**U.S.
      Securities and Exchange Commission**


Washington,
      D.C. 20549







**FORM
      10-QSB**










**[X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT**




**OF 1934 for the quarterly period ended September 30,
      2006**





**[
       ] 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)**







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




**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 [ ]





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 November 13, 2006:
      31,757,365





Number
      of
      shares of preferred stock outstanding as of November 13, 2006:
      1,875,000












**INDEX
                TO FORM
                10-QSB**Page
                No.**PART
                I**Item
                1.    Financial Statements (Unaudited)
            3Condensed Consolidated Balance Sheet- September 30, 2006 (unaudited)
            3Condensed
                Consolidated Statements of Operations And
                Comprehensive IncomeNine Months and Three Months Ended September 30, 2006 and 2005 (unaudited)
            4Condensed Consolidated Statements of Cash
                Flows-
                Nine Months Ended September 30, 2006 and 2005 (unaudited)
            5Notes to Condensed Consolidated Financial Statements
                (unaudited)
            6-12Item
                2.    Management's Discussion and
                Analysis of Financial Condition And
                Results of Operations
            13-17Item
                3.    Controls and
                Procedures
            17**PART
                II**Item
                1.    Legal Proceedings
            18Item
                2.    Unregistered Sales of Equity
                Securities and Use of Proceeds
            18Item
                3.    Defaults Upon Senior
                Securities
            18Item
                4.    Submission of Matters to a Vote of
                Security Holders
            18Item 5.   
              Exhibits and Reports
            18




2
 *Index*




**ITEM
      1.**




**CHINA
                DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED BALANCE SHEET****AS
                OF SEPTEMBER 30, 2006****(UNAUDITED)** **ASSETS****CURRENT
                    ASSETS**Cash
                    and cash equivalents
                
                $
                250,021Accounts
                    receivable, net of allowances
                
                
                9,609,477Inventories
                
                
                516,020Other
                    receivablesand prepaid expenses
                
                
                1,455,791**Total
                    Current Assets**
                
                
                11,831,309**INTANGIBLE
                    ASSETS**
                
                
                392,521**INVESTMENTS
                    IN TELEVISION SERIES, NET**
                
                
                610,223**INVESTMENTS
                    IN AFFILIATES**
                
                
                321,979**PROPERTY
                    AND EQUIPMENT, NET**
                
                
                13,358,246**TOTAL
                    ASSETS**
                
                $
                26,514,278**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****CURRENT
                    LIABILITIES**Convertible
                    debentures
                
                $
                1,100,000Accounts
                    payable
                
                
                7,688,868Other
                    payables and accrued liabilities
                
                
                1,287,199Due
                    to a director
                
                
                84,472Due
                    to a related company
                
                
                92,792Value
                    added tax payable
                
                
                8,640Income
                    tax payable
                
                
                2,726,397**Total
                    Current Liabilities**
                
                
                12,988,368**COMMITMENTS
                    AND CONTINGENCIES**
                
                
                -**MINORITY
                    INTERESTS**
                
                
                87,249**STOCKHOLDERS'
                    EQUITY**Series
                    A convertible preferred stock ($0.001par value, 40,000,000
                    sharesauthorized,1,875,000
                    shares issued and outstanding as ofSeptember
                    30, 2006)
                
                
                1,875Series
                    B convertible preferred stock ($0.001par value, 1,000
                    sharesauthorized,Nil
                    shares issued and outstanding)
                
                
                -Common
                    stock ($0.001 par value, 500,000,000 shares authorized,31,757,365
                    shares issued and outstanding as ofSeptember
                    30, 2006)
                
                
                31,757Additional
                    paid-in capital
                
                
                5,939,862Deferred
                    stock compensation
                
                
                (1,333
                )Retained
                    earningsUnappropriated
                
                
                6,597,226Appropriated
                
                
                956,343Accumulated
                    other comprehensive loss
                
                
                (87,069
                )**Total
                    Stockholders' Equity**
                
                
                13,438,661**TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY**
                
                **$**
                26,514,278The
                    accompanying notes are an integral part of these condensed consolidated
                    financial statements





3
 *Index*
  **CHINA
                  DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS AND****COMPREHENSIVE
                  INCOME (UNAUDITED)** **For
                      the three months**
                  
                  **For
                      the nine months****ended**
                  
                  **ended****September
                      30.**
                  
                  **September
                      30.****2006**
                  
                  2005
                  
                  **2006**
                  
                  2005**NET
                      SALES**Revenue
                      from digitalizaiton of television signals
                  
                  $
                  1,906,869
                  
                  $
                  2,170,918
                  
                  $
                  5,592,296
                  
                  $
                  3,870,460Revenue
                      from television advertising
                  
                  
                  2,090,339
                  
                  
                  -
                  
                  
                  5,817,045
                  
                  
                  -Revenue
                      from software development
                  
                  
                  8,284
                  
                  
                  -
                  
                  
                  41,507
                  
                  
                  -Revenue
                      from investment in television series
                  
                  
                  90,510
                  
                  
                  -
                  
                  
                  265,530
                  
                  
                  0Government
                      grant received
                  
                  
                  323,252
                  
                  
                  314,569
                  
                  
                  948,322
                  
                  
                  919,3104,419,255
                  
                  
                  2,485,487
                  
                  
                  12,664,700
                  
                  
                  4,789,770**COST
                      OF SALES**
                  
                  
                  (2,800,292
                  )
                  
                  (807,562
                  )
                  
                  (7,972,911
                  )
                  
                  (1,546,106
                  )**GROSS
                      PROFIT**
                  
                  
                  1,618,962
                  
                  
                  1,677,925
                  
                  
                  4,691,789
                  
                  
                  3,243,664**OPERATING
                      EXPENSES**Selling,
                      general and administrative expenses
                  
