form10-k.htm

The discussion contained in this 10-K under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussion under "Description of Business," including the "Risk Factors" described in that section, and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them.

As used in this Form 10-K, unless the context requires otherwise, “we” or “us” or the “Company” means China Digital Media Corporation and its subsidiaries.

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PART I

Item 1.	Description of Business	4

Item 1A.	Risk Factors	9

Item 1B.	Unresolved Staff Comments	11

Item 2.	Properties	11

Item 3.	Legal Proceedings	12

Item 4.	Submission of Matters to a Vote of Security Holders	12

PART II

Item 5.	Market for Registrant’s Common Stock, Related Security Holder Matters	12

Item 6.	Selected Financial Data	12

Item 7.	Management’s Discussion and Analysis	17

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 8.	Financial Statements and Supplementary Data	18

Item 9.	Changes with and Disagreements With Accountants on Accounting and Financial Disclosure	42

Item 9A.	Controls and Procedures	42

Item 9B.	Other Information

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	44

Item 11.	Executive Compensation	45

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	46

Item 13.	Certain Relationships and Related Transactions; and Director Independence	47

PART IV

Item 14.	Principal Accountant Fees and Services	48

Item 15.	Exhibits and Financial Statement Schedules	48

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PART I

ITEM 1. Description of Business

Historical Corporate Development

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. 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.

CDHL was incorporated in Hong Kong on January 5, 2000 as an investment holding company. Its wholly owned subsidiary, Arcotect (Guangzhou) Ltd. (“AGL”), was incorporated in China as a wholly foreign owned limited liability company on September 24, 2001. AGL is engaged in software development, digital television subscriber and application platform development. AGL, through its Nanhai branch established on July 8, 2004, is engaged in the business of converting television signals from analog into digital signal systems using digital television set-top-boxes (“STB”) and smart cards.

On June 15, 2005, CDHL entered into a Strategic Alliance Agreement with shareholders of Guangdong HuaGuang Digimedia Culture Development Limited (“HuaGuang”) whereby CDHL held a 90% variable interest in HuaGuang. On January 24, 2007, CDHL exercised its right to hold 100% interest in HuaGuang.

On August 25, 2005, CDHL acquired a 100% interest in Guangdong M-Rider Media Company Limited (“M-Rider”), a limited liability company in the PRC. M-Rider operates primarily as a Chinese television advertising agency.

On October 17, 2005, CDHL established a wholly-owned subsidiary in China called Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”). This subsidiary has had no operations since its incorporation.

In February 2006, HuaGuang undertook two joint ventures with the Guizhou Television Station. Huaguang held a 51% equity interest in Guizhou Guishi Digimedia Advertising Company Limited (“Guishi Digimedia”) and a 49% equity interest in Guizhou Guishi Huaguang Media Company Limited (“Guishi Huaguang”). Guishi Digimedia is a television advertising agency and Guishi Huaguang provides various services to television channels including program sourcing, schedule planning and the production of television programming. On August 19, 2007, HuaGuang sold its shares in Guishi Digimedia and Guishi Huaguang to Guizhou Tianma Advertising Company.

On August 23, 2006, CDHL acquired a 20% interest in Arable Media Limited (“Arable”). Arable is engaged in the business of developing middleware software and applications for digital TV STB.

On May 21, 2007, CDHL acquired a 100% interest in Maxcomm Ltd. (“Maxcomm”), its only asset is the 80% interest in Arable. After the completion of the acquisition, CDHL beneficially owns 100% interest in Arable.

On October 29, 2007, Arable established a wholly-owned subsidiary in China called Arable (Guangzhou) Limited (“Arable GZ”). This subsidiary is engaged in research and development, marketing and promotion of STB Middleware.

CDMC, CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Maxcomm, Arable and Arable GZ are hereinafter referred to as (the “Company”). Currently, the Company has approximately 181 employees located primarily in the PRC.

Current Corporate Structure and Mission

For the year ended December 31, 2008, CDMC owned the following subsidiaries:

(a)	100% of CDHL, an investment holding company incorporated in Hong Kong;

(b)	100% of Maxcomm, a limited liability company incorporated in British Virgin Island, which holds 80% equity interest in Arable, and a 20% interest in Arable, through CDHL, a limited liability company incorporated in Hong Kong;

(c)	100% of AGL through CDHL, a limited liability company incorporated in China;

(d)	100% variable interest of HuaGuang under CDHL, a limited liability company incorporated in China;

(e)	100% beneficial interest of M-Rider through CDHL, a limited liability company incorporated in China;

(f)	100% of Digimedia Shenzhen through CDHL, a dormant company incorporated in China;

(g)	100% interest in Arable GZ through Arable, a limited liability company incorporated in China;

Broadcasting media and cable television operational support services in the PRC is our primary source of business, and is currently a growth industry in China. Our business plan is to strengthen our brand image and to enlarge our presence and involvement in the Chinese media industry through investment, mergers, acquisitions and partnership alliances. We continue to believe there will be rapid growth and potential opportunities in China's media industry, thus we plan continue to invest our resources into the market across China.

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Operation Business

The Company is primarily involved in the following businesses in China:

1) Cable television operational support services and digital broadcast technology development; and

2) Advertising sales.

Cable Television Operational Support Services and Digital Broadcast Technology Development

Arcotect (Guangzhou) Ltd. (“AGL”), a wholly owned foreign subsidiary of CDMC, duly established under the laws of the PRC, is legally authorized to carry out the business activities enumerated in its PRC business license, namely, research, production and the development of STB for digital television (“DTV”), computer software, software relating to information platform for DTV, software and hardware relating to DTV; sales and after sale services of self- manufactured products; carrying out network projects; and providing related consulting, technical, repair and maintenance services. AGL is the sole contractor providing support services for the operation of DTV in Nanhai, located in Guangdong Province, a city with over 410,000 residential and commercial cable television subscribers.

On February 6, 2004, the Company signed a 20-year Co-operative Agreement for Total Migration into the DTV System for the Nanhai District and subsequently signed a supplementary agreement on July 8, 2005 (collectively, the “Cooperative Agreements”) with the Nanhai Network Company, a city-owned cable network operator located 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 the technical issue of the local network upgrade by Nanhai Network Company, the Migration completion date has been re-scheduled to the end of 2009. 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 2009.

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 purchased by subscribers.

Under the Co-operative Agreements, the Company is responsible for supplying all subscribers with a digital STB on a lease basis to subscribers. If subscribers require an additional STB, they must purchase the STB from the Company and pay an additional subscription fee. 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 DTV business processes, such as database management, billings, 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.

In early May of 2006, the Company’s office located in Nanhai moved to a much larger facility with more than 10,000 sq. ft. The new office building is also headquarters to the Nanhai TV Bureau and the Nanhai Network Company.

During 2007, the Company entered into an agreement with the Nanhai Network Company to obtain a more favorable DTV basic subscription fee income sharing plan in exchange for setting aside a certain portion of trade receivable balance due from Nanhai Network Company from the current balance. Such portion is to be amortised over 15 years annually and evenly out of the increased fee income after the expected upward price adjustment for DTV basic subscription fee implemented in 2008. The said portion is being treated as long term asset in the financial statements as of December 31, 2008.

On August 23, 2006, the Company entered into a Subscription Agreement and Cooperation Agreement (the “Agreement”) with Manta Finance Limited for the subscription of a 20% equity interest in Arable Media Limited, a wholly owned subsidiary of Manta Finance Limited. On May 21, 2007, Company entered into a Share Purchase And Transfer Agreement (the “2nd Agreement”) with Lippo Star Investment Limited for acquiring 80% equity interest in Arable Media Limited via Maxcomm Limited where the only asset of Maxcomm Limited is the equity interest in Arable Media Limited. Arable is engaged in the business of developing middleware software and applications for digital TV STB similar to 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 on the digital STB for DTV subscribers which could provide new sources of revenue from existing customers in Nanhai and other cities.

Arable GZ is engaged in research and development, sales and marketing of STB Middleware in China.

Migration to DTV Service

The Company has migrated approximately 66,000 subscribers in 2008 totaling about 343,000 subscribers to the DTV system as of December 31, 2008, and the Migration is expected to be completed by 2009.

Basic Services

Basic service is available to all cable television subscribers, consisting of 46 channels of programming. This service comprises programming provided by national television networks, provincial and city television stations, and one channel provided by AGL.

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Value Added Packages (VAP)

The broadcast system that decrypts the signal for the Company’s STB 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 152 channels, including a 46-channel basic package and 106 pay channels bundled into various value added packages, including 3 high definition channels, movie, life & leisure, sports, drama and family.

Addition STB

In the city of Nanhai, each household has more than two television sets on average. DTV subscribers can buy an additional STB from AGL for their other television sets and pay a subscription fee for the additional STB.

Value Added Services (VAS)

During the second quarter of 2007, the Company launched the first value added service through the DTV platform: a real time stock information system. The subscribers can subscribe to receive the real time stock information for the Chinese companies which are listed in the Chinese stock market (namely “A” shares and “B” shares) with charts, analysis and related information on the television set through the Company’s developed middleware platform.

Other Revenue Sources

AGL also generates revenues from installation services, through the sale of additional STB and reconnection services.

IP based STB

The Company deploys an IP (Internet Protocol) based STB which is integrated with new middleware applications, JAVA Runtime and XML browser, developed by Arable. The Company believes the advanced STB will enable the Company to provide additional value added services that can be deployed in the future; such as targeted advertising, interactive TV programs, online shopping, console games, stock trading and interactive education services. The Company is currently negotiating partnerships with various vendors to provide interactive services, transforming a television set into an interactive multimedia platform.

Customer and Technical Service

The operating support system, which is developed by AGL’s software team, manages all operating processes including technical support to customers, database management, billing services, inventory control, sales support, and call center services. AGL’s call center provides 24/7 call answering capability and other technical support services. The call center handled over 360,000 enquiries in 2008.

Sales, Marketing and Advertising

AGL has 86 persons in the sales and customer services team. The Company sells services through direct customer contact, retail outlets, door-to-door selling, television advertising and road show promotion.

Technology Development

From time to time, AGL works closely with our technology partners to develop new technologies and additional features in order to improve and enhance our operations and services. Since 2006, the Company has partnered with Arable to design middleware for additional functions and applications for the digital STB. Arable GZ was established to provide local support on STB middleware to AGL, and further develop the China market.

Television Channel Management and Advertising Sales

M-Rider is a wholly owned subsidiary of the Company and a limited liabilities company registered in China. M-Rider is an advertising sales agent principally engaged in media planning, production, and distribution of advertisement through television channels and related consulting services.

During the year of 2008, M-Rider provided consultation to AGL for advertising and promotion for its sales of additional STB, VAS, and VAP on DTV business in Nanhai.

Television Program Production and Investment

During the year of 2008, HuaGuang did not have any business activity.

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Strategic Partnership

The Company is exploring the possibilities of creating alliances with strategic partners; particularly those that could help expand its territories. The Company believes that the opportunities in China’s DTV business are enormous and that it makes more sense to partner with other companies and investors that can complement the Company’s core strength as a provider of services to operate DTV and a developer of customized applications for DTV in China.

Growth Opportunities

The Company believes its strengths in China’s media industry, are in the areas of cable television operational support services and digital broadcasting technology developments, and television channel management and advertising sales.

Cable Television Operations and Digital Broadcasting Technology Development

Currently, many cities in China have the infrastructure capable to broadcast DTV programs, but not many cities today are undertaking a city-wide digital Migration. The Company believes that this large potential market for DTV services presents opportunities in the digitization of cable TV services in China in the coming years. In addition, the pricing of digital TV services are likely to be improved and be more acceptable to subscribers in coming years. Furthermore, the Company believes that declining prices of STBs may help to cut costs of DTV migration and expand coverage of DTV broadcasting.

The Company believes that five years of experience has made it's operations and migration process efficient and effective which has created a substantial platform for the future growth in cable TV digitalization projects in other cities with a size similar to Nanhai. The Company is exploring its ability to utilize its competitive advantages in seeking other cities, particularly in Guangdong province, to repeat its Migration model. A number of cities have expressed interest in working with the Company because of the proven skills and experiences in operation, marketing and technology, although the Company has not entered into any definitive or preliminary agreements with any cities. The operation of a DTV service business is a business with long term stable recurring cash flow, but substantial upfront capital investment has prevented the Company from investing in other cities until additional cash flow can be generated internally or financed elsewhere. There is no assurance that the Company will be successful in entering into new agreements for future migrations, or that the Company will be able to finance any new migrations solely from its cash flows from the Nanhai Migration.

The Company has entered into a Memorandum of Understanding (the ''MOU'') with a city owned cable network company in the western part of Guangdong province to implement a digital TV digitalization project during the year.

