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 endedSeptember 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 o
              
              Accelerated
      filer oNon-accelerated
      filer o(Do
      not check if a smaller reporting company)
              
              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 o
    No x





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





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













CHINA
DIGITAL MEDIA CORPORATION


INDEX
TO FORM 10-Q





Page
      No.PART
      IItem
      1. Financial StatementsCondensed
      Consolidated Balance Sheet
              -
      September 30, 2008 (unaudited) and December 31, 2007
    (audited)
            3Condensed
      Consolidated Statements of Operations And Comprehensive Income
      (Loss)
              -
      Nine months and Three Months Ended September 30, 2008 and 2007
      (unaudited)
            4Condensed
      Consolidated Statements of Cash Flows
              -
      Nine months Ended September 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
      3. 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


September
      30, 2008
            
            
            December
      31, 2007(Unaudited)
            
            
            (Audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            171,595
            
            
            $
            334,410Accounts
      receivable, net of allowances
            
            
            2,098,987
            
            
            
            1,851,193Inventories,
      net
            
            
            1,361,524
            
            
            
            781,561Other
      receivables and prepaid expenses
            
            
            171,345
            
            
            
            500,229Value
      added taxes recoverable
            
            
            74,795
            
            
            
            45,530Total
      Current Assets
            
            
            3,878,246
            
            
            
            3,512,923ACCOUNTS
      RECEIVABLE, long-term portion, net of allowances
            
            
            1,626,702
            
            
            
            7,781,997INTANGIBLE
      ASSETS
            
            
            4,321,276
            
            
            
            4,320,924INVESTMENTS
      IN TELEVISION SERIES, NET of impairment of $223,421
            
            
            -
            
            
            
            -PROPERTY
      AND EQUIPMENT, NET
            
            
            13,947,201
            
            
            
            13,193,066DEFERRED
      TAX ASSET
            
            
            -
            
            
            
            123,982OTHER
      ASSETS
            
            
            -
            
            
            
            124,471TOTAL
      ASSETS
            
            $
            23,773,425
            
            
            $
            29,057,363LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESConvertible
      debentures, net of discount
            
            $
            2,965,000
            
            
            $
            2,212,631Accounts
      payable
            
            
            4,822,202
            
            
            
            5,109,728Other
      payables and accrued liabilities
            
            
            1,077,161
            
            
            
            707,932Due
      to directors
            
            
            285,633
            
            
            
            241,239Due
      to a stockholder
            
            
            395,291
            
            
            
            384,581Due
      to related companies
            
            
            751,137
            
            
            
            730,831Business
      and other tax payable
            
            
            21,674
            
            
            
            157,646Income
      tax payable
            
            
            1,692,350
            
            
            
            2,082,349Total
      Current Liabilities
            
            
            12,010,448
            
            
            
            11,626,937LONG-TERM
      LIABILITIESAccounts
      payable
            
            
            1,100,563
            
            
            
            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
              September
      30, 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
                September
      30, 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
            
            
            (8,104,886
            )
            
            
            (970,704
            )Appropriated
            
            
            1,521,997
            
            
            
            1,521,997Accumulated
      other comprehensive income
            
            
            2,216,700
            
            
            
            1,400,602Total
      Stockholders' Equity
            
            
            10,662,414
            
            
            
            16,811,326TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            23,773,425
            
            
            $
            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 nine months endedSeptember
      30
              
              
              September
      302008
              
              
              2007
              
              
              2008
              
              
              2007(Restated)
              
              
              
              
              
              (Restated)NET
      SALESRevenue
      from digitalization of television signals
              
              $
              1,698,059
              
              
              $
              1,361,511
              
              
              $
              4,960,035
              
              
              $
              4,119,214Revenue
      from television advertising
              
              
              143,430
              
              
              
              33,493
              
              
              
              288,354
              
              
              
              330,791Revenue
      from software development
              
              
              78
              
              
              
              168
              
              
              
              18,735
              
              
              
              22,188Government
      grant received
              
              
              -
              
              
              
              320,546
              
              
              
              -
              
              
              
              977,1021,841,567
              
              
              
              1,715,718
              
              
              
              5,267,124
              
              
              
              5,449,295COST
      OF SALESCost
      of Sales - digitalization of television signals
              
              
              (198,422
              )
              
              
              (189,611
              )
              
              
              (574,946
              )
              
              
              (537,990
              )Depreciation
      - digitalization of television signals
              