                  
                  852,992
                  
                  
                  314,535
                  
                  
                  2,056,933
                  
                  
                  720,388Depreciation
                      and amortization
                  
                  
                  48,183
                  
                  
                  11,759
                  
                  
                  82,997
                  
                  
                  28,090Total
                      Operating Expenses
                  
                  
                  901,175
                  
                  
                  326,294
                  
                  
                  2,139,930
                  
                  
                  748,478**INCOME
                      FROM OPERATION**
                  
                  
                  717,787
                  
                  
                  1,351,631
                  
                  
                  2,551,859
                  
                  
                  2,495,186**OTHER
                      INCOME (EXPENSES)**Equity
                      loss of affiliates
                  
                  
                  253
                  
                  
                  -
                  
                  
                  (1,149
                  )
                  
                  -Interest
                      income
                  
                  
                  968
                  
                  
                  268,142
                  
                  
                  2,632
                  
                  
                  268,091Volume
                      discounts earned
                  
                  
                  -
                  
                  
                  1,826,868
                  
                  
                  
                  
                  
                  1,826,868Other
                      income
                  
                  
                  1,900
                  
                  
                  -
                  
                  
                  25,753
                  
                  
                  -Interest
                      expenses
                  
                  
                  (4,948
                  )
                  
                  (5,554
                  )
                  
                  (4,948
                  )
                  
                  (5,554
                  )Interest
                      paid to related companies and directors
                  
                  
                  (5,663
                  )
                  
                  -
                  
                  
                  (12,097
                  )
                  
                  -Total
                      Other Income / (Expenses), net
                  
                  
                  (7,491
                  )
                  
                  2,089,456
                  
                  
                  10,191
                  
                  
                  2,089,405**NET
                      INCOME BEFORE TAXES AND MINORITY INTERESTS**
                  
                  
                  710,296
                  
                  
                  3,441,087
                  
                  
                  2,562,050
                  
                  
                  4,584,591Income
                      tax expense
                  
                  
                  (162,358
                  )
                  
                  -
                  
                  
                  (803,309
                  )
                  
                  -Minority
                      interests
                  
                  
                  43,402
                  
                  
                  36
                  
                  
                  63,322
                  
                  
                  36**NET
                      INCOME**
                  
                  $
                  591,340
                  
                  $
                  3,441,123
                  
                  $
                  1,822,063
                  
                  $
                  4,584,627**OTHER
                      COMPREHENSIVE LOSS**Foreign
                      currency translation loss
                  
                  
                  (48,723
                  )
                  
                  3,902
                  
                  
                  (48,363
                  )
                  
                  3,902**COMPREHENSIVE
                      INCOME**
                  
                  $
                  542,617
                  
                  $
                  3,445,025
                  
                  $
                  1,773,700
                  
                  $
                  4,588,529**Net
                      income per share-basic - two classes method**
                  
                  $
                  0.02
                  
                  $
                  0.11
                  
                  $
                  0.05
                  
                  $
                  0.16**Net
                      income per share-diluted**
                  
                  $
                  0.01
                  
                  $
                  0.01
                  
                  $
                  0.04
                  
                  $
                  0.01Weighted
                      average number of shares outstanding during the year -
                      basic
                  
                  
                  31,748,365
                  
                  
                  30,087,468
                  
                  
                  31,471,286
                  
                  
                  27,572,851Number
                      of preferred shares outstanding during the year
                  
                  
                  1,875,000
                  
                  
                  1,875,000
                  
                  
                  1,875,000
                  
                  
                  1,875,000Weighted
                      average number of shares outstanding during the year-
                      diluted
                  
                  
                  41,220,139
                  
                  
                  405,087,468
                  
                  
                  40,878,544
                  
                  
                  403,683,962The
                      accompanying notes are an integral part of these condensed
                      consolidated
                      financial statements


4
 *Index*




**CHINA
                DIGITAL MEDIA CORPORATION AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006 and
                2005** 2006
                
                2005**CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    income
                
                $
                1,822,063
                
                $
                4,584,627Adjusted
                    to reconcile net income to cash providedby
                    operating activities:Equity
                    loss of affiliate
                
                
                1,149
                
                
                -Amortization
                    - cost of sales
                
                
                160,892
                
                
                -Depreciation
                    - cost of sales
                
                
                1,980,385
                
                
                885,920Depreciation
                
                
                82,997
                
                
                21,752Stock
                    issued for services
                
                
                128,500
                
                
                -Minority
                    interests
                
                
                (63,322
                )
                
                -Changes
                    in operating assets and liabilities(Increase)/decrease
                    in:Accounts
                    receivable
                
                
                (5,165,390
                )
                
                (3,216,071
                )Other
                    receivables and prepaid expenses
                
                
                (705,200
                )
                
                (2,811,524
                )Inventories,
                    net
                
                
                (89,993
                )
                
                (51,083
                )Due
                    from a director
                
                
                -
                
                
                41,576Increase/(decrease)
                    in:Due
                    to related companies
                
                
                (125,602
                )
                
                293,241Accounts
                    payable
                
                
                3,462,529
                
                
                (64,819
                )Other
                    payables and accrued liabilities
                
                
                996,543
                
                
                2,680,644Value
                    added tax payable
                
                
                (7,690
                )
                
                21,450Income
                    tax payable
                
                
                852,045Net
                    cash provided by operating activities
                
                
                **3,329,906**
                
                
                2,385,713**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Investments
                    in affiliate
                
                
                (323,128
                )
                
                (200,221
                )Purchase
                    of property and equipment
                
                
                (5,590,817
                )
                
