Company.
SFAS No. 165 became effective for interim or annual periods ending after
June 15, 2009 and did not impact the Company’s financial statements. The
Company evaluated for subsequent events through the issuance date of the
Company’s financial statements. No recognized or non-recognized subsequent
events were noted.
 
 Determination
of the Useful Life of Intangible Assets
 (Included
in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS
No. 142-3 “Determination of the Useful Lives of Intangible
Assets”)
 
 FSP SFAS
No. 142-3 amended the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under previously issued goodwill and intangible
assets topics. This change was intended to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under topics related to
business combinations and other GAAP. The requirement for determining useful
lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to
all intangible assets recognized as of, and subsequent to, the effective date.
FSP SFAS No. 142-3 became effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The adoption of FSP SFAS No. 142-3 did not impact the
Company’s financial statements.
 
 Noncontrolling
Interests
 
 (Included
in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB
No. 51”)
 
 SFAS
No. 160 changed the accounting and reporting for minority interests such
that they will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 160 became effective for fiscal years
beginning after December 15, 2008 with early application prohibited. The
Company implemented SFAS No. 160 at the start of fiscal 2009 and no longer
records an intangible asset when the purchase price of a noncontrolling interest
exceeds the book value at the time of buyout. Any excess or shortfall for
buyouts of noncontrolling interests in mature restaurants is recognized as an
adjustment to additional paid-in capital in stockholders’ equity. Any shortfall
resulting from the early buyout of noncontrolling interests will continue to be
recognized as a benefit in partner investment expense up to the initial amount
recognized at the time of buy-in. Additionally, operating losses can be
allocated to noncontrolling interests even when such allocation results in a
deficit balance (i.e. book value can go negative).
 
 The
Company presents noncontrolling interests (previously shown as minority
interest) as a component of equity on its consolidated balance sheets. Minority
interest expense is no longer separately reported as a reduction to net income
on the consolidated income statement, but is instead shown below net income
under the heading “net income attributable to noncontrolling interests.” The
adoption of SFAS No. 160 did not have any other material impact on the
Company’s financial statements.
 
 Consolidation
of Variable Interest Entities — Amended
 (To
be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”)
 
 SFAS
No. 167 amends FASB Interpretation No. 46(R) “Consolidation of
Variable Interest Entities regarding certain guidance for determining whether an
entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. SFAS
No. 167 is effective for the first annual reporting period beginning after
November 15, 2009, with earlier adoption prohibited. The Company will adopt
SFAS No. 167 in fiscal 2010 and does not anticipate any material impact on
the Company’s financial statements.
 
 7
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2010 (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, 2010 and 2009:
 
 Digitalizationof
      Television
                
                
                Television
                
                
                Software
                
                
                Investmentsin
      TelevisionSignals
                
                
                Advertising
                
                
                Development
                
                
                Series
                
                
                Total2010Revenues
                
                $
                4,450,398
                
                
                $
                461,283
                
                
                $
                -
                
                
                $
                -
                
                
                $
                4,911,681Gross
      profit
                
                
                1,406,031
                
                
                
                70,208
                
                
                
                -
                
                
                
                -
                
                
                
                1,476,239Net
      income (loss)
                
                
                546,737
                
                
                
                (65,373
                )
                
                
                (75,088
                )
                
                
                (5,853
                )
                
                
                400,423Total
      assets
                
                
                18,362,239
                
                
                
                1,341,399
                
                
                
                3,116,856
                
                
                
                2,398
                
                
                
                22,822,892Capital
      expenditure
                
                
                (963,395
                )
                
                
                6,759
                
                
                
                -
                
                
                
                -
                
                
                
                (956,637
                )Depreciation
      and amortization
                
                $
                2,576,823
                
                
                $
                -
                
                
                $
                13,108
                
                
                $
                -
                
                
                $
                2,589,9312009Revenues
                
                $
                3,807,013
                
                
                $
                144,303
                
                
                $
                -
                
                
                $
                -
                
                
                $
                3,951,316Gross
      profit
                
                
                1,035,978
                
                
                
                65,638
                
                
                
                -
                
                
                
                -
                
                
                
                1,101,616Net
      income (loss)
                
                
                380,325
                
                
                
                50,890
                
                
                
                (105,520
                )
                
                
                (7,788
                )
                
                
                317,907Total
      assets
                
                
                16,435,134
                
                
                
                1,036,083
                
                
                
                381,875
                
                
                