              
              (1,061,699
              )
              
              
              (817,728
              )
              
              
              (2,864,892
              )
              
              
              (2,289,627
              )Cost
      of Sales - television advertising
              
              
              (83,685
              )
              
              
              2,432
              
              
              
              (185,694
              )
              
              
              (307,394
              )(1,343,806
              )
              
              
              (1,004,907
              )
              
              
              (3,625,532
              )
              
              
              (3,135,011
              )GROSS
      PROFIT
              
              
              497,761
              
              
              
              710,811
              
              
              
              1,641,592
              
              
              
              2,314,284OPERATING
      EXPENSESSelling,
      general and administrative expenses
              
              
              (708,698
              )
              
              
              (665,198
              )
              
              
              (1,907,198
              )
              
              
              (1,561,696
              )Provision
      for doubtful debts
              
              
              (6,351,225
              )
              
              
              (614,463
              )
              
              
              (6,351,225
              )
              
              
              (977,972
              )Amortization
      of convertible debt discount
              
              
              -
              
              
              
              (516,666
              )
              
              
              (752,369
              )
              
              
              (1,549,998
              )Depreciation
      and amortization
              
              
              (18,619
              )
              
              
              (24,679
              )
              
              
              (61,486
              )
              
              
              (72,775
              )Total
      Operating Expenses
              
              
              (7,078,542
              )
              
              
              (1,821,006
              )
              
              
              (9,072,278
              )
              
              
              (4,162,441
              )LOSS
      FROM OPERATION
              
              
              (6,580,781
              )
              
              
              (1,110,195
              )
              
              
              (7,430,686
              )
              
              
              (1,848,157
              )OTHER
      INCOME (EXPENSES)Interest
      income
              
              
              297
              
              
              
              796
              
              
              
              2,242
              
              
              
              1,666Other
      income
              
              
              129,814
              
              
              
              40,773
              
              
              
              210,319
              
              
              
              63,831Interest
      expenses
              
              
              (132,030
              )
              
              
              (32,087
              )
              
              
              (241,741
              )
              
              
              (95,115
              )Interest
      paid to related companies and directors
              
              
              (6,537
              )
              
              
              (4,293
              )
              
              
              (23,105
              )
              
              
              (10,037
              )Other
      expenses
              
              
              (1,191
              )
              
              
              (19,986
              )
              
              
              (43,781
              )
              
              
              (51,301
              )Total
      Other Expenses, net
              
              
              (9,647
              )
              
              
              (14,797
              )
              
              
              (96,066
              )
              
              
              (90,956
              )NET
      LOSS BEFORE TAXES
              
              
              (6,590,428
              )
              
              
              (1,124,992
              )
              
              
              (7,526,752
              )
              
              
              (1,939,113
              )Income
      tax (expense) income
              
              
              (19,737
              )
              
              
              (15,178
              )
              
              
              392,570
              
              
              
              (129,128
              )NET
      LOSS FROM CONTINUING OPERATIONS
              
              
              (6,610,165
              )
              
              
              (1,140,170
              )
              
              
              (7,134,182
              )
              
              
              (2,068,241
              )DISCONTINUED
      OPERATIONSEquity gain (loss) of affiliate
              
              
              -
              
              
              
              20,292
              
              
              
              -
              
              
              
              (14,538
              )Net gain from subsidiary
              
              
              -
              
              
              
              361,763
              
              
              
              -
              
              
              
              225,415Gain on disposal of affliate
              
              
              -
              
              
              
              19,249
              
              
              
              -
              
              
              
              86,059GAIN
      FROM DISCONTINUED OPERATIONS
              
              
              -
              
              
              
              401,304
              
              
              
              -
              
              
              
              296,936NET
      LOSS
              
              
              (6,610,165
              )
              
              
              (738,866
              )
              
              
              (7,134,182
              )
              
              
              (1,771,305
              )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
              
              
              (112,800
              )
              
              
              (156,180
              )
              
              
              816,098
              
              
              
              (37,601
              )COMPREHENSIVE
      INCOME (LOSS)
              
              $
              (6,722,965
              )
              
              $
              (895,046
              )
              
              $
              (6,318,084
              )
              
              $
              (1,808,906
              )Net
      loss per share - basic - two classes method-
      From continuing operations
              
              $
              (0.15
              )
              
              $
              (0.04
              )
              
              $
              (0.17
              )
              