Pursuant to the MOU, the Company will invest in digital TV set top boxes to convert all subscribers in the city from analog into digital TV broadcasting whereas the cable network company will upgrade its cable network into a 2-way capable one. Both parties agreed to develop business plans on the digital TV platform, broadband Internet and other value added services to be deployed into the market.

Apart from signing up additional Migration business, the Company will focus on developing and providing value added services through the STB to DTV subscribers. Currently, a number of applications are on trial and such services are expected to be available in coming months, which the Company believes will drive its growth organically.

Once the migration program is fully completed, income from additional STB sales as well as its subscription fee, VAS subscription fee and advertising income are expected to be increased. Accordingly, the profitability of our DTV business is expected to be improved.

Growth Strategies

DTV business

The Company has established a successful and profitable model for the DTV services in Nanhai. For the near term, the Company’s strategy is to complete the migration at Nanhai to drive growth. In the mid or longer term, the Company’s strategy is to use cash flow generated from existing operations to provide VAS through the digitalized STB in Nanhai. With the expected rapid growth in population of Nanhai area in the coming years, we expect the VAS subscription fee to become one of the major income and profit contributors.

We will continue to explore opportunities for development of migration projects in other cities in Guangdong Province. We may utilize future positive cashflow generated from the Nanhai DTV to be used for the upfront investment to the new projects.

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Middleware and VAS business

In addition to developing its existing businesses, the Company plans to propose additional services through the cable network such as Internet connection, IPTV or IP telephony. These services, however, involve further upfront cash investment in related equipment and marketing, negotiation with the business partners, and head to head competition with China Telecom, a dominant player in the provision of Internet services in China. While the Company’s management team has previous operating experience in the provision of Internet services elsewhere, the Company will formulate development plans for these services when, and if, market conditions are favorable.

We started our STB middleware development a few years ago with the commencement of our Nanhai business operation. This middleware has proved to be successful and to work smoothly on our STB. We have noticed that the demand for STB middleware in China keeps increasing where the supply is limited. We believe we could provide our middleware technique to other customers across China. We believe this could become one of our main businesses in near future.

Our Nanhai cable partner is also working on the upgrade of their cable network to a two-way system which is also expected to be completed shortly. Such upgrade would enable us to offer various kinds of VAS to our cable subscribers. Provision of VAS is expected to become one of our core businesses in the mid-term.

Government Regulation

The media industry in the PRC is subject to government control and censorship. Due to the PRC’s admission to membership in the World Trade Organization, the Company believes the government is committed to opening its domestic markets for foreign investors and that this should favorably impact the media industry. Some restrictions on the Company’s businesses have already been relaxed. For example, as a foreign company, we can now own a 100% equity interest in a company in the advertising business and up to a 49% equity interest in a company in the program production business.

Currently in China, foreign capital is prohibited from establishing and running broadcasting related stations, network, and content production companies. The Company, with a business license under the name of AGL, is legally permitted to develop and produce technical products and provide consulting and technical services to the licensed cable network companies for the operation of DTV in China, while sharing compensation from those network companies.

Government regulations still prohibit the Company from qualifying for holding an equity interest in certain media business. In order to avoid unnecessary delays, and to be able to invest in the media sectors such as television advertising and program production, the Company has invested into media businesses in China through its subsidiary HuaGuang. Through HuaGuang, the Company obtains the business benefits of companies engaging in the media business while maintaining their legal status as Chinese enterprises.

Effects of Inflation

The Company’s principal business is related to the media industry in China. Revenues and expenses remain relatively constant and are not affected by the levels of inflation in China or elsewhere. For the foreseeable future, the Company does not anticipate that inflation will affect the existing business.

Competition

Cable Television Operational Support Services and Digital Broadcasting Technology Development

In China, television broadcasting has been the vehicle for the government to distribute information to the public. While government officials intend to control and monitor the content to be delivered through other broadcasting systems, the exertion of control on other broadcasting systems may not be as dominant as it is for television. In the forseeable future, the Company believes government officials will continue imposing tight control on distribution of content through the cable television network. In order to enhance and effectively control the distribution of content, the Company believes government officials will plan to fully convert the current analogue television broadcasting signal into digital signal, and cable television will remain as the major form of delivery for television programming in China in the coming years although there will be competition from satellite, IP television and other media.

Advertising Sales

Advertising time sales are directly related to a channel’s audience population and viewership. The China Central Television (“CCTV”), the dominant broadcaster in China, has a strong influence on broadcasting in the country, and localized television content can serve the needs of audiences down to the city levels. Advertising revenues generated by local television stations are substantial. In recent years, country-level cable television stations have tendered their television channels/air time to advertising agencies at fixed cost in order to generate guaranteed income. Competition in different parts of the country is fierce between advertising agencies and television channels at the provincial and city levels. In order to maximize profit, advertising agencies have begun to provide their own content to increase their channels’ viewership. Because of this trend, some advertising firms are trying to vertically integrate their business into program sourcing and production. It is believed that the television advertising industry will remain fiercely competitive and media firms will integrate their scope of business to include program production, sourcing and advertising sales.

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Item 1A. Risk Factors

Risks Related to The Company’s Business and Industry

The Company has a limited operating history on which to evaluate the Company’s operations.

The Company commenced operations in early 2005, and as such, the Company has had a limited history on which an investor may evaluate the Company’s operations. The Company had revenues of $7.9 million (restated), $14.9 million (restated) and $7.5 million for fiscal years 2005, 2006 and 2007 respectively. The Company had net income of $3.1 million, net loss $0.2 million (restated), net loss $4.1 million (restated) and net loss $13,375,575 for fiscal years 2005, 2006, 2007, and 2008 respectively. Any investment in the Company should be considered as a high risk one because the investor will be placing funds at risk in an unseasoned early stage company with unforeseen costs, expenses, competition and other problems to which such companies are often subject.

The Company’s cable television migration operations require the Company to incur significant upfront costs to supply customers with set-top-boxes, recovery of which would be better managed if the Company is able to sell customers sufficient number of value-added services or additional set-top-boxes.

The Company’s agreement with the Nanhai Network Company provides that the Company migrates all cable TV subscribers in Nanhai from an analog signal to a digital signal by the end of 2009. In order for the Company to maintain a more stable liquidity, the Company must also sell to subscribers’ additional value-added services or additional STB, in addition to receiving portions of subscription fees from the Nanhai Network Company. If a sufficient number of subscribers do not purchase additional value-added services or additional STB from the Company, the Company may not be in a position to offset the initial cost for providing the STB in a timely manner.

The Company’s business plan requires substantial capital and there is no assurance that the Company will be able to raise such capital.

The Company’s goal is to expand the Company’s operation by entering into new cable television digitization migration agreements with new cities similar to its arrangement with Nanhai which requires a significant amount of capital. In particular, in order to perform cable television migrations in other cities, the Company is required to provide STB for subscribers if similar terms to the Nanhai one are provided. A significant amount of additional capital is required to provide the boxes to subscribers by the Company. The Company does not have any commitments for funding at this time, and additional funding may not be available to the Company in the future on favorable terms, if at all.

A substantial portion of the Company’s accounts receivable is with the Nanhai Network Company.

Approximately 99% of the Company’s accounts receivables are with the Nanhai Network Company in connection with the cable television digitization migration being performed by the Company. These receivables are paid to the Company based on a schedule with the Nanhai Network Company. If the Nanhai Network Company is to delay its payment to the Company or be unable to pay the monies due to the Company, the Company’s high concentration of credit risk may cause financial difficulties and may cause the Company to become unable to fulfill the payment obligations to the Company’s vendors.

The Company’s revenue recognition in connection with the Company’s cable television migration project occurs substantially in advance of the Company’s cash receipts from the migration project.

The Company recognizes revenues from the Company’s cable television migration project in Nanhai on a monthly basis. However, subscribers pay their subscription fees to the Nanhai Network Company on a quarterly basis, and the Company receives their portion of the fees after a certain period which could be as long as six months. As such, there is a considerable delay between the Company’s recognition of revenues and the cash receipts on such revenues.

The Company’s success will depend on public acceptance of cable services in China.

The Company’s future results of operations will depend substantially upon the increased acceptance of pay-TV programs, such as premium channels, and value added services in China.

The Company is dependent on three suppliers for the Company’s set-top-boxes and smart cards.

The Company’s cable television digitization migration process requires the Company to supply subscribers with STB and smart cards. Currently, the Company relies on three suppliers for the Company’s STB and smart cards. If any of these suppliers is unable to produce STB or smart cards to the Company on a timely basis and in a cost effective manner, the Company’s ability to complete the cable television digitization migration plan in Nanhai or in other cities on schedule would be adversely effected.

The Company did not receive any government grants in 2008 and there is no assurance that any government grant will be received in 2009.

Since the price increase of DTV subscription fee in general is approved by the local government, the revenue of the Company is increased too. Such increase in revenue is an additional income to the existing level of income. It is treated as a substitute of the government grant by the local authority. The government grant was not received by the Company during 2008.

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The requirements of being a public company may strain the Company’s resources and distract the Company’s management.

As a public company, the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may place a strain on the Company’s systems and resources. The Exchange Act requires that the Company files annual, quarterly and current reports with respect to the Company’s business and financial condition. The Sarbanes-Oxley Act requires that the Company maintains effective disclosure controls and procedures and internal controls for financial reporting. The Company is required to document and test the Company’s internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of the Company’s internal controls over financial reporting and a report by the Company’s independent registered public accountants addressing these assessments. During the course of testing, the Company may identify deficiencies which the Company may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if the Company fails to achieve and maintain the adequacy of the Company’s internal controls, as such standards are modified, supplemented or amended from time to time, the Company may not be able to ensure that the Company can conclude on an ongoing basis that the Company has effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

In order to maintain and improve the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. This may divert management's attention from other business concerns, which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. In addition, the Company may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and the Company cannot assure you that the Company will be able to do so in a timely fashion.

Technological advances, the introduction of new products, and new design and manufacturing techniques could adversely affect the Company’s operations unless the Company is able to adapt to the resulting change in conditions.

The Company’s future success and competitive position depends to a significant extent upon the Company’s proprietary technology, specifically the technology included in the Company’s set-top-box. The Company will be required to expend substantial funds for and commit significant resources to conducting research and development activities, the engagement of additional engineering and other technical personnel, and the enhancement of design and manufacturing processes and techniques. There can be no assurance that any new STB will receive or maintain customer or market acceptance. If the Company is unable to design and manufacture new STB on a timely and cost-effective basis, such inability could have a material adverse effect on the Company’s business, financial condition, results of operations and liquidity.

The Company’s business operations may be affected by legislative or regulatory changes in China.

Changes in laws and regulations governing the content of advertising, business licensing or otherwise affecting the DTV business, including the content of TV programs and value added services, in China may also have adverse impact on the Company’s results of operations, business or prospects.

The Company has reserved a significant number of shares of its common stock for issuance upon the exercise of warrants and upon the conversion of debentures. The issuance of these shares will have a dilutive effect on the common stock and may lower the Company’s stock price.

During the year of 2006, the Company issued warrants to purchase an aggregate of 17,222,205 shares of our common stock and issued convertible debentures which may be converted into an aggregate of 6,888,882 shares of common stock. The exercise prices on these warrants range from $0.80 per share to $2.25 per share, and the conversion price of the debentures is $0.45 per share. If issued, the shares underlying the warrants and debentures would increase the number of shares of common stock currently outstanding and will dilute the holdings and voting rights of the Company’s then-existing shareholders. One of the debenture holders converted an amount of $135,000 debenture to common stock in December 2007. The Company entered into an extension agreement with this debenture holder on December 8, 2008 where the conversion price of the debentures is reduced to $0.25 per share.

The Company’s Chairman controls a substantial portion of the outstanding common stock, and as long as he does, he may be able to control the outcome of stockholder voting.

Mr. Daniel Ng, the Company’s Founder, Chairman, President and CEO, is the beneficial owner of approximately 41.0% of the outstanding shares of the Company’s common stock. As long he owns a significant percentage of common stock, the Company’s other shareholders may be unable to affect or change the management or the direction of the Company without his support. Mr. Ng will be able to exert significant influence over the outcome of all corporate actions requiring stockholder approval, including the election of directors, amendments to the Company’s articles of incorporation and approval of significant corporate transactions.

The Company’s stock price is highly volatile, trading in the Company’s stock is sporadic, and the value of an investment in the Company’s common stock may fluctuate significantly.

The market price of the Company’s common stock has fluctuated widely and may continue to fluctuate. These fluctuations may be exaggerated since the trading volume of the Company’s common stock is volatile and sporadic. These fluctuations may or may not be based upon any business or operating results.

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Risks Related with Doing Business in the People’s Republic of China (the “PRC” or “China”)

All of the Company’s assets and operations are located in China and all of the Company’s revenue is derived from the Company’s operations in China. Accordingly, the Company’s results of operations and prospects will be subject, to a significant extent, to the economic, political and legal developments in China, which have rapidly changed.