                (4,268,264
                )Net
                    cash used in investing activities
                
                
                **(5,913,945**
                **)**
                
                (4,468,485
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Proceeds
                    from stock issuance in private placement
                
                
                387,500
                
                
                -Proceeds
                    from issuance of common stock
                
                
                -
                
                
                2,387,662Investments
                    from a minority stockholder
                
                
                122,514
                
                
                -Proceeds
                    from convertible debentures
                
                
                1,100,000
                
                
                -Due
                    to a stockholder
                
                
                -
                
                
                384,908Due
                    to a director
                
                
                84,472
                
                
                -Net
                    cash provided by financing activities
                
                
                **1,694,486**
                
                
                **2,772,570****EFFECT
                    OF EXCHANGE RATE ON CASH**
                
                
                14,662
                
                
                -**NET
                    (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS**
                
                
                (874,891
                )
                
                689,798**CASH
                    AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**
                
                
                1,124,912
                
                
                159,928**CASH
                    AND CASH EQUIVALENTS AT END OF PERIOD**
                
                $
                250,021
                
                $
                849,726**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION**Cash
                    paid for interest
                
                
                3,348
                
                
                5,554Cash
                    paid for income tax
                
                
                -
                
                
                -The
                    accompanying notes are an integral part of these condensed consolidated
                    financial statements




5
 *Index*




**CHINA
      DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF** **SEPTEMBER** **30, 2006 (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, 2006, the consolidated results of operations for the three and
      nine months ended September 30, 2006 and 2005, and consolidated statements
      of
      cash flows for the nine months ended September 30, 2006 and 2005. The
      consolidated results for the three and nine months ended September 30, 2006
      are
      not necessarily indicative of the results to be expected for the entire fiscal
      year ending December 31, 2006. These consolidated financial statement should
      be
      read in conjunction with the consolidated financial statements and notes for
      the
      year ended December 31, 2005 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, 2006 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”) and
      Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”) and its 90%
      variable interest entity (“VIE”) in Guangdong HuaGuang DigiMedia Culture
      Development Limited (“HuaGuang”) and 51% owned subsidiary of HuaGuang in Guizhou
      Guishi Digimedia Advertising Company Limited (“Guishi Digimedia”) (collectively,
“the Company”). The
      Company accounts for its 49% investment held by HuaGuang in Guizhou
      Guishi Huaguang Media Company Limited (“Guishi Huaguang”) and its 20% investment
      held by CDHL in Arable Media Limited (“Arable”) using
      the
      equity method. The
      minority interests represent the minority shareholders’ 10% and 54.1%
      proportionate share of the results of HuaGuang and Guishi Digimedia
      respectively.





The
      accompanying unaudited condensed consolidated financial statements for the
      three
      and nine months ended September 30, 2005 include the financial statements of
      CDMC and its wholly owned subsidiaries, CDHL and AGL.





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 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
      charges installation fees and 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.




Government
      grant





The
      local
      government of Nanhai City also approved a grant of Rmb10,000,000 each year
      for
      five years from 2003 to finance the purchase of STB and smart cards for sale
      and
      lease to subscribers. The grant is recognized as revenue on receipt from the
      local government.




6
 *Index*


**CHINA
        DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF** **SEPTEMBER** **30, 2006 (UNAUDITED)**


Television
      Advertising sales





The
      Company acts as an advertising agent for certain television channels by selling
      advertising air time spaces and television program backdrops to customers.
      The
      Company's advertising services revenue is derived from billings that are earned
      when the advertisements are placed and revenue is recognized as the media
      placements appear. During 2006, the Company purchase blocks of advertising
      slots
      and was the primary obligor and carried all of the credit risk for the
      advertisement placements and accordingly, recorded the full amount of such
      billings from the advertisement placements as revenue. Deferred revenues are
      recognized as a liability when billings are received in advance of the date
      before revenues are earned.





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.





Television
      series





The
      Company invested in the production of two television series. Revenue from
      investments in television series is recognized upon receipt from the production
      company.




**NOTE
      2 -** **INVESTMENT
      IN AFFILIATES**





On
      May 8,
      2006 ,
      the
      Company’s 90% VIE, HuaGuang, set up Guishi Huaguang, a joint venture which
      HuaGuang owns 49% interest, located in China. The joint venture was formed
      to provide
      television programming services for a
      period of 20 years.





The
      Company’s effective interest of 44.1% in Guishi Huaguang is accounted for using
      the equity method of accounting and is stated at cost plus equity in
      undistributed earnings or losses since acquisition. The Company’s share of the
      net income/(loss) for the three months and nine months ended September 30,
      2006
      was $263 and ($1,139) respectively.




A
      summary
      of the unaudited condensed financial statements of the affiliate as of September
      30, 2006 is as follows:





Current
                assets
            
            $
            377,758Non-current
                assets
            
            
            253Total
                Assets
            
            $
            378,011Current
                liabilities
            
            $
            1,264Stockholders’
                equity
            
            
            376,747Total
                Liabilities and Stockholders’ Equity
            
            $
            378,011Revenues
            
            $
            -Gross
                Profit
            
            $
            -Net
                loss
            
            $
            (2,583
            )




7
 *Index*


**CHINA
        DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF** **SEPTEMBER** **30, 2006 (UNAUDITED)**




The
      Company’s share of the loss for the nine months ended September 30, 2006 is as
      follows:





Company
                share at 44.1%
            
            $
            (1,139
            )Equity
                in loss of affiliate
            
            $
            (1,139
            )








On
      August
      23, 2006, the Company subscribed to 20% equity interest in Arable, a limited
      liability company organized and existing under the laws of Hong Kong and the
      Company paid cash of $2,552 for the share capital of Arable.