              $
              (0.07
              )-
      From discontinued operations
              
              
              0.00
              
              
              
              0.01
              
              
              
              0.00
              
              
              
              0.01Net
      loss per share - diluted-
      From continuing operations
              
              $
              (0.15
              )
              
              $
              (0.04
              )
              
              $
              (0.17
              )
              
              $
              (0.07
              )-
      From discontinued operations
              
              
              0.00
              
              
              
              0.01
              
              
              
              0.00
              
              
              
              0.01Weighted
      average number of shares outstanding during the period -
    basic
              
              
              42,706,363
              
              
              
              31,602,365
              
              
              
              42,556,463
              
              
              
              31,602,365Weighted
      average number of shares outstanding during the period -
      diluted
              
              
              42,706,363
              
              
              
              31,602,365
              
              
              
              42,556,463
              
              
              
              31,602,365


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 NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007
 (UNAUDITED)
  2008
                
                
                2007(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss) income from continuing operations
                
                $
                (7,134,182
                )
                
                $
                (2,068,241
                )Net
      (loss) income from discontinued operations
                
                
                -
                
                
                
                296,936Total
      net loss
                
                
                (7,134,182
                )
                
                
                (1,771,305
                )Adjusted
      to reconcile net loss to cash provided by operating
      activities:Equity
      loss of affiliate - discontinued operation
                
                
                -
                
                
                
                36,934Depreciation-cost
      of sales
                
                
                2,864,892
                
                
                
                2,289,627Depreciation
      and amortization
                
                
                61,486
                
                
                
                59,373Depreciation
      and amortization of discontinued operation
                
                
                -
                
                
                
                13,402Provision
      for doubtful debts
                
                
                6,351,225
                
                
                
                977,972Amortization
      of convertible debt discount
                
                
                752,369
                
                
                
                1,549,998Loss
      on disposal of affiliate
                
                
                -
                
                
                
                (86,059
                )Amortization
      on stock compensation
                
                
                21,200
                
                
                
                47,700Gain
      on disposal of interest in subsidiary
                
                
                -
                
                
                
                (255,415
                )Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                
                
                (443,724
                )
                
                
                (890,135
                )Other
      receivables and prepaid expenses
                
                
                254,089
                
                
                
                (650,165
                )Inventories
                
                
                (579,963
                )
                
                
                (181,911
                )Deferred
      tax asset
                
                
                123,982
                
                
                
                (152,224
                )Other
      assets
                
                
                124,471
                
                
                
                156,504Increase
      (decrease) in:Due
      to a related company
                
                
                -
                
                
                
                -Accounts
      payable
                
                
                193,937
                
                
                
                (1,147,515
                )Other
      payables and accrued liabilities
                
                
                517,201
                
                
                
                (161,599
                )Business
      tax payable
                
                
                (135,972
                )
                
                
                (153,503
                )Value
      added taxes payable
                
                
                45,530
                
                
                
                38,133Income
      tax payable
                
                
                (389,999
                )
                
                
                378,758Other
      tax payable
                
                
                -
                
                
                
                (23,937
                )Net
      cash provided by operating activities
                
                
                2,626,542
                
                
                
                74,633CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      cash inflow from business combination
                
                
                -
                
                
                
                61Disposal
      of affiliates
                
                
                -
                
                
                
                265,924Investment
      in affiliate
                
                
                -
                
                
                
                360,684Disposal
      of subsidiary (Note 4)
                
                
                -
                
                
                
                87,333Purchase
      of property and equipment
                
                
                (2,706,013
                )
                
                
                (1,470,751
                )Net
      cash used in investing activities
                
                
                (2,706,013
                )
                
                
                (756,749
                )CASH
      FLOWS FROM FINANCING ACTIVITIESDue
      to related companies
                
                
                20,306
                
                
                
                (3,539
                )Minority
      interests
                
                
                -
                
                
                
                92,918Due
      to a stockholder
                
                
                10,710
                
                
                
                779,101Due
      to directors
                
                
                44,394
                
                
                
                82,511Net
      cash provided by financing activities
                
                
                75,410
                
                
                
                950,991EFFECT
      OF EXCHANGE RATE ON CASH
                
                
                (158,754
                )
                
                
                (264,787
                )NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (162,815
                )
                
                
                4,088CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                334,410
                
                
                
                402,591CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                171,595
                
                
                $
                406,679


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 SEPTEMBER 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
September 30, 2008, the consolidated results of operations for the three months
and nine months ended September 30, 2008 and 2007, and consolidated
statements of cash flows for the nine months ended September 30, 2008 and
2007. The consolidated results for the three months and nine months ended
September 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 nine months ended September 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 Limited
(“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 nine months ended September 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.