The PRC’s economic, political and social conditions, as well as government policies, could affect the Company’s business. China has been one of the world’s fastest-growing economies. However, there is no assurance that such growth will be sustained in the future. If in the future China’s economy experiences a downturn or grows at a lower rate than expected, there could be a drop in demand in the Company’s markets.

If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely curtailed which could lead to a significant decrease in profitability.

While the economy of the PRC has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in supply of money and rising inflation. In order to control inflation in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. If similar restrictions are imposed in the future, it may lead to a slowdown of economic growth and diminish the interest and demand for the Company’s services and products, leading to a decline in profitability.

Because Chinese law governs all of the Company’s material agreements, the Company may not be able to enforce the Company’s rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital.

Chinese law governs all of the Company’s material agreements, many of which are with Chinese governmental agencies. The Company cannot assure you that the Company will be able to enforce any of the Company’s material agreements. The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in China over the past 25 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to the Company. The inability to enforce or obtain a remedy under any of the Company’s agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on the Company’s operations.

Fluctuations in the value of the Chinese currency, the Renminbi, relative to foreign currencies could affect the Company’s operating results.

The Company prepares its financial statements in United States dollars, but payroll and other costs of non-United States operations will be payable in foreign currencies, primarily Renminbi. To the extent future revenue is denominated in non-United States currencies, the Company would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have material adverse effect on the Company’s business, financial condition and operating results. The value of Renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in monetary policy, political and economic conditions of the Mainland Government. As the Company’s operations are in China, any significant revaluation of the Renminbi may materially and adversely affect the Company’s cash flows, revenues and financial condition. For example, to the extent that the Company needs to convert United States dollars into Renminbi for the Company’s operations, appreciation of this currency against the United States dollar could have a material adverse effect on the Company’s business financial condition and results of operations for the exchange loss incurred. Conversely, if the Company decides to convert Renminbi into United States dollars for other business purposes whereas the United States dollar appreciates against this currency, less United States dollar would be converted which also results in a foreign exchange risk. The Chinese government recently announced that it is pegging the exchange rate of the Renminbi against a number of currencies, rather than just the United States dollar. Fluctuations in the Renminbi exchange rate could adversely affect the Company’s business.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

The Company leased offices for its following subsidiaries: (1)AGL, with about 1,188 square meters for operation and paid total rent of $66,457 for year 2008 under lease term expiring on January 2014; (2) AGL Nanhai, with 1,045 square meters for operation and paid total rent of $36,016 for year 2008 under lease term expiring on March 2009; (3) M-Rider, with 18 square meters and paid total rent of $1,269 for year 2008 under lease term expiring on January 2014; (4) HuaGuang, with 45 square meters and paid total rent of $3,250 for year 2008 under lease term expiring Jan 2014; and (5) Arable GZ, with 52 square meters and paid total rent of $3,510 for year 2008 under lease term expiring on July 2011. The Company also leased nine staff quarters with total area of 970 square meters and paid total rent of $28,815 for year 2008 under various lease terms expiring through January 2009 to December 2011.

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ITEM 3. 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 4. Submission of Matters to a Vote of Security Holders

None.

PART II

ITEM 5. Market for the Registrant’s Common Stock, Related Security Holder Matters, and Small Business Issuer Purchases of Equity Securities

(a) The principal market in which our common stock is traded is the Over-the-Counter Bulletin Board, under the symbol “CDGT”. The table below presents the high and low bid price for our common stock each quarter during the past two years and reflects inter-dealer prices, without retail markup, markdown, or commission, and may not represent actual transactions. We obtained the following information from QuoteMedia.com, an on-line source that provides historical pricing information.

Quarter Ended Low High

03/31/07 0.48 0.481

06/30/07 0.42 0.49

09/30/07 0.22 0.24

12/31/07 0.24 0.26

03/31/08 0.18 0.18

06/30/08 0.07 0.09

09/30/08 0.12 0.12

12/31/08 0.045 0.045

The above stock prices have been retroactively adjusted in the above table to reflect a 100 for 1 reverse split in 2005.

(b) Holders. The approximate number of holders of record of the Company's Common Stock was 108 in certificate form and over 2,120 shareholders deposit their shares with the clearing house according to the NOBO list provided by Broadridge Financial Solutions, Inc as of December 31, 2008.

Dividends

The Company has not declared any cash dividends on common stock since inception and does not anticipate paying such dividends in the foreseeable future. The Company plans to retain any future earnings for use in the business. Any decisions as to future payment of dividends will depend on our earnings and financial position and such other factors, as the Board of Directors deems relevant.

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Dividend Policy

All shares of common stock are entitled to participate proportionally in dividends if our Board of Directors declares them out of the funds legally available. These dividends may be paid in cash, property or additional shares of common stock. The Company has not paid any dividends since inception and presently anticipates that all earnings, if any, will be retained for development of our business. Any future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, operating and financial condition, capital requirements, and other factors.

Unregistered Sales of Equity Securities

During the quarter ended December 31, 2008, the Company did not issue any shares.

ITEM 6. Selected Financial Data

Not applicable.

ITEM 7. Management’s Discussion and Analysis

This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes thereto included in Part II, Item 7 of this Report. All amounts are expressed in U.S. dollars. Please also refer to our forward-looking statement.

Overview

During 2008, the Company reported a revenue of $7,290,344 (2007: $7,480,453), a decrease of 3% as compared with last year, and a net loss of $13,375,575 (2007 loss: $4,094,935).

The Company’s business plan is to complete the DTV migration program in Nanhai. The Company will focus its resources toward developing VAS to facilitate the future growth of the subscription income.

Critical Accounting Policies

The following discussion and analysis is based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company’s significant accounting policies are more fully described in the Notes to the Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of the Company’s financial position and results of operations and require the application of significant judgment by the Company’s management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the control of management. As a result they are subject to an inherent degree of uncertainty. In applying these policies, the Company’s management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on the Company’s historical operations, its future business plans and projected financial results, the terms of existing contracts, the Company’s observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The following discusses the Company’s significant accounting policies and estimates.

Principles of consolidation

The accompanying 2008 consolidated financial statements include the financial statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai Branch, Maxcomm, Arable, Arable GZ, M-Rider and Digimedia Shenzhen, and its 100% variable interest entity in HuaGuang.

The accompanying 2007 consolidated financial statements include the financial statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai Branch, M-Rider and Digimedia Shenzhen, its 90% variable interest entity in HuaGuang and 51% owned subsidiary of HuaGuang in Guishi Digimedia. The Company accounts for its 49% investment held by HuaGuang in Guishi Huaguang and its 20% investment held by CDHL in 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.

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

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Consolidation of variable interest entity

In accordance with Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”), variable interest entities (VIEs) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. In connection with the adoption of FIN 46R, the Company concluded that HuaGuang is a VIE and that the Company is the primary beneficiary. Under FIN 46R transition rules, the financial statements of HuaGuang are then consolidated into the Company’s consolidated financial statements.

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 was classified under “Cost of Sales”.

Revenue recognition

Digitalization of television signals

The Company entered into an agreement with Nanhai Network Company (“Network Company”) to assist its subscribers on the conversion of television signal from analog into digital by providing STBs and smart cards to the subscribers in Nanhai City on a lease basis. The Company is entitled to receive a portion of fees, for subscribers’ television subscription and pay-TV services, payable by Network Company, under the subscription agreement. 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 STBs and smart cards to new subscribers. Revenue arising from these services is recognized when the subscriber is invoiced for the STB and smart card upon the completion of installation works. In addition, the Company is entitled to be reimbursed for its operating expenses from Network Company in accordance to the subscription agreement. Revenue arising from costs reimbursement is recognized when the amounts are duly agreed upon between the Company and Network Company.

Government grant

The local government of Nanhai City also approved a grant of Rmb10,000,000 each year for five years commencing in 2004 to finance the purchase of STBs and smart cards for sale and lease to subscribers. The grant is recognized as revenue on a straight line basis. As of December 31, 2008 and 2007, the Company received $nil and $1,317,992 of government grant respectively. There is a possibility the government grant for 2008 may not be received in the future owing to an expected upward price adjustment of DTV subscription fee income, which would reduce the government grant.

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. 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.

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 depreciation in line with the depreciable life of the relevant products; or (c) a reduction of Inventories for products maintained in stock.

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Financial review of the Company for the year 2008:

Selected financial data
	Year Ended December 31
	2008			2007

Net sales	$	7,290,344		$	7,480,453


Net loss		(13,375,575	)		(4,094,935	)


Net loss per share –basic (two classes method)		(0.31	)		(0.11	)

Net income per share -fully diluted (two classes method)		(0.31	)		(0.11	)

Weighted average shares outstanding – basic		42,595,450			37,725,894

Weighted average shares outstanding - fully diluted		42,595,450			37,725,894

Total assets		17,535,847			29,057,363

Working Capital (Deficit)		(7,805,558	)		(8,114,014)

Stockholders' equity		4,372,380			16,811,326

No dividends have been declared or paid for any of the periods presented

CONSOLIDATED RESULTS OF OPERATIONS

Statements of Operations Items:

Sales

Sales for the fiscal year ended December 31, 2008 were $7,290,344 as compared to $7,480,453 for the fiscal year ended December 31, 2007, a decrease of $190,109 or 3%. The decrease in sales was due to the reduction in government grant which is offset by the increase in the revenue from the DTV basic subscription fee income owing to the upward adjustment of the basic subscription fee from Nanhai DTV subscribers effective from June 1, 2008.

The total number of DTV subscribers increased by 53,647 to 298,999 by the end of 2008. Sale of additional STB in 2008 was increased by 4,921 to 17,854, an increase of 38% from last year, representing approximately 6% of total DTV subscribers in Nanhai. The number of value added package subscriptions decreased by 1,248 to 32,493 in 2008, representing approximately 11% of total DTV subscribers in Nanhai. The digitalization project will continue in 2009 and the Company expects that revenue from DTV business will grow as a result of the completion of migration process in 2009.

Gross Margin

Due to the increase in depreciation charge of STB for the year, gross profit margin decreased from 36% in 2007 to 30% in 2008, and the gross profit amount decreased by $503,558 from last year.

Expenses

Selling, general, administrative and depreciation and amortization expenses for the fiscal year ended December 31, 2008 decreased by $1,310,228 or 37% to $2,199,254 in comparison with the last fiscal year ended December 31, 2007. The increase is mainly due to the decreased in R&D expenses and other general overheads. The porvision for doubtful debts for the year ended December 31, 2008 increased by $6,631,380 from last year, which was due to the increase in provision on the long term portion of account receivable from the Network Company.

The Company entered into an agreement with Network Company at the end of 2007 for amortizing a major portion of the receivable amount of $7,78,997 due from Nanhai Network Company over 15 years against its share of increased portion of DTV subscription fee out of the upward adjustment effective during the mid of year 2008. Owing to the latest global financial turmoil which has a drastic adverse impact on the economy of China, the Company considered that it may result in a drop in DTV subscription fee and a drop in the income of the Nanhai Network Company. This in turn increased the uncertainty of the recoverability of such long term receivable. The Company considered that a full doubtful debt provision which is amounted to $7,847,084 was necessary as of the year end.

Reclassifications have been made to the comparative figures for the year ended December 31, 2007 for showing the amortization of convertible debt discount under operating expenses where it was shown under other expenses in the last report. Also that for provision of doubtful debts has been separately shown under operating expenses where the comparative figure of this item for the year ended 2007 was included in the selling, general and administrative expenses in the last report.

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Income Taxes

Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), “ Accounting for Income Taxes .” A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss-carry forwards.

Income from Discontinued Operation

Income from discontinued operation in the statement of operation represents the shareholders’ share of an operating result in Guishi Digimedia, a 51% subsidiary, and Guishi Huaguang, a 49% affiliate, being disposed of during the period. For the year ended December 31, 2008, the income from the discontinued operation is nil (2007: $327,083).

Net Loss

The Company had net loss of $13,375,575 (2007 loss: $4,094,935) or $0.31 loss per common share for the year ended December 31, 2008, an increase of net loss $9,280,640 as compared with last year. The increase in net loss was due to drop in gross profit $503,558, the increase in doubtful debt provision $6,869,112, and the increase in impairment of goodwill $3,996,946.

Balance Sheet Items:

Current Assets

Current Assets of the Company decreased by $0.5 million to $3.0 million as at December 31, 2008. As the Company utilized most of its cash on DTV migration, it has maintained a low level of cash balance of $0.4 million as at December 31, 2008, an increase of $0.1 million from December 31, 2007. Accounts Receivable decreased by $0.8 million to $1.1 million in 2008.

Intangible Assets

Intangible assets decreased by $4.0 million during 2008, which is the due to the impairment of goodwill generated from the acquisition of Maxcomm. Owing to the weakening economy globally including China, the Company revised the income projection of the middleware company, Arable, for the coming years. Such revision also resulted in a much lower profitability projection which in turn reduce the net worth of its holding company, Maxcomm, as well. Accordingly, an impairment adjustment on the goodwill out of the acquisition of Maxcomm is required.