The
      Company’s effective interest of 20% in Arable is accounted for using the equity
      method of accounting and is stated at cost plus equity in undistributed earnings
      since subscription.





Current
                assets
            
            $
            32Non-current
                assets
            
            
            333,644Total
                Assets
            
            $
            333,676Non-current
                liabilities
            
            $
            376,597Stockholders’
                equity
            
            
            (42,921
            )Total
                Liabilities and Stockholders’ Equity
            
            $
            333,676Revenues
            
            $
            -Gross
                Profit
            
            $
            -Net
                loss
            
            $
            (55,733
            )





The
      Company’s share of the loss for the period from the date of subscription to
      September 30, 2006 is as follows:





Company
                share at 20%
            
            $
            (10
            )Equity
                in loss of affiliate
            
            $
            (10
            )





**NOTE
      3 - SEGMENT INFORMATION**





The
      Company operates in five reportable segments; digitalization of television
      signals, television advertising sales, software development, investment in
      television series and others. 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, 2006 and 2005:




**Digitalization**
            
            
            
            
            
            **Investments****of
                Television**
            
            **Television**
            
            **Software**
            
            **in
                television****Signals**
            
            **Advertising**
            
            **Development**
            
            **series**
            
            **Others**
            
            **Total****2006****Revenues**
            
            $
            6,540,618
            
            $
            5,817,045
            
            $
            41,507
            
            $
            265,530
            
            $
            0
            
            $
            12,664,700**Gross
                profit**
            
            
            3,437,525
            
            
            830,170
            
            
            339,507
            
            
            84,588
            
            
            0
            
            
            4,691,789**Total
                assets**
            
            
            20,077,910
            
            
            4,420,163
            
            
            52,965
            
            
            1,100,684
            
            
            862,555
            
            
            26,514,278**Capital
                expenditure**
            
            
            5,061,156
            
            
            416,272
            
            
            3,507
            
            
            104,137
            
            
            5,745
            
            
            5,590,817**Depreciation
                and amortization**
            
            
            1,999,880
            
            
            20,166
            
            
            9,730
            
            
            27,532
            
            
            6,074
            
            
            2,063,382**2005****Revenues**
            
            $
            4,403,692
            
            $
            354,927
            
            $
            7,893
            
            $
            0
            
            $
            23,258
            
            $
            4,789,770**Gross
                profit**
            
            
            3,102,492
            
            
            110,391
            
            
            7,523
            
            
            -
            
            
            23,258
            
            
            3,243,664**Total
                assets**
            
            
            13,056,124
            
            
            1,017,880
            
            
            95,724
            
            
            0
            
            
            1,390,171
            
            
            15,559,899**Capital
                expenditure**
            
            
            4,392,036
            
            
            60,690
            
            
            5,398
            
            
            -
            
            
            10,361
            
            
            4,468,485**Depreciation
                and amortization**
            
            
            894,554
            
            
            438
            
            
            8,569
            
            
            0
            
            
            4,111
            
            
            907,672





8
 *Index*


**CHINA
        DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF** **SEPTEMBER** **30, 2006 (UNAUDITED)**


**NOTE
      4 -** **EARNINGS
      PER SHARE**





Earnings
      per share on a diluted basis were $ 0.01 and $0.04 for the three and nine months
      period ended September 30, 2006. As of September 30, 2006, we have
      outstanding:





-
      31,757,365 shares of common stock;


-
      1,875,000 shares of preferred stock;


-
      125,000
      shares of common stock to be issued upon conversion of convertible debentures;


-
      warrants to purchase 125,000 shares of common stock at an exercise price of
      $0.90 per share, expire in July 2011; and


-
      warrants to purchase 62,500 shares of common stock at an exercise price of
      $2.00
      per share, expire in July 2011.





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 three months and
      nine
      months ended September 30, 2006 are calculated as follows:





For
                the three months ended September 30, 2006
            
            For
                the nine months ended September 30, 2006EarningsNet
                Income
            
            
            591,340
            
            
            1,822,063Income
                available to common stockholders
            
            
            591,340
            
            
            1,822,063Basic
                - 2 classes methodIncome
                available to common stockholders
            
            
            591,340
            
            
            1,822,063Weighted-average
                common stock outstanding
            
            
            31,748,365
            
            
            31,471,286Number
                of preferred stock
            
            
            1,875,000
            
            
            1,875,000Basic
                earnings per share - Common Stock
            
            
            0.02
            
            
            0.05Basic
                earnings per share - Preferred Stock
            
            
            0.02
            
            
            0.05DilutedIncome
                available to common stockholders
            
            
            591,340
            
            
            1,822,063Income
                available to common stockholders and assumed conversions
            
            
            592,940
            
            
            1,823,663Weighted-average
                common stock outstanding
            
            
            31,748,365
            
            
            31,471,286Number
                of preferred stock - converted bases
            
            
            9,375,000
            
            
            9,375,000Weighted-average
                common stock outstanding for 8% convertible debenture - assumed
                conversions
            
            
            96,774
            
            
            32,258Diluted
                weighted-average common stock outstanding
            
            
            41,220,139
            
            
            40,878,544Diluted
                earnings per share
            
            
            0.01
            
            
            0.04





Warrants
      to purchase 125,000 shares of common stock at $0.90 per share and 62,500 shares
      of common stock at $2.0 per share were outstanding as of September 30, 2006
      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.
      The warrants, which expire on July 30, 2011, were still outstanding on September
      30, 2006.