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 additional STB and smart cards to 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.





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 nine
months ended September 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.





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.





- 6
-


CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF SEPTEMBER 30, 2008 (UNAUDITED)
 
 
 NOTE
1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONT.)




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)           
Accounts receivable





The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts.    An allowance for
doubtful accounts is established and recorded based on managements’ assessment
of the credit history with the customer and current relationships with
them.





As of
September 30, 2008 and 2007, the Company considered all accounts receivable
collectable after $6,351,225 and $977,972 were provided for doubtful
accounts for the nine months ended September 30, 2008,
respectively.





(F)
            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 SEPTEMBER 30, 2008 (UNAUDITED)
 
 
 NOTE
1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONT.)




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.





(G)
            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.





(H)
            Recent
      Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS 141R also establishes disclosure requirements to enable
the evaluation of the nature and financial effects of the business combination.
This statement is effective for us beginning January 1, 2009. We do not
expect the adoption of SFAS 141R to have a material impact on our financial
position and results of operations.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling 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 non-controlling 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 non-controlling 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 non-controlling owners.  SFAS No. 160
affects those entities that have an outstanding non-controlling 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 non-derivative 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. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.





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.





In
October 2008, FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Actibe”, to clarify
guidance on determining the fair value of a financial asset under SFAS No. 157
in a market that is not active. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been issued. The
adoption of this statement effective September 30, 2008 did not have a material
impact on our financial position or results of operations.


- 8
-
 CHINA
DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF SEPTEMBER 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 nine months ended September 30, 2008 and
2007:




Digitalization
              
              
              
              
              
              
              
              
              Investmentsof
      Television
              
              
              Television
              
              
              Software
              
              
              in
      TelevisionSignals
              
              
              Advertising
              
              
              Development
              
              
              Series
              
              
              Total2008Revenues
              
              $
              4,960,035
              
              
              $
              288,354
              
              
              $
              18,735
              
              
              $
              -
              
              
              $
              5,267,124Gross
      profit
              
              
              1,520,196
              
              
              
              102,661
              
              
              
              18,735
              
              
              
              -
              
              
              
              1,641,592Net
      Income (loss)
              
              
              (5,762,569
              )
              
              
              28,554
              
              
              
              64,511
              
              
              
              (14,922
              )
              
              
              (5,684,426
              )Total
      assets
              
              
              18,811,375
              
              
              
              583,467
              
              
              
              4,271,394
              
              
              
              107,189
              
              
              
              23,773,425Capital
      expenditure
              
              
              2,416,927
              
              
              
              12,429
              
              
              
              154,316
              
              
              
              122,341
              
              
              
              2,706,013Depreciation
      and amortization
              
              $
              2,903,993
              
              
              $
              -
              
              
              $
              15,313
              
              
              $
              7,072
              
              
              $
              2,926,3782007
      (Restated)Revenues
              
              $
              5,096,316
              
              
              $
              330,791
              
              
              $
              22,188
              
              
              $
              -
              
              
              $
              5,449,295Gross
      profit (loss)
              
              
              2,268,699
              
              
              
              23,397
              
              
              
              22,188
              
              
              
              -
              
              
              
              2,314,284Net
      Income (loss)
              
              
              934,754
              
              
              
              (512,663
              )
              
              
              (144,672
              )
              
              
              (101,358
              )
              
              
              176,061Total
      assets
              
              
              25,872,201
              
              
              
              265,417
              
              
              
              1,453,152
              
              
              
              954,703
              
              
              
              28,545,473Capital
      expenditure
              
              
              1,146,241
              
              
              
              (584,613
              )
              
              
              17,376
              
              
              
              390
              
              
              
              579,394Depreciation
      and amortization
              
              $
              1,485,471
              
              
              
              -
              
              
              
              6,151
              
              
              
              28,373
              
              
              $
              1,519,995


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




2008
              
              
              2007Total
      net (loss) income for reportable segments
              
              $
              (5,684,426
              )
              
              $
              176,061Unallocated
      amounts relating to corporate operationsInterest
      expenses
              
              
              240,473
              
              
              
              96,129Amortization
      of convertible debt discount
              
              
              752,369
              
              
              
              1,549,998Interest
      paid to related companies and directors
              
              
              23,105
              
              
              
              10,037Gain
      from discontinued operations
              
              
              -
              
              
              
              (296,936
              )Administration
      expenses
              
              
              365,685
              
              
              
              571,624Professional
      fees
              
              
              51,382
              
              
              
              15,000Others
              
              
              16,743
              
              
              
              1,514Total
      net loss
              
              $
              (7,134,182
              )
              
              $
              (1,771,305
              )


- 9
-


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






NOTE
3 - EARNINGS PER SHARE





As of
September 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.