Property and Equipment, Net

The net increase in property and equipment of the Company of $1.0 million in 2008 mainly represented purchase of STB for migration in 2008.

Current Liabilities

Current Liabilities of the Company have decreased by $0.8 million to $10.8 million as at December 31, 2008. The decrease was mainly attributable to the classification of part of convertible debenture as long term liability which is offset by the accounting treatment for reinstating the debenture costs out of the convertible feature.

Impact of Inflation

The Company believes that inflation has had a negligible effect on operations over the past two years.

Trends, Events, and Uncertainties

The Company believes that the demand for its DTV services is stable as cable television service in Nanhai is monopolized by the local television bureau. The increase of the number of DTV subscribers depends on the digitalization schedule. The increase of subscribers is dependent on our migration plan and the rate of increase of residents in Nanhai.

On the technology side, the Company is not certain about the impact of technological changes on its business as such development in IPTV, satellite and terrestrial broadcasting. However, assuming the Company has sufficient cash resources, the Company intends to continue to put more resources in research and development in order to catch up with the technological development especially with a focus on DTV related businesses.

In advertising sales, the Company plans to enter into more exclusive television channel arrangements in order to increase its sales volume and try to boost its advertising rate. The Company expects that revenue will increase as the 2008 Olympic Games hosted by the PRC in Beijing approach. The Company, however, has a concern that the cost to obtain exclusive television channel arrangements will escalate since the PRC is opening its advertising market to foreign investors.

The Company believes television program production will generate stable revenue for the Company. The Company believes that the government policy of the PRC to control the production and publication of media content, especially movie and television drama, is the most important factor. However, due to the demand for television programs and the digitalization of television as the primary task for SARFT, the Company anticipates that more investors will be allowed to enter the market and competition will be increased.

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Liquidity and Capital Resources

On December 31, 2008, the Company had cash of $436,062 and a working capital deficit of $7,805,558. This compares with cash of $334,410 and a working capital deficit of $8,114,014 at December 31, 2007.

Operating activities had a net surplus of cash in the amount of $4,599,248 during the year, reflecting an excess of revenues over operating expenditures.

Net cash used in investing activities for the fiscal year ended December 31, 2008 was $4,114,665 as compared with net cash used in investing activities of $3,241,369 for the fiscal year ended December 31, 2007. The increase in net cash used in investing activities was due to the increase in purchases of STBs for migration purpose.

Net cash used in financing activities for the fiscal year ended December 31, 2008 was $220,123. The majority of net cash used in financing activities was to pay down a related company.

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

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

The Company issued a total of $3.1 million in convertible debentures in November and December 2007, 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 have enough cash to repay the debentures. The Company had negotiated with the debenture holders to refinance or otherwise satisfy the debentures. As of the date of this report, the Company had entered into an extension agreement with one major debenture holder holding $2.105,000 in principal amount of debenture to extend the maturity date to June 2010.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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ITEM 8. Financial Statements

CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

CONTENTS

	Page

Report of Independent Registered Public Accounting Firm	19

Consolidated Balance Sheets as of December 31, 2008 and 2007	21

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2008 and 2007	22

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008 and 2007	23

Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007	24

Notes to the Consolidated Financial Statements as of December 31, 2008 and 2007	2 5- 42

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Jimmy C.H. Cheung & Co

Certified Public Accountants

(A member of Kreston International) Registered with the Public Company Accounting Oversight Board

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:

China Digital Media Corporation

We have audited the accompanying consolidated balance sheet of China Digital Media Corporation and subsidiaries as of December 31, 2007 and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Digital Media Corporation and subsidiaries as of December 31, 2007 and the results of its operations and its cash flows for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 24 to the consolidated financial statements, the Company had a net loss of 13,375,575, an accumulated deficit of $14,346,279 and a working capital deficiency of $7,805,558. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 24. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

JIMMY C.H. CHEUNG & CO

Certified Public Accountants

Hong Kong

Date: February 26, 2008

1607 Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong

Tel: (852) 25295500 Fax: (852) 28651067

Email: jimmycheung@jimmycheungco.com

Website: http://www.jimmycheungco.com

BONGIOVANNI & ASSOCIATES, CPA's

19720 Jetton Road, 3rd Floor

Cornelius, NC 28031

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of:

China Digital Media Corporation

We have audited the accompanying consolidated balance sheet of China Digital Media Corporation and subsidiaries as of December 31, 2008 and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Digital Media Corporation and subsidiaries as of December 31, 2008 and the results of its operations and its cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

BONGIOVANNI & ASSOCIATES, CPA's

Certified Public Accountants

Cornelius, N.C.

Date: February 18, 2009

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
	December 31, 2008			December 31, 2007
	(Audited)			(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	436,062		$	334,410
Accounts receivable, net of allowances		1,078,228			1,851,193
Inventories, net		1,247,781			781,561
Other receivables and prepaid expenses		194,386			500,229
Value added taxes recoverable		52,820			45,530
Total Current Assets		3,009,277			3,512,923

ACCOUNTS RECEIVABLE, long term portion, net of allowances		-			7,781,997
INTANGIBLE ASSETS, NET of impairment of $3,996,595		324,329			4,320,924
INVESTMENTS IN TELEVISION SERIES, NET of impairment of $223,421		-			-
PROPERTY AND EQUIPMENT, NET		14,202,241			13,193,066
DEFERRED TAX ASSET		-			123,982
OTHER ASSETS		-			124,471
TOTAL ASSETS	$	17,535,847		$	29,057,363

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible debentures, net of discount	$	950,000		$	2,212,631
Accounts payable		5,178,216			5,109,728
Other payables and accrued liabilities		923,980			707,932
Due to directors		285,642			241,239
Due to a stockholder		396,331			384,581
Due to related companies		454,555			730,831
Business and other tax payable		23,099			157,646
Income tax payable		2,603,012			2,082,349
Total Current Liabilities		10,814,835			11,626,937

LONG TERM LIABILITIES
Convertible debentures, net of discount		2,015,000			0
Accounts payable		333,632			619,100
Total Long Term Liabilities		2,348,632			619,100

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' EQUITY
Series A convertible preferred stock ($0.001 par value, 40,000,000 shares
authorized,1,875,000 shares issued and outstanding as of
December 31, 2008 and December 31, 2007)		1,875			1,875
Common stock ($0.001 par value, 500,000,000 shares authorized,
42,706,363 shares and 42,117,057 shares issued and outstanding as of December 31, 2008
and December 31, 2007 respectively)		42,706			42,117
Additional paid-in capital		14,984,021			14,836,639
Deferred stock compensation		-			(21,200	)
Retained earnings
Unappropriated		(14,346,279	)		(970,704	)
Appropriated		1,521,997			1,521,997
Accumulated other comprehensive income		2,168,060			1,400,602
Total Stockholders' Equity		4,372,380			16,811,326

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	17,535,847		$	29,057,363

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

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CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (AUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2008 AND 2007

	2008			2007

NET SALES
Revenue from digitalization of television signals	$	6,855,420		$	5,714,471
Revenue from television advertising		392,296			384,423
Revenue from software development		42,628			63,567
Government grant received		-			1,317,992
		7,290,344			7,480,453
COST OF SALES
Cost of Sales - digitalization of television signals		(891,836	)		(560,085	)
Depreciation - digitalization of television signals		(3,952,496	)		(3,023,468	)
Cost of Sales - television advertising		(271,419	)		(428,234	)
		(5,115,751	)		(4,802,302	)
GROSS PROFIT		2,174,593			2,678,151

OPERATING EXPENSES
Selling, general and administrative expenses		(2,199,254	)		(3,509,482	)
Provision for doubtful debts		(7,847,084	)		(1,215,704	)
Amortization of convertible debt discount		(752,369	)		(2,100,779	)
Depreciation and amortization		(82,959	)		(99,920	)
Total Operating Expenses		(10,881,666	)		(6,925,885	)

LOSS FROM OPERATION		(8,707,073	)		(4,247,734	)

OTHER INCOME (EXPENSES)
Loss on disposal of investment in television series		-			(261,187	)
Impairment of goodwill		(3,996,946	)		-
Interest income		2,808			2,629
Other income		207,863			142,370
Interest expenses		(279,000	)		(125,049	)
Interest paid to related companies and directors		(30,091	)		(17,400	)
Other expenses		(52,095	)		(35,009	)
Total Other Expenses , net		(4,147,461	)		(293,646	)

NET LOSS BEFORE TAX		(12,854,534	)		(4,541,380	)

Income tax (expense) income		(521,041	)		119,362

NET LOSS FROM CONTINUING OPERATIONS	$	(13,375,575	)	$	(4,422,018	)

DISCONTINUED OPERATIONS
Equity gain (loss) of affiliate		-			(14,391	)
Gain on disposal of subsidiary		-			255,415
Gain on disposal of affiliate		-			86,059
GAIN FROM DISCONTINUED OPERATIONS		-			327,083

NET LOSS		(13,375,575	)		(4,094,935	)

OTHER COMPREHENSIVE INCOME
Foreign currency translation gain		767,458			1,425,817

COMPREHENSIVE LOSS	$	(12,608,117	)	$	(2,669,118	)

Net loss per share - basic - two classes method
- From continuing operations	$	(0.31	)	$	(0.12	)
- From discontinued operations		0.00			0.01

Net loss per share - diluted
- From continuing operations	$	(0.31	)	$	(0.12	)
- From discontinued operations		0.00			0.01

Weighted average number of shares outstanding during the period - basic		42,595,450			37,725,894

Weighted average number of shares outstanding during the period - diluted		42,595,450			37,725,894

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

Table of Contents

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AUDITED)



	Series A Convertible Preferred Stock				Common Stock						Additional			Deferred			Unappropriated			Appropriated		Accumulated other
											paid-in			stock			retained			retained		comprehensive						Comprehensive
	Shares		Amount		Shares			Amount			capital			compensation			earnings			earnings		loss			Total			(Loss) Income

Balance at December 31, 2006		1,875,000		1,875		31,602,365			31,602			10,812,806			(84,800	)		3,688,643		$	957,585	$	(25,215	)	$	15,382,496

Audit adjustment for opening balance																		0								-

Stock issued for acquisition		-		-		10,000,000			10,000			3,750,000			-			-			-		-			3,760,000
Stock issued for private placement		-		-		550,000			550			249,450			-			-			-		-			250,000
Cancellation of stocks		-		-		(335,308	)		(335	)		(110,317	)		-			-			-		-			(110,652	)
Stock issued for converted debenture		-		-		300,000			300			134,700			-			-			-		-			135,000
Amortization on stock compensation		-		-		-			-			-			63,600			-			-		-			63,600
Transferred to statutory surplus reserve		-		-		-			-			-			-			(564,412	)		564,412		-			-
Net loss for the year		-		-		-			-			-			-			(4,094,935	)		-		-			(4,094,935	)
Foreign currency translation gain		-		-		-			-			-			-			-			-		1,425,817			1,425,817
Comprehensive loss		-		-		-			-			-			-			-			-		-			-			(2,669,118	)

Balances at December 31, 2007		1,875,000		1,875		42,117,057			42,117			14,836,639			(21,200	)		(970,704	)		1,521,997		1,400,602			16,811,326

Amortisation on stock compensation		-		-		-			-			-			21,200			-			-		-			21,200
Stock issued for converted debenture interest		-		-		589,306			589			147,382			-			-			-		-			147,971
Net loss for the year		-		-		-			-			-			-			(13,375,575	)		-		-			(13,375,575	)
Foreign currency translation gain		-		-		-			-			-			-			-			-		767,458			767,458
Comprehensive loss		-		-		-			-			-			-			-			-		-			-			(12,608,117	)

Balance at December 31, 2008		1,875,000	$	1,875		42,706,363		$	42,706		$	14,984,021		$	0		$	(14,346,279	)	$	1,521,997	$	2,168,060		$	4,372,380

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

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CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 and 2007
(AUDITED)


	2008			2007

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations	$	(13,375,575	)	$	(4,422,018	)
Net income from discontinued operations		-			327,083
Total net loss		(13,375,575	)		(4,094,935	)
Adjusted to reconcile net loss to cash provided by operating activities:
Equity loss of affiliate - discontinued operation		-			14,391
Impairment loss of goodwill		3,996,946
Loss on disposal of investment in television series		-			261,187
Impairment loss of investment in television series		-			223,421
Depreciation-cost of sales		3,952,496			3,023,468
Depreciation and amortization		82,959			86,518
Depreciation and amortization of discontinued operation		-			13,402
Provision for doubtful debts		7,847,084			1,215,704
Amortization of convertible debt discount		752,369			2,100,779
Loss on disposal of affiliate		-			(86,059	)
Amortization on stock compensation		21,200			63,600
Gain on disposal of interest in subsidiary		-			(255,415	)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable		707,878			(1,060,143	)
Other receivables and prepaid expenses		253,023			624,396
Inventories		(466,220	)		(306,080	)
Deferred tax asset		123,982			(123,982	)
Other assets		124,471			935,023
Increase (decrease) in:
Due to a related company		-			-
Accounts payable		(216,980	)		(162,510	)
Other payables and accrued liabilities		364,019			(1,077,413	)
Business tax payable		(134,547	)		(141,886	)
Value added taxes payable		45,530			17,680
Income tax payable		520,663			127,549
Net cash provided by operating activities		4,599,298			1,398,695

CASH FLOWS FROM INVESTING ACTIVITIES
Net cash inflow from business combination		-			61
Disposal of affiliates		-			265,924
Investment in affiliate		-			360,684
Disposal of subsidiary		-			87,333
Purchase of property and equipment		(4,114,665	)		(3,955,371	)
Net cash used in investing activities		(4,114,665	)		(3,241,369	)

CASH FLOWS FROM FINANCING ACTIVITIES
Due to related companies		(276,276	)		350,345
Minority interests		-			92,918
Proceeds from issuance in private placement		-			250,000
Due to a stockholder		11,750			384,581
Due to directors		44,403			156,583
Net cash provided by (used in) financing activities		(220,123	)		1,234,427

EFFECT OF EXCHANGE RATE ON CASH		(162,858	)		540,066

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		101,652			(68,181	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		334,410			402,591

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	436,062		$	334,410


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.