9
 *Index*


**CHINA
        DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF** **SEPTEMBER** **30, 2006 (UNAUDITED)**




**NOTE
      5 - COMMITMENTS AND CONTINGENCIES**




Contingent
      consideration





During
      2005, the Company acquired all of the issued and outstanding capital of M-Rider
      for a total consideration of $1,047,559 of which $132,927 was payable in cash
      and $914,632 payable by the issue of shares of the Company’s common stock. On
      the effective date of August 25, 2005, CDHL paid the cash consideration of
      $132,927 and 29,158 shares of the Company’s common stock having a value of
      $62,141 were issued to the stockholders of M-Rider. As of September 30, 2006,
      the Company is contingently liable to issue shares of common stock to the value
      of $852,491 one year from the effective date, adjusted proportionately for
      the
      achievement by M-Rider by that date that their net operating cash flow is not
      less than $1,129,512.





On
      January 31, 2006, HuaGuang entered into an Asset Transfer Agreement (the “AT
      Agreement”) with Guiyang Classic & Fashion Advertising Co., Limited
      (“Guiyang Classic”), a television program production company organized and
      existing under the laws of the PRC, pursuant to which HuaGuang will acquire
      all
      media related businesses, assets, contracts and management from Guiyang Classic.
      Pursuant to the terms of the AT Agreement, the Company will pay $2,200,000
      to
      Guiyang Classic by a combination of cash and restricted common stock of the
      Company, subject to certain adjustments in the event that the acquired assets
      generate a profit of less of than $2,500,000 in the next two years. The
      completion of this transaction is subjected to certain conditions, including
      official PRC Government approval and due diligence. The Company expects to
      complete the acquisition during 2006.




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 September 30, 2006 and
      management’s opinion as to the likelihood of loss in respect of each loss
      contingency.




On
      May
      24, 2005, Ziegler, Ziegler & Associates LLP and Scott Ziegler filed a
      Complaint against the Company in the United States District Court for the
      Southern District of New York for using their internet domain name to distribute
      the Company’s promotional information over the internet. The Plaintiffs seek
      several types of damages in an amount not less than $1,250,000. The Company’s
      counsel was instructed to vigorously defend the action as the emails in question
      were distributed by a party not hired nor associated with the Company.
      Accordingly, no provision has been made as of September 30, 2006.




On
      January 18, 2006, counsel for 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 $9,000 and is awaiting
      the plaintiff’s response. The Company has accrued $9,000 as at September 30,
      2006.




**NOTE
      6 - COMMON STOCK**




On
      March
      15, 2006, the Company issued 310,000 shares of restricted common stock at $1.25
      per share to a corporate investor for an aggregate consideration of $387,500
      under a Stock Purchase Agreement dated March 14, 2006. The Company relied on
      an
      exemption from registration pursuant to Regulation S under the Securities Act
      of
      1933 in connection with the issuance of these shares.





On
      March
      29, 2006, the Company issued 2,381 shares of restricted common stock with a
      fair
      value of $3,000 to a consultant retained by a
      stockholder. The fair value of $3,000 on this stock issue was charged to the
      stockholder’s account in the accompanying financial statements. The Company
      relied on an exemption from registration pursuant to Section 4(2) under the
      Securities Act in connection with the issuance of these shares.




10
 *Index*


**CHINA
        DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF** **SEPTEMBER** **30, 2006 (UNAUDITED)**


On
      March
      30, 2006, the Company issued 335,308 shares of restricted common stock with
      a
      fair value of $577,065 for the outstanding participation costs in the production
      of two television series. The Company relied on an exemption from registration
      pursuant to Section 4(2) under the Securities Act in connection with the
      issuance of these shares.





On
      June
      5, 2006, the Company issued 40,000 shares of restricted common stock with a
      fair
      value of $46,400 to a consultant .
      The
      Company relied on an exemption from registration pursuant to Section 4(2) under
      the Securities Act in connection with the issuance of these shares. During
      2006, the Company recognized expense of $46,400 as of September 30, 2006, for
      services by the consultant.





During
      July 27, 2006, the Company issued 30,000 shares of restricted common stock
      having a fair value of approximately $30,000 to a consultant for services to
      be
      performed through July 2007. The
      Company relied on an exemption from registration pursuant to Section 4(2) under
      the Securities Act in connection with the issuance of these shares. During
      2006, the Company recognized expense of $28,667 and recorded deferred stock
      compensation of $1,333 as of September 30, 2006, for services by the consultant.





During
      2006, CDHL contributed registered capital of $779,207 to AGL.




**NOTE
      7 - CONVERTIBLE DEBENTURES**





On
      July
      7, 2006, the Company sold 20 units of securities to a corporate investor for
      $1,000,000 and on July 21, 2006, the Company sold 2 units of securities to
      an
      accredited investor for $100,000. Each “Unit” consists of (i) a 8% interest
      bearing convertible debenture in the principal amount of $50,000, convertible
      at
      $0.80 per share and matured on the earlier of: (a) one year from the first
      anniversary of the subscription agreement or (b) the date of a closing of a
      firm
      underwritten public offering of securities of the Company’s common stock or
      other securities, (ii) a five-year Class A warrant to purchase 62,500 shares
      of
      its common stock, par value $0.001 per share at an exercise price of $0.90
      per
      share, (iii) a five-year Class B warrant to purchase 31,250 shares of its common
      stock at an exercise price of $2.00 per share, (iv) a Class J warrant to
      purchase 31,250 shares of its common stock at an exercise price of $0.80 per
      share exercisable for 12 months starting on June 1, 2007, (v) a six-year Class
      C
      warrant to purchase 31,250 shares of its common stock at an exercise price
      of
      $0.90 per share on the same terms as the Class A Warrant, provided that it
      is
      only exercisable if the Class J Warrant has already been exercised, and (vi)
      a
      six-year Class D warrant to purchase 15,625 shares of its common stock at an
      exercise price of $2.00 per share on the same terms as the Class B Warrant,
      provided that it is only exercisable if the Class J Warrant has already been
      exercised; and further provided that only investors purchasing greater than
      $250,000 in Units received the warrants set forth in (iv), (v), and (vi) above.
      The securities issuable upon conversion of the debentures and exercise of the
      warrants are eligible for certain registration rights.