                104,334
                
                
                
                17,957,426Capital
      expenditure
                
                
                1,818,436
                
                
                
                1,077
                
                
                
                36,710
                
                
                
                454
                
                
                
                1,856,677Depreciation
      and amortization
                
                $
                2,303,414
                
                
                $
                24
                
                
                $
                15,901
                
                
                $
                283
                
                
                $
                2,319,622
 
 A
      reconciliation is provided for unallocated amounts relating to corporate
      operations which is not included in the segment
    information.2010
                  
                  
                  2009Total
      net income for reportable segments
                  
                  $
                  400,423
                  
                  
                  $
                  317,907Unallocated
      amounts relating to corporate operationsInterest
      expenses
                  
                  
                  129,540
                  
                  
                  
                  163,164Interest
      paid to related companies and directors
                  
                  
                  9,353
                  
                  
                  
                  11,762Administration
      expenses
                  
                  
                  246,789
                  
                  
                  
                  189,760Professional
      fees
                  
                  
                  143
                  
                  
                  
                  20,254Others
                  
                  
                  16,775
                  
                  
                  
                  1,725Total
      net loss
                  
                  $
                  (2,176
                  )
                  
                  $
                  (68,757
                  )
 NOTE
3 - EARNINGS PER SHARE
 
 As of
June 30, 2010, 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.
 
 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, 2010 and 2009 are calculated as follows:
  2010
                
                
                2009Net
      Loss
                
                $
                (2,176
                )
                
                $
                (68,757
                )Basic - 2 classes methodLoss
      available to common stockholders
                
                $
                (2,176
                )
                
                $
                (68,757
                )Weighted-average
      common stock outstanding
                
                
                42,706,363
                
                
                
                42,706,363Basic
      earnings per share - Common Stock
                
                $
                (0.00
                )
                
                $
                (0.00
                )DilutedLoss
      available to common stockholders
                
                $
                (2,176
                )
                
                $
                (68,757
                )Diluted
      weighted-average common stock outstanding
                
                
                63,005,030
                
                
                
                63,005,030Diluted
      earnings per share
                
                $
                (0.00
                )
                
                $
                (0.00
                )
 8
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF JUNE 30, 2010 (UNAUDITED)
 NOTE
4 - COMMITMENTS AND CONTINGENCIES
 
 Contingencies
 
 The
Company accounts for loss contingencies in accordance with SFAS 5 “Accounting
for Loss Contingencies”, and other related guidance.  Set forth below
is a description of certain loss contingencies as of December 31, 2005 and
management’s opinion as to the likelihood of loss in respect of each loss
contingency.
 
 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. Pre-trial discovery has commenced in the
matter.
 
 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.
The United States District Court for the Southern District of New York
issued a decision dismissing Ziegler’s lawsuit against the Company in its
entirety on July 12, 2010.  The Plaintiffs did not file any appeal
within the one month period.  And the case is
closed.
  NOTE
5 - COMMON STOCK
 
 During
the six months ended June 30, 2010, the Company did not issue any
shares.
 
 NOTE
6 - CONVERTIBLE DEBENTURE
 
 The
following is a summary of debenture as at June 30, 2010 and December 31,
2009.
  June
      30,
                
                
                December
      31,2010
                
                
                2009(Unaudited)
                
                
                (Audited)$2,150,000
      Convertible Debentures, net of $135,000 conversions, $100,750 redemption
      and unamortized discount of $0 as of June 30, 2010 and December 31, 2009
      at 10% interest per annum due each quarter end in 2010 and 2011 which
      expires on December 31, 2011$
                1,914,250
                
                
                $
                1,914,250$500,000
      Convertible Debentures, net of unamortized discount of $0 as of June 30,
      2010 and December 31, 2009 at 13% interest per annum for the year 2009 due
      at the end of 2009, and at 14% interest per annum for the year 2010 which
      expired on December 31, 2010.500,000
                
                
                
                500,000$200,000
      Convertible Debentures, net of unamortized discount of $0 as of June 30,
      2010 and December 31, 2009 respecitively at 4% interest per annum which
      expired in May 2008, in default200,000
                
                
                
                200,000$150,000
      Convertible Debentures, net of unamortized discount of $0 as of June 30,
      2010 and December 31, 2009 respecitively which expires on December 31,
      2010150,000
                
                
                
                150,000$100,000
      Convertible Debentures, net of unamortized discount of $0 as of June 30,
      2010 and December 31, 2009 at 4% interest per annum which expired in June
      2008, in default100,000
                
                
                
                100,000$
                2,864,250
                
                
                $
                2,864,250
 
 For the
fiscal quarter ended June 30, 2010, the Company has convertible debentures with
total value of $2,864,250 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.
 