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 nine months
ended September 30, 2008 and 2007 are calculated as follows:




2008
              
              
              2007(Restated)Net
      Loss
              
              
              (7,134,182
              )
              
              
              (1,771,305
              )Basic
      - 2 classes methodLoss
      available to common stockholders
              
              $
              (7,134,182
              )
              
              $
              (1,771,305
              )Weighted-average
      common stock outstanding
              
              
              42,556,463
              
              
              
              31,602,365Basic
      earnings per share - Common Stock-From
      continuing operations
              
              
              (0.17
              )
              
              
              (0.07
              )-From
      discontinuing operations
              
              
              (0.00
              )
              
              
              0.01DilutedLoss
      available to common stockholders
              
              $
              (7,134,182
              )
              
              $
              (1,771,305
              )Diluted
      weighted-average common stock outstanding
              
              
              42,556,463
              
              
              
              31,602,365Diluted
      earnings per share-From
      continuing operations
              
              
              (0.17
              )
              
              
              (0.07
              )-From
      discontinuing operations
              
              
              0.00
              
              
              
              0.01


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 September 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.




- 10
-


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





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.  The Company is currently awaiting a
decision from the Court on its motion to dismiss the case.





The
Company contested the allegations of the Plaintiffs and has vigorously defended
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 Company also does not believe that United States
District Court for the Southern District of New York has jurisdiction over us to
even hear this case.  The Company believes it has 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 September 30, 2008.





NOTE
5 - COMMON STOCK





During
the quarter ended September 30, 2008, the Company did not issue any
shares.





NOTE
6 - CONVERTIBLE DEBENTURE





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




September 30, 2008
              
              
              December 31, 2007(Unaudited)
                (In
      default)
              
              
              (Audited)$2,150,000
      Convertible Debentures, net of $135,000 conversions as of September 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 September 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 September 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 September 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 September 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 September 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.




- 11
-


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


NOTE 6 - CONVERTIBLE DEBENTURE
(CONT.)




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.




Convertible
debt discount amortized for the nine months ended September 30, 2008 and
September 30, 2007 was $752,369 and $1,549,998
respectively.   Debenture interest accrued for the nine months
ended September 30, 2008 and September 30, 2007 was $44,501 and $92,745
respectively.





The
default interest expense on convertible debenture for the nine months ended
September 30, 2008 was $195,973.





NOTE
7 - RELATED PARTY TRANSACTIONS





As of
September 30, 2008, the Company owed two directors $285,633 for short-term
advances.  Interest is charged at 6% per annum on the amount
owed.





As of
September 30, 2008, the Company owed to related companies $751,137 for
short-term unsecured advances made. Interest is charged at 6% per annum on the
amount owed.





As of
September 30, 2008, the Company owed to a stockholder $395,291 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 $8,104,886 at September 30, 2008 that includes a net
loss of $7,134,182 for the period ended September 30, 2008.  The
Company’s total current liabilities exceed its total current assets by
$8,132,202.  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.  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 420,000 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 September 30, 2008, the
Company has migrated about 280,000 subscribers into the digital
system.





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.





Under the
Co-operative Agreement, the Company is the 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.





- 13
-




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 , 89 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 was
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 additional STBs
was reduced, such change in pricing is expected to improve the profitability and
cash flow 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 effectively to enhance the
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 on a supplier for approximately 100% of its purchases in the
third quarter of 2008 for the Nanhai digitalization of TV system in the
Nanhai project. As of September 30, 2008, accounts payable to this supplier
amounted to $4,825,949 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 September 30, 2008 increased by $125,849
or 7% to $1,841,567 from $1,715,718  for the same period ended September
30, 2007. The increase in total net sales was due to the increase in cable
TV basic subscription fee income and the television advertising income which was
offset by the loss of government grant. For the nine months ended September
30, 2008, we recorded total revenue of $5,267,124, or 3% decrease compared to
total revenue of  $5,449,295 for the same period last year. The
decrease in total net sales was due to the loss of government grant. 
The basic and additional STBs registered increased from about 470,604 as of
September 30, 2007 to 518,937 as of September 30, 2008.