The
      conversion prices for the convertible debentures and warrants are fixed and
      the Company has adequate authorized shares for such future conversions of
      the convertible debentures and warrants.





**NOTE
      8 -** **RELATED
      PARTY TRANSACTIONS**





On
      August
      23, 2006, the Company entered into an agreement with a 20% affiliate to advance
      a total of $768,738 to support the research and development on the middleware
      applications for digital TV set-top box. The advances will be used to pay for
      license fees in the future and other expenses or refunded to the Company if
      the
      applications cannot be applied to the Company’s set-top boxes. As of September
      30, 2006, the Company has advanced $137,772 to the affiliate. The advances
      are
      interest free for a period of five years and thereafter interest is charged
      at
      the rate of LIBOR plus 2% on the outstanding balance.





As
      of
      September 30, 2006, a director and a related company loaned to the Company
      $84,472 and $92,792 respectively as short-term unsecured advances. The loans
      bear interest at 6% per annum and have no fixed repayment terms.





As
      of
      September 30, 2006, a stockholder loaned to the Company $136,324 as short-term
      unsecured loans. The loan bears interest at 6% per annum and has no fixed
      repayment terms.




11
 *Index*


**CHINA
        DIGITAL MEDIA CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF** **SEPTEMBER** **30, 2006 (UNAUDITED)**




**NOTE
      9 -** **SUBSEQUENT
      EVENTS**





(1)
      On
      October 25, 2006, the Company received a notice from a corporate investor not
      to
      exercise the option and to request the Company to repurchase 310,000 shares
      of
      restricted common stock at the repurchase price of $1.41 per share at a total
      of
      $436,548 under a Stock Purchase Agreement dated March 15, 2006.





(2)
      Sale
      of securities





On
      November 17, 2006, the Company completed a private equity financing with four
      accredited investors for $3,000,000, $1,000,000 of which was rolled over from
      the investor of the sale completed on July 7, 2006 (see Note 7). The investor’s
      previously purchased securities were returned to the Company in partial exchange
      for the units issued on this private equity financing. Upon
      the
      closing of this private equity financing, the investor waived all rights
      associated with the previously purchased securities and waived all interest
      payments accrued on the previously purchased securities.





Under
      the
      private equity financing, the Company sold 30 units of securities. Each unit
      consists of (i) an eighteen-month 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.




12
 *Index*




**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-QSB. 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 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. It was incorporated in
      Nevada 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, which is now our corporate name. 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 media industry in the PRC, the business of broadcasting media
      and
      cable television. Our business plan is to strengthen our branding and to enlarge
      our presence and involvement in the media industry through investments, mergers,
      acquisitions and alliance partnerships. In view of the rapid growth and
      potential opportunities we believe exist in China's media industry, we will
      continue to invest our resources into the media market throughout
      China.







Cable
      TV operations and digital broadcast technology development




Arcotect
      (Guangzhou) Ltd. (“AGL”), a wholly owned foreign subsidiary of CDMC doing
      business in China, is the sole contractor and operator of digital television
      (“DTV”) services in Nanhai, Guangdong Province, a city with over 410,000
      residential and commercial cable television subscribers.




On
      February 6, 2004, we signed a 20-year Co-operative Agreement for Total Migration
      into DTV System for the Nanhai District and subsequently signed a supplementary
      agreement on July 8, 2005 (collectively, the “Co-operative Agreements”) with Nanhai
      Network Company, a city-owned cable network operator in Guangdong
      Province .
      Pursuant to the Co-operative Agreements, the Company is responsible for
      migrating all cable television subscribers in Nanhai from an analog to a digital
      system (“Migration”) by the end of 2007.




13
 *Index*





Under
      the Co-operative
      A greement,
      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. If subscribers want an additional set-top-box,
      the subscriber 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
      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 148
      channels, including a 48-channel basic package and 100 pay channels bundled
      into
      various value added packages, such as World Movie, Life & Leisure, World
      Sports, News, Drama and Family.




As
      of
      September 30, 2006, the Company has migrated about 220,000 subscribers into
      the
      digital system and the migration program is on schedule. The Company has
      deployed an IP (Internet Protocol) based set-top-box which is integrated with
      new middleware applications, JAVA Runtime, XML browser, which is developed
      by
      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.




In
      May
      2006, the Company commercially launched high definition TV broadcasts, providing
      dramatically improved resolution and sound quality, in which 3 high definition
      TV channels are packaged in our pay-TV programs. The Company is currently
      negotiating partnerships with various vendors to provide interactive services,
      transforming a television set into an interactive multimedia
      platform.




In
      early
      May of 2006, the Company in Nanhai moved its office into a new premise with
      more
      than 10,000 sq. ft. The new office building is also headquarters to Nanhai
      TV
      Bureau and Nanhai Network Company.





On
      August
      23, 2006, the Company entered into a Subscription Agreement and Cooperation
      Agreement (the “Agreement”) with Manta Finance Limited to subscribe 20% equity
      interest in Arable Media Limited, a wholly owned subsidiary of Manta Finance
      limited (“Arable Media”). Arable Media is engaged in the business of developing
      middleware software and applications for digital TV set-top boxes such as those
      deployed by the Company in its digital roll-out program in the City of Nanhai.
      The Company believes that Arable could assist in developing customized
      applications for our digital TV subscribers which could provide new sources
      of
      revenue from our existing customers in Nanhai and other cities.