Table of Contents

CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

(A)	Organization

China Digital Media Corporation (“CDMC”) (previously HairMax International, Inc.) was incorporated in the State of Nevada on August 13, 1987.

China Digimedia Holdings Limited (“CDHL”) (previously Arcotect Digital Technology Limited) was incorporated in Hong Kong on January 5, 2000 as an investment holding company. Through its wholly owned subsidiary, Arcotect (Guangzhou) Ltd. (“ AGL”) incorporated in the People’s Republic of China (“PRC”) as a wholly owned foreign limited liability company on September 24, 2001, CDHL is engaged in software development, digital television subscription and application platform development (“software development”). Through its Nanhai Branch (“AGL Nanhai Branch”) established in July 8, 2004, AGL is also engaged in the business of converting television signals from analogue into digital format (“digitalization of television signals”), using digital television set-top-box (STB) and smart cards.

On December 28, 2004, CDMC entered into a Plan of Exchange (“the Agreement”) with CDHL pursuant to which:

(i)	the stockholders of CDHL purchased 2,850,000 shares of the Company’s Series A Convertible Preferred Stock from the majority stockholders of the Company in return for the payment of $400,000 in cash.

(ii)	the stockholders of CDHL has agreed to transfer all of CDHL’s common stock to the Company for the issue of 20,000,000 shares of restricted common stock of the Company.

The Agreement was consummated on March 31, 2005 whereupon 1,500,000 shares of restricted common stock were issued by the Company to the stockholders of CDHL in lieu of the 20,000,000 shares of restricted common stock contemplated by the Agreement. The reduction was consented by the stockholders of CDHL in light of the significant increase in the price of the shares of common stock of the Company since the execution of the Agreement.

Additionally, it was subsequently discovered that 875,000 shares of the Company’s Series A Convertible Preferred Stock were previously converted before the execution of the Agreement. The stockholders of CDHL accepted the remaining 1,975,000 shares of the Company’s Series A Convertible Preferred Stock and 1,750,000 shares of common stock converted from the 875,000 shares of the Company’s Series A Convertible Preferred Stock in lieu of the 2,875,000 shares of the Company’s Series A Convertible Preferred Stock in return for the payment of $400,000 in cash.

On completion of the Agreement in March 2005, the merger of CDMC and CDHL was treated for accounting purposes as a capital transaction and recapitalization by CDHL (“the accounting acquirer”) and re-organization by CDMC (“the accounting acquiree”). The financial statements have been prepared as if the reorganization had occurred retroactively.

Accordingly, the financial statements include the following:

(1)	The balance sheet consists of the net assets of the acquirer at historical cost and the net assets of the acquiree at historical cost.

(2)	The statement of operations includes the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the merger.

The Company changed its name to China Digital Media Corporation in March 2005.

On June 15, 2005, CDHL entered into a Strategic Alliance Agreement with shareholders of Guangdong HuaGuang Digimedia Culture Development Limited (“HuaGuang”) whereby CDHL will hold a 90% variable interest in HuaGuang for the issue of 83,042 shares of CDMC. On January 24, 2007, CDHL exercised its right to hold 100% interest in HuaGuang.

On August 25, 2005, CDHL acquired a 100% interest in Guangdong M-Rider Media Company Limited (“M-Rider”), a limited liability company in the PRC, from the shareholders of M-Rider for US$132,927 in cash and 29,158 shares of CDMC.

On October 17, 2005, CDHL established a wholly-owned subsidiary, Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”) in the PRC with a registered capital of $100,000. The subsidiary has no operations since its incorporation.

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CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

On May 8, 2006, HuaGuang set up two joint ventures, namely Guizhou Guishi Digimedia Advertising Company Limited (“Guishi Digimedia”) in which HuaGuang owns 51% interest, and Guizhou Guishi Huaguang Media Company Limited (“Guishi HuaGuang”) in which HuaGuang owns 49% interest, both located in China. Guishi Digimedia was formed to provide advertising agency services whereas Guishi HuaGuang was formed to provide television programming services, both for a period of 20 years. On August 19, 2007, HuaGuang sold its shares in Guishi Digimedia and Guishi Huaguang to Guizhou Tianma Advertising Company.

On August 23, 2006, CDHL acquired a 20% interest in Arable Media Limited (“Arable”). Arable is engaged in the business of developing middleware software and applications for digital television STB

On May 21, 2007, CDHL acquired a 100% interest in Maxcomm Limited (“Maxcomm”), its only asset is the 80% interest in Arable. After the completion of the acquisition, CDHL beneficially owns 100% interest in Arable.

On October 29, 2007, Arable established a wholly-owned subsidiary in the PRC, Arable (Guangzhou) Limited (“Arable GZ”). Arable GZ is engaged in research and development, marketing and promotion of STB middleware software. Arable GZ does not have operations up to December 31, 2007.

CDMC, CDHL, AGL, HuaGuang, M-Rider, Digimedia Shenzhen, Maxxcomm, Arable and Arable GZ are hereinafter referred to as (“the Company”).

(B)	Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(C)	Principles of consolidation

The accompanying 2008 consolidated financial statements include the financial statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai Branch, Maxcomm, Arable, Arable GZ, M-Rider, and its 100% variable interest entity in HuaGuang.

The accompanying 2007 consolidated financial statements include the financial statements of CDMC and its 100% owned subsidiaries CDHL, AGL and its Nanhai Branch, Maxcomm, Arable, Arable GZ, M-Rider and Digimedia Shenzhen, its 90% variable interest entity in HuaGuang.

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

(D)	Consolidation of variable interest entity

In connection with the adoption of FIN 46R, the Company concluded that HuaGuang is a VIE and that the company is the primary beneficiary. Under FIN 46R transition rules, the financial statements of HuaGuang are then consolidated into the Company’s consolidated financial statements.

(E)	Cash and cash equivalents

For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with a maturity of less than three months.

(F)	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 December 31, 2008 and 2007, the Company considers all its accounts receivable to be collectible after provision for doubtful accounts made in the financial statements.

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CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(G)	Inventories

Inventories are stated at lower of cost or market value, cost being determined on a first in first out method. The Company provided inventory allowances based on excess and obsolete inventories determined principally by customer demand. Inventory consists of finished goods purchased directly from manufacturers.

(H)	Property and equipment

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:

Set Top Box (“STB”) and smart cards

5 Years

Motor vehicles

10 Years

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 was classified under “Cost of Sales”. Accordingly, depreciation of STB and smart cards of the Company in 2008 for the amount of $3,952,496 was included in “Cost of Sales”.

(I)	Investments in television series

Investments in television series represent the unamortized costs of acquired television series production and participation costs. The investments are stated at the lower of cost less accumulated amortization or fair values. The investments are amortized, using the individual television series forecast method, in the proportion that current revenue bears to management’s estimate of ultimate revenue expected to be recognized from the exploitation and exhibition of the television series. The ultimate revenue which includes estimates over a period not to exceed 10 years following the date of initial release are prepared on a title-by-title basis and reviewed periodically based on current market conditions. Estimate of future revenue involve measurement uncertainty and it is therefore possible that reduction in the carrying value of investments in television series may be required as a consequence of changes in management’s future revenue estimates.

(J)	Long-lived assets

The Company accounts for long-lived assets under the Statements of Financial Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144, long-lived assets held and used by the Company are reviewed for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. The management reviewed for impairment on the goodwill for acquisition of Maxcomm of $3,996,595 was recognized for the year ended December 31, 2008. The Company believes that no impairment of other long-lived assets including property and equipment exist at December 31, 2008.

(K)	Valuation of financial instruments (other than derivative 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 receivable (trade and others), accounts payable (trade and related party) 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.

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CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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.

(L) Convertible Instruments

The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company are bifurcated and accounted for as a derivative financial instrument. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to the amortization of debt discount using the Effective Interest Method.

(M)	Derivative financial instruments

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants or options to acquire common stock and the embedded conversion features of debt that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net – cash settlement or (b) physical or net share settlement is not within the control of the Company. In such instances, net – cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net – cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. These derivative financial instruments are indexed to an aggregate of 6,888,888 shares of the Company’s common stock as of December 31, 2008 and are carried at fair value of $2,965,000.

Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

(N)	Revenue recognition

Digitalization of television signals

The Company entered into an agreement with Nanhai Network Company (“Network Company”) to assist its subscribers on the conversion of television signal 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 receive a portion of fees, for subscribers’ television subscription and pay-TV services, payable by Network Company, under the subscription agreement. 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.

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

Government grant

The local government of Nanhai City also approved a grant of Rmb10,000,000 each year for five years from 2004 to finance the conversion of television signal from analog into digital. The grant is recognized as revenue on a straight line basis.

As of December 31, 2008 and 2007, the Company received nil and $1,317,992 of government grant respectively.

Advertising sales

Software development

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CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

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.

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 stocks.

(O)	Research and Development

Research and development costs related to both present and future products are expenses as incurred. Total expenditures on research and development charged to general and administrative expenses for the years ended December 31, 2008 and 2007 were $18,469 and $763,231, respectively.

(P)	Income taxes

The Company accounts for income taxes under the Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period included the enactment date.

(Q)	Foreign currency transactions

CDMC, Arable and CDHL maintain their accounting records in their functional currencies of US$ and Hong Kong Dollars (“HK$”) respectively, whereas AGL, M-Rider, HuaGuang, and Shenzhen DigiMedia maintain their accounting records in their functional currency of RMB.

Foreign currency transactions during the year are translated to the functional currency at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the approximate rates of exchange at that date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.

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 are recorded within equity. Translation gain for the years ended December 31, 2008 and 2007 were $752,938 and $1,425,817 respectively.

(R)	Comprehensive income (loss)

The foreign currency translation gain or loss resulting from translation of the financial statements expressed in HK$ and RMB to US$ is reported as other comprehensive income in the statements of operations and stockholders’ equity. Other comprehensive income for the years ended December 31, 2008 and 2007 were $752,938 and $1,425,817 respectively.

(S)	Income per share

Basic income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive in nature.

(T)

Segments

The Company operates in four reportable segments, digitalization of television signals, software development, television advertising, and investments in television series.

Table of Contents

CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(U)	Reclassifications

Certain 2007 balances have been reclassified to conform to the 2008 presentation.

(V)	Recent accounting pronouncement

In October 2008, the Financial Accounting Standards Board ("FASB") issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" (FSP SFAS 157-3), which clarifies the application of SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), in an inactive market and provides an example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this standard did not have any impact on the Company's results of operations, cash flows or financial positions for the year ended December 31, 2008.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with generally accepted accounting principles. This statement became effective in November 2008. Adoption of SFAS 162 did not have a material impact on the Consolidated Financial Statements.

In February 2008, the FASB issued FSP SFAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP SFAS 157-2"). FSP SFAS 157-2 delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis (at least annually) until January 2009. The implementation of FSP SFAS 157-2 did not have a material impact on the Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements.

In December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method ) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The adoption of adopting SFAS No. 141R will have an impact on its accounting for business combination once adopted, but the effect is dependent upon acquisition at that time.