 On
December 08, 2008, March 24, 2009 and December 1, 2009, the Company entered into
various extension agreements (the “Extension Agreement”) with three of the
debenture holders in connection with the convertible debenture for the amount of
$2,665,000 because the Company did not have sufficient fund to repay the
debenture due. One of the Extension Agreement was filed with the Form 8-K on
December 12, 2008.  The Company is also in contact with other
debenture holders but has not agreed on any terms of extension up to the date of
this report.
 
 On July
20, 2010, the Company entered into a second extension agreement with one of the
debenture holders in connection with the convertible debenture for the amount of
$1,914,250 because the Company did not have sufficient fund to repay the
debenture due on June 30, 2010.  Such extension agreement was filed
with the Form 8-K on July 21, 2010.
 
 NOTE
8 - RELATED PARTY TRANSACTIONS
 
 As of
June 30, 2010, the Company owed two directors $235,748 for short-term
advances.  Interest is charged at 6% per annum on the amount
owed.
 
 As of
June 30, 2010, the Company owed to related companies $412,041 for short-term
unsecured advances made. Interest is charged at 6% per annum on the amount
owed.
 
 As of
June 30, 2010, the Company owed to a stockholder $9,270 for short-term advances
made.  Interest is charged at 6% per annum on the amount
owed.
   9
 
 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-K for the year ended December 31, 2009, and
specifically the factors described in such Form 10-K 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.
  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 analog
      cable television subscribers to digital television and providing various
      value added and broadband services to the digital subscribers;
      and-
              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 TV operations and
digital broadcast technology development
 
 AGL, a
wholly owned foreign subsidiary of CDMC incorporated in China, is the sole
contractor and operator of digital television (“DTV”) services in Nanhai,
Guangdong Province, a city with over 440,000 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 was responsible
for migrating all cable television subscribers in Nanhai from an analog to a
digital system (“Migration”) by the end of 2008. Owing to certain technical
issues of the local network upgrade of the Nanhai Network Company, the Migration
completion date was re-scheduled to the end of 2009. The Company entered into
three supplementary agreements with the Nanhai Network Company in May and
December 2007, and in February 2009 pursuant to the Co-operative Agreements, for
re-scheduling the Migration completion date to the end of 2008 and then end of
2009.    As of June 30, 2010, the Company has migrated about
438,388 subscribers into the digital system and the migration program is
completed.
 
 According
to the Co-operative Agreements, AGL is entitled to share the subscription fees
paid by all cable television subscribers as well as by DTV subscribers for basic
and additional services, including pay-TV services, VAS, and to receive the
subscription fee for any additional STBs.
 
 Under the
Co-operative Agreement, the Company is a sole contractor and operator of digital
TV in Nanhai. The Company is responsible for supplying all subscribers with a
digital set-top-box on a lease basis to subscribers. Subscribers must pay for an
additional set-top-box  by purchasing it from the Company. The Company
is also responsible for providing operational support services including
migration planning, marketing and sales, software development, customer service,
repair and maintenance and logistics administration. The Company’s proprietary
operating 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 85
channels, including a 51-channel basic package , 51 pay channels and 7 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
specialized 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.
 
 10
 
 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, 2008, 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, 2008. 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 on two suppliers for approximately 99% of its purchases in the
first six months of 2010 for the Nanhai digitalization of TV system in the
Nanhai project. As of June 30, 2010, accounts payable to these suppliers
amounted to $6,969,571 and $606,292 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 six months ended June 30, 2010 increased by $960,365 or 24% to
$4,911,681 from $3,951,316 for the same period ended June 30, 2009. The increase
in total net sales was due to the increase in cable TV subscription fee income
owing to the increased number of DTV subscribers during the year of 2009 through
migration.  The basic and additional STBs registered increased from
about 535,901 as of June 30, 2009 to 592,975 as of June 30, 2010.
 
 Gross
Profit
 
 Gross
Profit for the six months ended June 30, 2010 increased by $ 374,623 or 34% as
compared with the same period last year. The increase was mainly due to the
increase in DTV basic subscription fee income as a result of increased number of
migrated DTV users since the completion of full migration in Nanhai at the end
of 2009.
 