TV
      advertising sales




In
      August
      2005, the Company acquired 100% control of Guangdong M-Rider Media Company
      Limited (“M-Rider”) through our VIE and strategic partner - HuaGuang. M-Rider is
      an advertising sales company engaged in the distribution of television
      commercials. The Company pays fixed fees to the television stations and is
      responsible for reselling commercial airtime to international and local
      advertising customers, either directly or through agents. 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
      December 2005, M-Rider signed its largest wholesaler contract with Southern
      International Media Advertising Co., Ltd., to manage and operate the commercial
      airtime of a provincial station’s channel for a one year term starting on
      January 1, 2006, extendable for an additional year. As
      of
      September 30, 2006, M-Rider generated approximately $5.5 million revenue for
      selling advertising space in which over 230 brand names advertised on the
      managed channel. The Company believes t his
      successful model could be applied to other TV stations in other cities as well
      as in other provinces throughout China.




14
 *Index*




TV
      channel management and program production





With
      a
      growing subscription base, we intend to capitalize on our distribution platform
      through the production of original programming. Our plan is to develop a
      long-term presence in television program production, but we realize that program
      production is a relatively high risk venture. In order to obtain sufficient
      production experience, we have decided to participate through a strategic
      partner, Guangdong Runshi Movie & Music Production Co., Ltd., which has two
      ingredients we believe essential for success in China: a Class A license that
      allows filming to take place before submitting the film content for censorship,
      which makes the process very cost effective, and a good program distribution
      network. We have made a minority investment in two television series, XiGuan
      Affairs, with 40 episodes, and The Story of a Small Town, with 24 episodes.




In
      January 2006, the Company entered into an acquisition agreement, through its
      VIE, HuaGuang to purchase the media assets and personnel of Guiyang Classic
      & Fashion Advertising Co., Ltd., a television program production and
      advertising company in China. The target’s management team has over a decade of
      business experience in the media industry and a track record of successful
      television program production for different television channels.




In
      February 2006, the Company’s VIE, HuaGuang, entered into two joint venture
      agreements with a provincial television station for a term of 20 years. HuaGuang
      is engaged to operate a TV channel commencing May 2006; such operations to
      include content management, advertising sales and program production. Pursuant
      to the joint venture contracts, the provincial television station will provide
      the exclusive use of a television channel, including production resources and
      equipment, while outsourcing its entire advertising air time slots to the two
      joint ventures for an initial term of five years and the term is extendable.
      Guishi Digimedia, a 51% subsidiary of HuaGuang will serve as the exclusive
      advertising agent to manage the TV commercials. Guishi Huaguang, a 49% owned
      interest of HuaGuang, will be responsible for sourcing and production content,
      as well as schedule planning. Currently, over 100 professionals and experienced
      staff are working on the production, planning and scheduling, contents sourcing
      where the channel is focusing on fashion, entertainment, lifestyle and sports,
      24 hours a day.





The
      Company relied on three suppliers for approximately 99% of its purchases in
      the
      third quarter of 2006 for the Nanhai digitalization of TV system in the Nanhai
      project and relied on one TV channel for approximately 99% of its purchase
      of TV
      advertising time slots during the year of 2006 for the advertising agency sales
      of M-Rider. As of September 30, 2006, accounts payable to these suppliers
      amounted to $4,457,365, $2,041,946 and $531,061 for the Nanhai project, and
      $785,064 for M-Rider’s operations, respectively.





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, we
      have
      strategically partnered with a Chinese registered company, Guangdong HuaGuang
      DigiMedia Culture Development Limited (“HuaGuang”), formerly known as Guangdong
      Pukonyi Culture Development Limited, to hold investments in programs production
      and advertising operations on our behalf. We are therefore not the direct owner
      of the programming and advertising operations, whilst HuaGuang became a Variable
      Interest Entity (“VIE”) of the Company. We anticipate that this arrangement will
      be continued until further relaxation of the broadcasting policy in China.
      According to our Alliance Agreement with HuaGuang, we have Board and management
      control and operations of HuaGuang and are entitled to receive 90% of its gross
      profit. We have been advised by our Chinese counsel that these arrangements
      are
      necessary for the Company to control and benefit from its investments through
      HuaGuang, even though it is not the legal owner of these investments.





**RESULTS
      OF OPERATIONS**





**Sales**





Total
      net
      sales for the three months ended September 30, 2006 increased by $1,933,768
      or
      78% to $4,419,255 from $2,485,487 for the same period ended September 30, 2005.
      For nine months ended September 30, 2006, we recorded total revenue of
      $12,664,700, or 164% increase compared to total revenue of $4,789,770 for the
      same period last year. The increase in total net sales was due to the
      consolidation of revenue from the newly acquired subsidiary, M-Rider and the
      joint venture operation in Guiyang. Together with an increase in the number
      of
      television subscribers, sales of value-added services and the increase of
      commercial accounts, total revenues for digital television operations had
      contributed a growth for the nine months ended September 30, 2006 as compared
      to
      the comparable period in 2005. Advertising revenue was a new income source
      upon
      acquisition of M-Rider and establishment of new joint venture in Guiyang.




As
      required by SAB11:B, depreciation and amortization for property and equipment
      directly attributed to the generation of revenue was reclassified as under
“cost
      of sales”. Due to the increase in the acquisition of STBs for the migration
      project in Nanhai and business expansion of the Company into the agency and
      joint venture business of television advertising and channel management, gross
      profit margin dropped from 68% to 37% during the three months ended September
      30, 2005 and September 30, 2006 respectively; whereas it dropped from 68% to
      37%
      during the nine months ended September 30, 2005 and September 30, 2006
      respectively.