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2.	INTANGIBLE ASSETS

Intangible assets at of December 31, 2008 and 2007 consisted of the following:

	2008			2007

Goodwill recognized upon acquisitions of subsidiaries	$	4,320,924		$	4,320,924
Impairment loss		(3,996,946	)		--
	$	324,329		$	4,320,924

In accordance with SFAS No. 142 “Goodwill and other intangible assets,” goodwill is not amortized but is tested for impairment. The Company performed an assessment on goodwill arising from the M-Rider and Maxcomm acquisitions and concluded there was an impairment of $3,996,946 as to the carrying value of the goodwill in this reporting period.

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3.	BUSINESS COMBINATION

On May 21, 2007, CDHL entered into a Stock Purchase and Transfer Agreement (the “Purchase Agreement”) with a third party to purchase 100% of Maxcomm Limited, a corporation incorporated in the British Virgin Islands, which sole asset is an 80% equity interest in Arable Media Limited (“Arable”) in exchange for 10,000,000 shares of restricted common stock of the Company, having a fair value of $3.76 million, based on the 10 days' volume weighted average price. After the acquisition, the Company’s interest in Arable was increased from 20% to 100%. Arable is a software developer specialized in middleware products and applications for digital TV set-top box and broadcasting technologies. The acquisition was accounted for under the purchase method of accounting in accordance with step acquisition rules in Statement of Financial Accounting Statements No. 141, “Business Combinations”. Accordingly, the operating results of Maxcomm have been included in the consolidated statements of operation and comprehensive loss after the effective date of the acquisition of May 21, 2007.

The preliminary allocation of the net liabilities taken over is as follows:

Cash and cash equivalent	$	61
Other receivables and prepaid expenses		323,452
Total current assets		323,513

Property and equipment		701
Capitalized software development cost		592,756
Total assets		916,970

Accounts payable and accruals liabilities		(1,106,823	)
Net liabilities acquired		(189,853	)
Minority interest		(2,559	)
Share of pre-acquisition losses prior to becoming a subsidiary		27,361
	$	(165,051	)
Consideration for acquisition		3,760,000
Goodwill	$	3,925,051

Analysis of the net inflow of cash and cash equivalents in respect of the business combination is as follows:

Cash and cash equivalents acquired		$	61
Net cash inflow		$	61

The following table reflects the unaudited pro forma combined results of operations for the year ended December 31, 2007, assuming the acquisition had occurred at the beginning of 2007.

Revenue	$	7,480,453
Net loss	$	(4,211,390	)
Net loss per share - basic and diluted	$	0.00

4.	DISCONTINUED OPERATIONS

On August 17, 2007, the Company disposed its 51% owned subsidiary, Guishi Digimedia. The operation of Guishi Digimedia has been reclassified as discontinued operations in the accompanying consolidated statement of operations for the year ended December 31, 2007 and is summarized as follows:

Net Sales	$	650,344
Cost of Sales		(195,362	)
Gross Profit		454,982
Selling and Administrative Expenses		(656,916	)
Other Income		763
Income Tax		0
Net Loss		(201,171	)

Share of Loss	$	(102,597	)

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5.	BUSINESS DISPOSAL

On August 17, 2007, HuaGuang entered into an Agreement to Transfer the Equity in Guishi Digimedia and Guishi Huaguang (the “Transfer of Equity Agreement”) with a third party to sell its 51% equity interest in Guishi Digimedia and 49% equity interest in Guishi Huaguang to the third party for a total consideration of US$ 450,442. The consideration will be payable in three installments: (i) 40% of the purchase price was payable within seven business days of execution of the agreement, (ii) 30% of the purchase price is payable within five business days of the completion of the equity transfer, and (iii) 30% of the purchase price is payable by November 30, 2007. If the equity transfer is not completed for reasons not attributable to either party, either party may terminate the agreement and the transaction will be reversed in its entirety. On the completion of the sale, the Company recorded a gain on the disposal of Guishi Digimedia and Guishi Huaguang of $255,415 and $86,059 respectively.

The following table summarizes the assets and liabilities of Guishi Digimedia as of August 17, 2007 foregone:

Fixed Assets	$	628,560
Cash and bank balance		97,186
Accounts receivable		38,927
Other receivables		85,898
Prepaid expenses		216,080
Due to stockholders		(779,101	)
Accounts payable		(77,440	)
Other payables		(128,361	)
Accrued liabilities		(35,607	)
Deposit received		(48,922	)
Minority interest		(68,116	)
		(70,896	)
Gain on disposal of interest in subsidiary		255,415
Consideration	$	184,519

Satisfied by:
Cash consideration received	$	184,519

Net cash inflow arising on disposal

Cash consideration received	$	184,519
Cash and bank balance disposed of		(97,186	)
	$	87,333

6.	INVESTMENTS IN AFFILIATES

The Company’s effective interest of 49% 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 loss for the year ended December, 2007 was $14,391. The Company disposed its 49% equity interest in Guishi Huaguang on August 17, 2007.

A summary of the unaudited condensed financial statements of the affiliate as of August 17, 2007 is as follows:

Current assets	$	520,779
Non-current assets		225,746
Total assets	$	746,525

Current liabilities	$	379,454
Stockholders’ equity		367,071
Total Liabilities and Stockholders’ Equity	$	746,525

Revenues	$	-
Gross Profit	$	-
Net loss	$	29,669

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The Company’s share of the loss of this year up to August 17, 2007 is as follows:

Company share at 49%		$	14,391
Equity in loss of affiliate		$	14,391

7.	ACCOUNTS RECEIVABLE, NET

Accounts receivable at December 31, 2008 and 2007 consisted of the following:

	2008			2007

Accounts receivable, current portion	$	1,078,228		$	1,851,193
Amount recoverable beyond 12 months classified as non-current assets		7,970,844			7,781,997
Less: allowance for doubtful accounts		(7,970,844	)		-
Amount recoverable beyond 12 months classified as non-current assets (net)		-			7,781,997

During 2007, the Company entered into an agreement with the Network Company to obtain a more favorable digital TV basic subscription fee income sharing plan in exchange for setting aside a certain portion of trade receivable balance due from the Network Company from the current balance. Such portion is to be repayable by the Network Company over 15 years annually and evenly, and was classified as non-current assets in the consolidated financial statements as of December 31, 2007. Under the current global unstable financial and economic environment, the Company considered the collectability of the non-current portion uncertain. A full provision is made for such amount.

As of December 31, 2008 and 2007, the Company considered all accounts receivable collectable after $7,847,084 and $1,215,704 were provided for doubtful accounts for the years ended December 31, 2008 and 2007, respectively.

8.	INVENTORIES, NET

Inventories at December 31, 2008 and 2007 consisted of the following:

	2008		2007

Finished goods	$	1,247,781	$	781,561
Less: provision of obsolescence		--		--
Inventories, net	$	1,247,781	$	781,561

For both of the years ended December 31, 2008 and 2007, the Company has not recorded a provision for obsolete inventories.

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9.	OTHER RECEIVABLES AND PREPAID EXPENSES

Other receivables and prepaid expenses at December 31, 2008 and 2007 consisted of the following:

	2008		2007

Deposit paid for the sole advertising agency	$	46,588	$	134,350
Proceeds from the disposal of subsidiary and affiliate		-		138,946
Advances to staff		52,134		45,528
Prepayments		57,945		145,148
Utility deposits		37,719		36,257
	$	194,386	$	500,229

10.	INVESTMENTS IN TELEVISION SERIES, NET

The following is a summary of investments in television series related to the Company’s participations in the production of two television series through HuaGuang, a 100% held VIE:

	2008		2007

Television participation costs	$	-	$	223,421
Less: impairment loss		-		223,421
Television participation costs, net	$	-	$	-

During the year ended December 31, 2005, HuaGuang, a VIE, entered into two investment contracts to participate in the production of two television series. The Company’s participation is 20% and 34% of the total production costs. These investments, for which the Company does not have significant influence, are accounted for under the cost method of accounting.

b)	During the year ended December 31, 2007, the Company disposed of its 34% interest in a television series to the original producer who returned 335,308 shares of common stock previously issued to the producer as consideration. This disposal resulted in a loss of $261,187.

c)	Impairment loss of $0 and $223,421 was recorded for the years ended December 31, 2008 and 2007 respectively.

11. PROPERTY AND EQUIPMENT, NET

The following is a summary of property and equipment at December 31:

	2008		2007

STB and smart cards provided to subscribers	$	25,607,750	$	20,257,843
Motor vehicles		118,670		111,353
Furniture and office equipment		1,050,783		736,102
		26,777,203		21,105,298
Less: accumulated depreciation		12,574,962		7,912,232
Property and equipment, net	$	14,202,241	$	13,193,066

Depreciation expense for the years ended December 31, 2008 and 2007 were $4,035,455 and $3,123,388 respectively.

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12. OTHER ASSETS

Other assets represent deferred finance costs relate to commission, legal and financial advisory fees directly attributable to the issuance of the convertible debenture by the Company. Deferred finance costs are amortized over the life of the debenture of 18 months from November 2006. In 2008, costs amortized as expenses were $752,369.

13.	CONVERTIBLE DEBENTURES

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. 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. Furthermore, on December 13, 2006, the Company has completed another private equity financing with an accredited investor for $100,000.

As a result of the above, during 2008, the Company has the following convertible debentures outstanding;

On November 17, 2006 to a financial institution for $ 2,150,000

On November 17, 2006 to a financial institution for $ 200,000

On November 17, 2006 to a financial institution for $ 500,000

On November 17, 2006 to an individual investor for $ 150,000

On December 13, 2006 to an individual investor for $100,000

The above convertible debentures were issued pursuant to the private equity financing as described above 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. In December 2007, debenture amounted to $135,000 was converted to common stock by one of the debenture holders.

On December 08, 2008, the Company's Board of Directors entered into an extension agreement (the “Extension Agreement”) with one of the debenture holders in connection with the convertible debenture for the amount of $2,015,000 because the Company did not have sufficient funds to repay the debenture due. The Extension Agreement was filed with the Form 8-K on December 12, 2008. During the extension period, a principal amount of $100,750 is due on March 31, 2009, and the balance of $1,914,250 is due on June 30, 2010. The Company is also in contact with other debenture holders but has not agreed on any terms of extension up to the date of this report. The debenture holder currently holds three warrants, as adjusted, consisting of (i) a Class A warrant to purchase 4,777,773 commonn shares at an exercise price of $.80 per share, (ii) a Class B warrant to purchase 4,777,773 common shares at an exercise price of $1.20 per share, and (iii) a Class C warrant to purchase 2,388,887 common shares at an exercise price of $2.25 per share. Its convension price was also reduced to $.25, all pursuant to the Extension Agreement.

If the anti-dulution provision has not been triggered then the note would convert to approximately 8,000,000 common shares which would not constitute control. If however the anti-dilution provision has been triggred then this would convert to substantially more common shares.

The following is a summary of the principal portion of the convertible debentures outstanding as of December 31, 2008 and 2007:

	2008			2007


$2,150,000 Convertible Debentures, net of $135,000 as of December 31, 2008 and 2007 conversions and unamortized discount of $0 and $376,350 as of December 31, 2008 and 2007 respectively at 10% per annuum for the period from May 18, 2008 to December 31, 2008, at 13% interest per annum for the year ended 2009 due quarterly and 14% interest per annum due June 2010	$	2,015,000		$	1,503,650
$500,000 Convertible Debentures, net of unamortized discount of $0 and $126,852 as of December 31, 2008 and 2007 respectively at 4% interest per annum due May 2008		500,000			373,148
$200,000 Convertible Debentures, net of unamortized discount of $0 and $50,741 as of December 31, 2008 and 2007 respectively at 4% interest per annum due May 2008		200,000			149,259
$150,000 Convertible Debentures, net of unamortized discount of $0 and $38,056 as of December 31, 2008 and 2007 respectively at 4% interest per annum due May 2008		150,000			111,944
$100,000 Convertible Debentures, net of unamortized discount of $0 and $25,370 as of December 31, 2008 and 2007 respectively at 4% interest per annum due June 2008		100,000			74,630
		2,965,000			2,212,631
Less: current maturities		(950,000	)		(2,212,631	)
Long term portion	$	2,015,000		$	-

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14.	ACCOUNTS PAYABLE

Accounts payable at December 31, 2008 and 2007 consists of the following.

	2008		2007

Accounts payable	$	5,511,848	$	5,728,828
Less: current portion		5,178,216		5,109,728
Long term liabilities payable from January to December 2010	$	333,632	$	619,100

During 2007, the Company entered into an agreement with one of its major suppliers to extended the payment of its purchases over 24 equal monthly installments. The amounts owed to this supplier payable beyond one year as of December 31, 2008 are classified as long-term liabilities.

15.	OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities at December 31, 2008 and 2007 consist of the following:

	2008		2007

Other payables	$	409,103	$	320,469
Deposits received from customers		133,072		89,030
Accrued liabilities		381,805		298,433
	$	923,980	$	707,932

16.	INCOME TAX

a)	CDMC was incorporated in the United States and has incurred net operating loss for income tax purposes for 2008 and 2007.