Gross
Profit





Gross
profit for the three months ended September 30, 2008 decreased by $213,050
or 30%, and for the nine months ended September 30, 2008 decreased
by  $672,692 or 29% as compared with the same period last year because
of the increase in depreciation of STBs purchased for the DTV migration and
the loss in government grant income.





Expenses





Selling,
general, administrative and depreciation and amortization (not related directly
to generation of revenue) expenses for the three months ended September 30,
2008 increased by $5,257,536 or 289% to $7,078,542, and for the nine months
ended September 30, 2008 increased by  $4,909,837 or 118% to
$9,072,278 in comparison with the same periods ended September 30, 2007. The
increase is mainly due to the increase in provision of doubtful debt on the
long-term portion of accounts receivable.





- 14
-




Net
Loss





Net loss
after tax was $6,610,165 for the three months and $7,134,182 for the nine months
period ended September 30, 2008, compared to a net loss of $738,866 and
$1,771,305 respectively for the same period ended September 30, 2007. The
increase in net loss was because of the increase in provision of doubtful debt
on the long-term portion of account receivable over the increased uncertainty on
the future financial strength of Nanhai Network Company under the current global
financial crisis.





Balance
Sheet Items:





Current
Assets





Current
Assets of the Company increased by $0.4 million to $3.8 million during the first
nine months of 2008. As the Company utilized most of its cash on DTV migration,
it has maintained a low level of cash balance of $0.2
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
September 2008 compared to the same period last year.





Accounts
Receivable, long-term portion





Accounts
Receivable, long-term portion represents the amount of outstanding debt owed by
Nanhai Network Company which is to be repaid evenly on a monthly basis over the
next 15 years (up to 2013) starting from June 1, 2008.   An
agreement was entered into in the year 2007 for repaying this amount with the
increased cable TV subscription monthly fee effective from June
2008.  The management believes that the current global financial
crisis may have an adverse impact on the business of Nanhai Network
Company.  The uncertainty on its ability to repay such debt
in the long run has increased.  Accordingly, a one-off
provision of doubtful debt is considered necessary in this financial
period.  The amount of doubtful debt provided for this customer for
the three months ended September 30, 2008 is $6,351,225.





Property
and Equipment, Net





The net
increase in property and equipment of the Company of $0.8 million represented an
increase in purchases of STBs during the first nine months of 2008.





Other
Assets





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 September 30, 2008, such expense amortized was
$0.





Current
Liabilities





Current
liabilities of the Company increased by $0.4 million to $12.0 million during the
first nine months of 2008. The increase was mainly attributable to the amount of
discount being amortized during the year for the convertible
debenture.





Liquidity
and Capital Resources





On
September 30, 2008, we had cash of $171,595 and a working capital deficit of
$8,132,202. 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 $2,626,542 during the
nine months ended September 30, 2008 (2007: cash provided by operating
activities was $74,633) reflecting an excess of revenues over
expenditure.





Net cash
used in investing activities for the nine months ended September 30, 2008
was $2,706,013 as compared with net cash used in investing activities of
$756,749 for the nine months ended September 30, 2007. The increase in net
cash used in investing activities was due to the increase in purchases of STBs
in the first nine months of this year.





Net cash
provided by financing activities for the nine months ended September 30,
2008 was $75,410 funding activities of related companies, directors and
shareholders (2007: cash provided by financing activities was $950,991 of which
$779,101 represented shareholder’s funding activities ).





We
continued to receive cash from the 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
September 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.





- 15
-






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, of which $2.965 million is currently outstanding, 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 Company’s 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 nine months ended September 30, 2008 was
$816,098.





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
3. 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.







- 16
-






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 September 30, 2008, the Company did not issue any
shares.





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:
      November 11, 2008
              
              /s/
      Ng Chi Shing
              -----------------------------
              Ng
      Chi Shing
              Chief
      Executive Officer
              
              Date: November
      11, 2008
              
              /s/
      Ng Chi Shing
              -----------------------------
              Ng Chi
Shing
              Chief
      Financial Officer









- 18
-