15
 *Index*





**Expenses**





Selling,
      general, administrative and depreciation and amortization (not related directly
      to generation of revenue) expenses for the three months ended September 30,
      2006
      increased by $574,881 or 176% to $901,175 in comparison with the three month
      period ended September 30, 2005. Selling, general, administrative and
      depreciation and amortization expenses were $2,139,930 for the nine months
      ended
      September 30, 2006, increased by $1,391,452, compared to the same period ended
      September 30, 2006. Selling, general and administrative expenses increased
      by
      $538,457 and $1,336,545 for the three months and the nine months ended September
      30, 2006 respectively over the same period last year due to an increase in
      business activities, appointment of additional personnel for the development
      of
      new value-added products and services and the operation of newly established
      joint venture company. Depreciation and amortization increased by $36,424 and
      $54,907 for the three months and the nine months ended September 30, 2006
      respectively.





**Income
      from Operation**





Income
      from operation for the three and nine months ended September 30, 2006 was
      $717,787 and $2,551,859 respectively. The decrease of $633,844, or 47%, over
      $1,351,631 for the three months ended September 30, 2006 was owing to the
      increase in general and administrative expenses from consolidation of agency
      and
      joint venture business of television advertising and channel management, and
      due
      to corporate funding.





**Minority
      Interests**





Minority
      interests in the statement of operation represent the minority shareholders’
share of the profits in our consolidated variable interest entity and a 51%
      subsidiary. For the nine months ended September 30, 2006, we recognized
      minority’s share of our profit of $63,322.





**Net
      Income**





Net
      income after tax were $591,340 and $1,822,063 for the three and nine months
      period ended September 30, 2006, compared to the net income of $3,441,087 and
      $4,584,627 for the same period ended September 30, 2005 respectively. The
      decrease in net income was because of the recognition of a one time payment
      discount from a STB supplier in the same period of 2005 and provision made
      for
      income tax that has not been provided for in the same period of last year.





**Liquidity
      and Capital Resources**





On
      September 30, 2006, we had cash of $250,021 and a working capital deficit of
      $1,157,059. This compares with cash of $849,726 and a working capital deficit
      of
      $221,132 at September 30, 2005. The decrease in cash was mainly due to the
      increase in purchases of STBs in Nanhai project as compared with the same period
      of last year.





Operating
      activities had a net generation of cash in the amount of $3,329,906 during
      the
      nine months ended September 30, 2006 reflecting an excess of revenues over
      expenditure, and increased depreciation as mentioned above.




16
 *Index*




Net
      cash
      used in investing activities for the nine months ended September 30, 2006 was
      $5,913,945 as compared with net cash used in investing activities of $4,468,485
      for the nine months ended September 30, 2005. The increase in net cash used
      in
      investing activities was due to the increase in purchases of STBs and investment
      in subsidiaries, compared to the comparable period in 2005.




Net
      cash
      provided by financing activities for the nine months ended September 30, 2006
      was $1,694,486. The majority of net cash provided by financing activities was
      attributable through a private placement.





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
      September 30, 2006. Due to our acquisition and expansion of operations,
      additional cash was invested. Two additional joint venture investments commenced
      operations in the second quarter of 2006.





**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$”) and
      the Chinese
      Renminbi (“RMB”) .
      On July
      21, 2005, PRC let the RMB to fluctuate ending its decade-old valuation peg
      to
      the US$. Historically, the PRC government has benchmarked the RMB exchange
      ratio
      against the US$, thereby mitigating the associated foreign currency exchange
      rate fluctuation risk. 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 nine months ended September 30, 2006 was
      $87,069.




**ITEM
      3. CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




The
      Company’s chief executive officer and principal financial officer have reviewed
      and evaluated the effectiveness of the Company’s disclosure controls and
      procedures (as defined in Exchange Act Rules 13d-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 principal 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-QSB was being prepared.




**Changes
      in Internal Controls**





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.




17
 *Index*




**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. Pre-trial discovery has commenced in
      the
      matter. The file number of the civil action is 05 CV 4960. We made a motion
      to
      dismiss the complaint on the grounds that the Plaintiffs failed
      to establish that the District Court for the Southern District has personal
      jurisdiction over CDMC.  The Court has allowed the Plaintiffs to take
      discovery on the jurisdictional issue only, before deciding whether it will
      allow Plaintiffs to prosecute their case.  Plaintiffs have started,
      but have not yet completed jurisdictional discovery.





The
      Company contested 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 promotional e-mails, and the emails themselves recite
      that they were paid for by a shareholder of our Company, and not by the Company
      or an affiliate. We believe that the shareholder referred to in the emails
      was
      promoting its own interest and we had nothing to do with such activity. We
      believe we have no liability in this matter.





On
      January 18, 2006, counsel for 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 $9,000 and is awaiting
      the plaintiff’s response. The Company has accrued $9,000 as at September 30,
      2006.




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





During
      the quarter ended September 30, 2006, we issued certain unregistered securities
      as described in our Form 8-K filed July 13, 2006.





**Item
      3. Defaults Upon Senior Securities**





None.





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





None.





**Item
      5. Exhibits**








EXHIBIT
      NO. DESCRIPTION
      OF EXHIBIT





31.1
            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
                2002.




31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
                Exchange Act of1934,
                as adopted pursuant to Section 302 of the arbanes-Oxley Act of
                2002.




32
            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.




18
 *Index*




**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
              20, 2006
            By:
            /s/ Ng
              Chi ShingNg Chi Shing
              Chief
                  Executive Officer
                Chief
                  Financial Officer







19