CDHL, Maxcomm, and Arable are incorporated in Hong Kong and are subject to Hong Kong profits tax. No provision for Hong Kong profits tax has been made since all of these entities incurred a loss during 2008 and 2007.

AGL, M-Rider, HuaGuang, Shenzhen DigiMedia and Arable GZ were incorporated in the PRC and are subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. The applicable tax rate has been 25%. No tax benefit is expected from the tax credits in the future. The income tax expenses for 2008 and 2007 are summarized as follows:

PRC Income Tax	2008		2007

Current	$	--	$	--
Deferred		--		(119,362	)
	$	--	$	(119,362	) )

Deferred tax liabilities result from temporary differences for revenues earned but not yet taxable under PRC tax regulations.

The Company’s deferred tax asset at December 31, 2008 and 2007 consists of net operating losses carry forwards calculated using statutory effective tax rates. Due to its history of losses, the Company believes that sufficient objective, positive evidence currently exists to conclude that recoverability of its net deferred tax assets is unlikely rather than not. Consequently, the Company has provided a valuation allowance covering 100% of its net deferred tax assets with the exception of those of AGL.

As of December 31, 2008, CDMC had loss carried forward of approximately $5,229,793 for U.S. income tax purposes available for offset against future taxable U.S. income expiring in 2028.

As of December 31, 2008, CDHL has Hong Kong tax loss carry forwards of approximately $310,743. Currently, the Hong Kong tax losses can be carried forward indefinitely.

As of December 31, 2008, Arable has Hong Kong tax loss carry forwards of approximately $767,372. Currently, the Hong Kong tax losses can be carried forward indefinitely.

As of December 31, 2008, all the PRC companies have tax loss carry forwards of approximately $1,543,735 which is not expected to be utilized in near future.

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c)	The reconciliation of income taxes computed at the statutory income tax rates to total income taxes for the years ended December 31, 2008 and 2007 is as follows:

		2008			2007

CDMC
	Income tax computed at the federal statutory rate		34	%		34	%
	State income taxes, net of federal tax benefit		5	%		5	%
	Valuation allowance		39	%		39	%

CDHL
	Income tax computed at applicable tax rate		16.5	%		17.5	%
	Valuation allowance		(16.5	%)		(17.5	%)

Arable
	Income tax computed at applicable tax rate		16.5	%		17.5	%
	Valuation allowance		(16.5	%)		(17.5	%)

AGL
	Income tax computed at applicable tax rate		0	%		33	%
	Valuation allowance		0	%		(33	%)

M-Rider
	Income tax computed at applicable tax rate		25	%		33	%
	Valuation allowance		(25	%)		(33	%)

HuaGuang
	Income tax computed at applicable tax rate		25	%		33	%
	Valuation allowance		(25	%)		(33	%)

Under the current government policy, any company certified as the Software Enterprise in China is fully exempt from corporate income tax for two years, and 50% exempt for the following three years starting from its first profitable year. Since AGL has been certified as Software Enterprise in China, its corporate income tax is exempt for the year ended 2008 and 2009 as it had taxable profit in 2008.

17.	NET LOSS PER SHARE

Loss per share on a diluted basis were $0.31 and $0.12 for the fiscal years ended December 31, 2008 and 2007 respectively. As of December 31, 2008, the Company has outstanding:

- 42,706,363 shares of common stock;

- 1,875,000 shares of preferred stock;

- 10,615,553 shares of common stock to be issued upon conversion of convertible debenture (“CD”);

- 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.

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In accordance with paragraph 40 and 41 of SFAS 128 and EITF 03-6, basic and diluted earnings per share on a two class method for the fiscal year ended December 31, 2008 and 2007 were calculated as follows:


	2008			2007

Loss from continuing operations	$	(13,375,575	)	$	(4,422,018	)
Gain from discountinued operations		-			327,083
Net Loss		(13,375,575	)		(4,094,935	)

Basic - 2 classes method
Loss available to common stockholders	$	(13,375,575	)	$	(4,094,935	)

Weighted-average common stock outstanding		42,595,450			37,725,894

Basic earnings per share - Common Stock
-From continuing operations		(0.31	)		(0.12	)
-From discontinued operations		0.00			0.01

Diluted
Loss available to common stockholders	$	(13,375,575	)	$	(4,094,935	)

Diluted weighted-average common stock outstanding		42,595,450			37,725,894

Diluted earnings per share
-From continuing operations		(0.31	)		(0.12	)
-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 December 31, 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. The warrants, which expire on November, 2012, were still outstanding on December 31, 2008.

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18.

SEGMENTS

The Company operates in five reportable segments; digitalization of television signals, software development, television advertising, investments in television series and other. 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. As a result, the components of operating income for one segment may not be comparable to another segment. The following is a summary of the Company’s segment information for the years ended December 31, 2008 and 2007:

	Digitalization									Investments
	of Television			Television			Software			in Television
	Signals			Advertising			Development			Series			Total
2008
Revenues	$	6,855,420		$	392,296		$	42,628		$	-		$	7,290,344
Gross profit		2,011,087			120,878			42,628			-			2,174,593
Net Income (loss)		(7,924,314	)		(9,338	)		(128,033	)		(17,525	)		(8,079,210	)
Total assets		16,615,629			476,417			337,671			106,130			17,535,847
Capital expenditure		3,824,376			12,020			156,926			121,343			4,114,665
Depreciation and amortization	$	4,005,096		$	-		$	23,228		$	7,131		$	4,035,455

2007
Revenues	$	7,032,463		$	384,423		$	63,567		$	-		$	7,480,453
Gross profit (loss)		3,448,910			(43,811	)		63,567			(790,515	)		2,678,151
Net Income (loss)		2,077,103			(641,986	)		(1,047,808	)		(1,805,462	)		(1,418,153	)
Total assets		23,771,154			682,482			4,452,575			151,152			29,057,363
Capital expenditure		3,838,186			(572,670	)		39,873			22,123			3,327,512
Depreciation and amortization	$	3,066,146		$	10,154		$	8,801		$	38,287		$	3,123,388

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

	2008			2007

Total net loss for reportable segments	$	(8,079,210	)	$	(1,418,153	)
Unallocated amounts relating to corporate operations
Impairment of goodwill		3,996,946			-
Interest expenses		277,305			125,049
Amortization of convertible debt discount		752,369			2,100,779
Interest paid to related companies and directors		30,091			17,400
Gain from discontinued operations		-			(355,865	)
Administration expenses		190,289			542,989
Professional fees		32,578			240,346
Others		16,787			6,084

Total net loss	$	(13,375,575	)	$	(4,094,935	)

19.	STOCKHOLDERS’ EQUITY

(A) Stock issuances

1.	Stock issued for debenture interest payment

During the year 2008, the Company issued 589,306 shares of its restricted common stock with a fair value of $147,382 to third parties for paying debenture interest in lieu of cash.

(2)	Stock issued for acquisition

During the year 2008, the Company issued 10,000,000 shares of its restricted common stock with a fair value of $3,760,000 to a third party to acquire 100% equity interest in Maxcomm.

(3)	Stock issued for converted debenture

During the year 2008, the Company issued 300,000 shares of common stock to a debenture holder who converted $135,000 of the debenture.

(4)	Stock issued for private placement

During the year 2008, the Company issued 550,000 shares of its restricted common stock to a third party with a fair value of $250,000 for private placement.

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CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(B) Appropriated retained earnings

The Company’s PRC subsidiaries are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on the after-tax net income determined in accordance with the laws and regulations of the PRC. Prior to January 1, 2006 the appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the laws and regulations of the PRC until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 5% to 10% of the after tax net income determined by the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10 percent of net income after tax per annum, such contributions not to exceed 50 percent of the respective companies’ registered capital.

The statutory reserve funds are restricted for use to set off against prior period losses, expansion of production and operation or for the increase in the registered capital of the Company. The statutory public welfare fund is restricted for use in capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation.

During 2008 and 2007, the Company appropriated $328,113 and $564,412 respectively to the reserves funds based on its net income in accordance with the laws and regulations of the PRC.

During 2008, no restricted capital was being contributed.

20.	RELATED PARTY TRANSACTIONS

As of December 31, 2008 and 2007, the Company owed to two directors $285,642 and $241,239 respectively for short-term advances. Interest is charged at 6% per annum on the amount owed.

As of December 31, 2008 and 2007, the Company owed to related companies $454,555 and $730,831 respectively for short-term unsecured advances made. Interest is charged at 6% per annum on the amount owed.

As of December 31, 2008 and 2007, the Company owed a stockholder $396,331 and $384,581, respectively, for short-term unsecured advances made. Interest is charged at 6% per annum on the amount owed.

21.	COMMITMENTS

(A)	Employee benefits

The full time employees of the Company in China are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provision and contributions made for such employee benefits was $90,746 and $93,011 for the years ended December 31, 2008 and 2007, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.

The Company also operates a Mandatory Provident Fund plan (“the plan”) which is available to all employees in Hong Kong. Both the Company and the employees are required to contribute 5% (subject to an aggregate amount of $256) per month of the employees’ relevant income. Contributions from the Company are 100% vested in the employees as soon as they are paid to the plan. Contributions to the plan are expensed as they become payable in accordance with the rules of the plan and amounted to $4,680 and $6,588 for the years ended December 31, 2008 and 2007 respectively. The assets of the plan are held separately from those of the Company and are managed by independent professional fund managers.

(B)	Operating leases commitments

The Company leases office spaces from third parties under five operating leases; two leases expire on March 31, 2009 and July 20, 2011, and three leases expire on January 8, 2014 for total monthly rentals of $9,714. The Company also leases spaces for staff quarters from third parties under nine operating leases which expire from January 1, 2009 to December 31, 2011 with total monthly rentals of $2,057. Accordingly, for the years ended December 31, 2008 and 2007, the Company recognized rental expense for office spaces in the amount of $139,367 and $129,407, respectively

As of December 31, 2008, the Company has outstanding commitments with respect to the above non-cancelable operating leases, which are due as follows:

2009	$	101,468
2010		86,379
2011		88,671
2012		86,039
Thereafter		90,341
	$	452,899

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CHINA DIGITAL MEDIA CORPORATION

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(continued)

22.	CONTINGENCIES

The Company accounts for loss contingencies in accordance with SFAS 5 “Accounting for Loss Contingencies”, and other related guidance. Set forth below is a description of certain loss contingencies as of December 31, 2005 and management’s opinion as to the likelihood of loss in respect of each loss contingency.

On May 24, 2005, 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 for this contingency has been made as of December 31, 2008 due to the remote chance of an unfavorable outcome.

23.	CONCENTRATIONS AND RISKS

During 2008 and 2007, 100% of the Company’s assets were located in China and 100% of the Company’s revenues were derived from customers in China.

The Company relied on two suppliers and purchases from those suppliers for the year ended December 31, 2008 and 2007 are as follows:

For the year ended	Supplier A			Supplier B

December 31, 2008		88	%		11	%
December 31, 2007		72	%		15	%

At December 31, 2008 and 2007, accounts payable to those two suppliers totaled $5,008,624 and $4,951,855 respectively.

24.	GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $14,346,279 at December 31, 2008 that includes a net loss of $13,375,575 for the year ended December 31, 2008. The Company’s total current liabilities exceed its total current assets by $7,805,558. These factors raise substantial doubt about its ability to continue as a going concern. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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

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ITEM 9. Changes with and Disagreements With Accountants on Accounting And Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Evaluation of Controls. As of the end of the period covered by this annual report on Form 10-K, the Company evaluated the effectiveness of the design and operation of (i) our disclosure controls and procedures ("Disclosure Controls"), and (ii) our internal control over financial reporting ("Internal Controls"). This evaluation ("Evaluation") was performed by our President and Chief Executive Officer and Chief Financial Officer ("CFO"), Ng Chi Shing ("CEO & CFO"). In this section, the Company presents the conclusions of our CEO & CFO based on and as of the date of the Evaluation, (i) with respect to the effectiveness of our Disclosure Controls, and (ii) with respect to any change in our Internal Control that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our Internal Control.

CEO & CFO Certifications. Attached to this annual report, as Exhibits 31.1 and 31.2, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This section of the annual report contains the information concerning the Evaluation referred to in the Rule 13a-14(a)/15d–14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d–14(a) Certifications for a more complete understanding of the topic presented.

Disclosure Controls and Internal Control. Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to us is made known to the CEO & CFO by others, particularly during the period in which the applicable report is being prepared. Internal Control, on the other hand, are procedures which are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized, (ii) the Company's assets are safeguarded against unauthorized or improper use, and (iii) our transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with accounting principals generally accepted in the United States.