 Expenses
 
 Selling,
general, administrative and depreciation and amortization (not related directly
to generation of revenue) expenses for the six months ended June 30, 2010
increased by $337,438 or 27%
to $1,565,713 in comparison with the six months period ended June 30,
2009.  The increase in these expenses was due to the increased
research and development expenses incurred for the value added services for DTV
users in NH to be launched at the end of this year.
 
 Net
Loss
 
 Net loss
after tax was $2,176 for the six months period ended June 30, 2010, compared to
a net loss of $68,757 for the same period ended June 30, 2009. The decrease in
net loss was mainly because of the increased gross profit.
 
 Balance
Sheet Items:
 
 Current
Assets
 
 Current
Assets of the Company decreased by $0.9 million to $6.4 million during the first
six months of 2010. As the amount of bank loan drawn against the restricted cash
was less than that of last year,  the restricted cash balance required
for securing the bank loans was lower as a result.
 
 Property
and Equipment, Net
 
 The net
decrease in property and equipment of the Company of $2.0 million represented a
reclassification of STBs from fixed assets to inventory for the returned STBs
from the migrated subscribers during the first quarter of 2010, where such
returned STBs were held for sales purpose.
 
 Other
Asset
 
 Other
assets represent utility deposits, cash advance for business trips to staff and
prepayment for general expenses.
 
 Current
Liabilities
 
 Current
liabilities of the Company decreased by $4.0 million to $13.1 million during the
first six months of 2010. The decrease was mainly attributable to the decrease
in account payable to the supplier of STBs and bank loan drawn as of June 30,
2010.  And the reclassification of the convertible debenture to long
term portion as a result of the extension to the end of the year 2011 also
caused part of the decrease.
 
 Liquidity
and Capital Resources
 
 On June
30, 2010, we had cash of $2,846,880 and a working capital deficit of $6,710,955.
This compares with cash of $3,600,583 and a working capital deficit of
$9,905,650 at December 31, 2009. The decrease in cash was mainly due to the
settlement to one of the suppliers before month end in June 2010.
 
 Operating
activities had a net generation of cash in the amount of $1,804,432 during the
six months ended June 30, 2010 (2009: $1,979,634) reflecting an excess of
revenues over expenditure.
 
 Net cash
used in investing activities for the six months ended June 30, 2010 was
$1,035,99 1as compared with net cash used in investing activities of $1,856,677
for the six months ended June 30, 2009. The decrease in net cash used in
investing activities was due to the decrease in purchases of STBs in the first
six months of this year.
 
 Net cash
used in financing activities for the six months ended June 30, 2010 was
$1,458,748 representing the additional bank loan drawn during the period (2009:
used in financing activities $320,776 ).
 
 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, 2010. 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 matured in May and June 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 did not
have enough cash to repay the debentures.  The Company has negotiated
with some of the debenture holders to extend the debentures.  As of
the date of this report, the Company has entered into agreement with three
debenture holders holding $2,564,250 in debentures that provided for the
extension of their debentures to  December 31, 2010 and December 31,
2011.  The Company redeemed partially a debenture for $100,750 from
one of the debenture holders on December 31, 2009.
 
 11
  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 loss for the six months ended June 30, 2010 was
$53,710.
 
 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.
 
 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.
 
 12
 
 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.
The United States District Court for the Southern District of New York
issued a decision dismissing Ziegler’s lawsuit against the Company in its
entirety on July 12, 2010.  The Plaintiffs did not file any appeal
within the one month period.  And the case is
closed.
  
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 During
the six months ended June 30, 2010, the Company did not issue any
securities.
   Item
3. Defaults Upon Senior Securities
 
 Owing to
its tight financial situation, the Company did not fully redeem the debentures
that matured in May and June 2008, and June 2010 but offered extension terms to
all the debenture holders.  The Company paid the debenture interests
due on June 30, 2010 to one of the debenture holders who had extended the
debenture and redeemed partially such debenture for $100,750 from the same
debenture holder on the same date.  As of date of this report, three
out of five debenture holders have accepted the extension offer.
 
 Item
4. Reserved
  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
  13
 
 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, 2010
                
                /s/
      Ng Chi Shing
                Ng
      Chi Shing
                Chief
      Executive Officer
                
                Date:August
      13, 2010
                
                /s/
      Chung Lai Lok
                Chung
      Lai Lok
                Chief
      Financial Officer