Limitations on the Effectiveness of Controls. Our management does not expect that our Disclosure Controls or our Internal Control will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances so of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of a system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions. Based upon the Evaluation, our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives. Our CEO & CFO have concluded that our disclosure controls and procedures are effective at that reasonable assurance level to ensure that material information relating to the Company is made known to management, including the CEO and CFO. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, in accordance with Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Certifying Officers, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment using these criteria, the Company’s management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2008.

This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this report.

ITEM 9B. Other Events

None.

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PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

Identification of Directors

The following information, as of December 31, 2008 is furnished with respect to each Director and Executive Officer:

Name of Director	Age		Date of Service	Position with Company

Ng Chi Shing		44	2004	President, Chief Executive Officer, Director
Chen Lu		39	2005	Director
Chen Juan		32	2005	Director

All Directors serve for one-year terms.

All officers serve at the pleasure of the Board.

There are no arrangements or understandings pursuant to which any of them were elected as officers.

Mr. Ng Chi Shing is our President and Chief Executive Officer and Director and Chief Financial Officer. Mr. Ng is founder and CEO of Arcotect Digital Technology Limited. Arcotect Digital Technology Limited was founded to capitalize on the numerous opportunities in China arising from the digitization of cable television services and the reform of state owned cable television enterprises. Mr. Ng has extensive experience in Cable TV operations, Internet and information technology industry. Over his 17 years experience in the industry, he has been Chairman, CEO and director of public companies in Hong Kong, such companies including DCP Holdings Ltd., Hong Kong Cable TV Ltd, the first cable TV operator in Hong Kong, Hong Kong Star Internet Ltd., the first Internet Service Provider in Hong Kong. Mr. Ng is also the Chairman of Hong Kong Information Technology Federation and the founder member of Hong Kong Internet Service Providers Association. Besides, Mr. Ng was elected as Hong Kong’s “Ten Outstanding Young Digi Persons” by Hong Kong Productivity Council and Hong Kong Junior Chamber in 2000.

Mr. Chen Lu is a Director of the Company. Mr. Chen has over 18 years experience in banking, telecom and broadcasting industry in China. Mr. Chen was the founder and general manager of Guangzhou Vispac Telecom Co Ltd. and Guangzhou DaiLin Communication Co. Ltd.

Ms. Chen Juan is a Director of the Company. She is currently a teacher of computer related courses in Guangdong Dance College since 1999.

There have been no events under any bankruptcy act, any criminal proceedings and any judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past 5 years.

Audit Committee Financial Expert

The Company does not have a separately designated standing audit committee. The entire Board of Directors acts as an audit committee for the purpose of overseeing the accounting and financial reporting processes, and our audits of the financial statements. The Commission has adopted regulations relating to audit committee composition and functions, including disclosure requirements relating to the presence of an "audit committee financial expert" serving on its audit committee. In connection with these new requirements, our Board of Directors examined the Commission's definition of "audit committee financial expert" and concluded that the Company does not currently have a person that qualifies as such an expert. Presently, there are only three directors serving on our Board, and the Company is not in a position at this time to attract, retain and compensate additional directors in order to acquire a director who qualifies as an "audit committee financial expert". While neither of our current directors meets the qualifications of an "audit committee financial expert", each of our directors, by virtue of his past employment experience, has considerable knowledge of financial statements, finance, and accounting, and has significant employment experience involving financial oversight responsibilities. Accordingly, the Company believes that our current directors capably fulfill the duties and responsibilities of an audit committee in the absence of such an expert.

Code of Conduct

The Company has adopted a code of conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Such code of ethics will be provided to any person without charge, upon request, by sending such request to us at our principal office. The Company publishes the code in the Company’s website at www.chinadigimedia.com.

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Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and the Company is required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 2008. The Company believes that all of these filing requirements are satisfied by our executive officers, directors and by the beneficial owners of more than 10% of our common stock. In making this statement, the Company has relied solely on copies of any reporting forms received by it, and upon any written representations received from reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was required to be filed under applicable rules of the Commission.

Changes in Nomination Procedures

There have been no material changes to the procedures by which security holders may recommend nominees for the Company’s Board since the Company’s filing in which we discussed such procedures.

ITEM 11. Executive Compensation

During the fiscal years ended December 31, 2007 and 2008, we did not have any employees that earned greater than $100,000 in salary and bonus. The following table sets forth information regarding the annual compensation for our Chief Executive Officer.

Summary Compensation Table

Name and Principal Position	Year	Salary ($)			Bonus ($)	All Other Compensation ($)	Total ($)

Ng Chi Shing (a.k.a. Daniel Ng) Chairman of the Board, Chief Executive Officer and President	2008		38,478	(1)				38,478
	2007		38,475	(1)				38,475

(1) Includes $38,461 (based on a conversion rate of Hong Kong dollars to U.S. dollars of 7.8 to 1) payable to Mr. Ng pursuant to his agreement with our subsidiary China Digimedia Holdings Limited, and $17.28 payable by the Company.

Stock Option Grants

No options, warrants, or stock appreciation rights were issued during fiscal year 2008 to any employees.

Discussion of Employment Agreements and Termination or Change of Control Arrangements

Effective January 1, 2006, Mr. Daniel Ng and our subsidiary, China Digimedia Holdings Limited (or CDHL), entered into an employment agreement pursuant to which Mr. Ng agreed to serve as Chief Executive Director of CDHL. The employment agreement provides for a base salary of HK $25,000 per month (or approximately US $3,205) and a discretionary year-end bonus. The employment agreement may be terminated by CDHL on three months’ written notice, provided that CDHL reserves the right to terminate the agreement at any time without prior notice with cause. The employment agreement also provides that during the term of the employment and for one year thereafter, the Mr. Ng shall not compete in any other business or services similar to that of CDHL.

Effective January 1, 2006, we entered into an employment agreement with Mr. Ng pursuant to which Mr. Ng agreed to serve as our Chief Executive Officer for an initial term ending December 31, 2008, which may be renewed for additional one-year periods. The agreement provides for an annual salary of $12 in 2006, $14.40 in 2007, and $17.28 in 2008, provided that if our revenues increase by 50% or more in 2006 as compared to 2005. Commencing in 2008, Mr. Ng’s salary shall increase to the “Market Rate,” which is defined as the comparable rate of pay for a CEO employed by a company in a similar industry with similar capacity, as determined and approved by our Board of Directors. As of the date of this report, this determination has not been made. The annual salary for Mr. Ng was $17.28 in 2008. Commencing in 2007, Mr. Ng is entitled to receive an annual bonus as determined by the Board of Directors. As of the date of this report, this determination has not been made. No such bonus has been declared or paid to Mr. Ng. Upon termination of the agreement by us for a reason other than for “cause” (as defined in the agreement) or upon the death or disability of Mr. Ng, Mr. Ng is entitled to a severance payment of his then salary and bonus for the remaining term of the employment agreement. Upon termination of the agreement upon the disability of Mr. Ng, Mr. Ng is entitled to 75% of his then base salary and bonus for a period of one year. Upon termination of the agreement by us for “cause,” Mr. Ng is entitled to all amounts due to him for any portion of the payroll period worked but for which payment had not yet been made up to the date of termination. The employment agreement provides that during the term of the employment and for three months thereafter, the Mr. Ng shall not compete in any other business or services similar to that of our business or services.

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Director Compensation

Directors who are also employees do not receive compensation for their services as directors.

Director Compensation Table – 2008

Name	Fees Earned or Paid in Cash ($)		Total ($)

Chen Lu		25,862		25,862

Chen Juan		-		-

(1) Mr. Ng’s total compensation is reflected in the Summary Compensation Table.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners

All persons known by the Company to own beneficially more than 5% of any class of the Company's outstanding stock on December 31, 2008, are listed below:

Title of Class	Name and Address	# Shares	Nature of Ownership	Current % Owned
Common Stock, $.001 Par Value	Ng Chi Shing Ste B 27/Fk Wah Ctr 191 Java Road, North Point, Hong Kong	17,398,440 (A)	Direct	40.7%
Common Stock, $.001 Par Value	Chen Lu 2505-06 25/F Stelux House 698 Prince Edward Road E. Hong Kong	5,851,560	Direct	13.7%
Common Stock, $.001 Par Value	Billy, Tam Wai Keung 2505-06 25/F Stelux House 698 Prince Edward Road E. Hong Kong	8,000,000 (B)	Direct	18.7%
Common Stock, $.001 Par Value	Vision Opportunity Master Fund, Ltd. 20 West 55th Street 5th Floor New York, Ny 10019	4,227,929 (C)	Direct	9.9% (C)
Preferred Stock, $.001 Par Value (D)	Ng Chi Shing Ste B 27/Fk Wah Ctr 191 Java Road, North Point, Hong Kong	1,403,100 (A)	Direct	74.8%
Preferred Stock, $.001 Par Value (D)	Chen Lu 2505-06 25/F Stelux House 698 Prince Edward Road E. Hong Kong	471,900 (A)	Direct	25.2%

(A) On March 21, 2007, Modern Delta transferred 23,250,000 shares of common stock and 1,875,000 shares of Series A Convertible Preferred Stock of the Company owned by Modern Delta Limited to Daniel Ng and Chen Lu. After completion of the restructuring, Daniel Ng owned 17,398,440 shares of common stock and 1,403,100 shares of Series A Convertible Preferred Stock of the Company, and Chen Lu owned 5,851,560 shares of common stock and 471,900 shares of Series A Convertible Preferred Stock of the Company

(B) CDHL acquired 100% shares in Maxcomm from Lippo Star Investment Limited (“Lippo Star”) at a consideration of $3,760,000 on May 21, 2007. The consideration was fully settled by issuing 10,000,000 shares of CDGT common stock to Lippo Star, of which 8,000,000 shares was issued to Mr. Tam as a shareholder of Lippo Star.

(C) Based on the Schedule 13G/A filed February 12, 2009, Vision held 828,596 shares. Vision is eligible to purchase an aggregate of 20,004,431 shares of our common stock pursuant to the exercise of warrants and the conversion of debentures. However, pursuant to the terms of the transaction documents relating to the purchase of the foregoing securities, Vision may not acquire shares of common stock upon exercise of any such warrants or conversion of the debenture to the extent that, upon exercise or conversion, respectively, the number of shares of common stock beneficially owned by Vision and its affiliates would exceed 9.9% of the issued and outstanding shares of our common stock. The amount listed assumes the conversion or exercise of the debenture or warrants, as applicable, in an amount up to 9.9% of our outstanding common stock after such conversion or exercise. Vision Capital Advisors, LLC, a Delaware limited liability company (formerly known as Vision Opportunity Capital Management, LLC) (the "Investment Manager"), and Adam Benowitz, in his capacity as managing member of the Investment Manager, may be deemed to share dispositive and voting power over the shares held by the Vision. Mr. Benowitz and the Investment Manager disclaims beneficial ownership of the shares disclosed herein.

(D) Each share of preferred stock is convertible into five shares of common stock.

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Security Ownership of Management

The following table sets forth the number of shares owned beneficially on December 31, 2008, by each Director and by all Officers and Directors as a group. No shares listed below have been pledged by the holder of such shares.

Title of Class	Name and Address	# Shares	Nature of Ownership	Current % Owned
Common Stock, $.001 Par Value	Ng Chi Shing 2505-06, 25F, 698 Prince Edward Road E., Hong Kong	17,398,440	Direct (y)	40.7%
Common Stock, $.001 Par Value	Chen Lu 2505-06, 25F, 698 Prince Edward Road E., Hong Kong	5,851,560	Direct (y)	13.7%
Common Stock, $.001 Par Value	Chen Juan 2505-06, 25F, 698 Prince Edward Road E., Hong Kong	None	Direct	-0-%
Common Stock, $.001 Par Value	All Officers and Directors as a Group	23,250,000	Direct	54.4%
Preferred Stock, $.001 Par Value (z)	Ng Chi Shing 2505-06, 25F, 698 Prince Edward Road E., Hong Kong	1,403,100	Direct (y)	74.8%
Preferred Stock, $.001 Par Value (z)	Chen Lu 2505-06, 25F, 698 Prince Edward Road E., Hong Kong	471,900	Direct (y)	25.2%

(y) On March 21, 2007, Modern Delta transferred 23,250,000 shares of common stock and 1,875,000 shares of Series A Convertible Preferred Stock of the Company owned by Modern Delta Limited to Daniel Ng and Chen Lu. After completion of the restructuring, Daniel Ng directly owned 17,398,440 shares of common stock and 1,403,100 shares of Series A Convertible Preferred Stock of the Company, and Chen Lu directly owned 5,851,560 shares of common stock and 471,900 shares of Series A Convertible Preferred Stock of the Company

(z) Each share of preferred stock is convertible into five shares of common stock, and votes together with the common stock on all matters on an “as converted” basis.

Securities Authorized for Issuance Under Equity Compensation Plans

As of December 31, 2008, the Company’s equity compensation plan information was as follows.

Equity Compensation Plan Information

Plan Category	Number of Securities to be issued upon exercise of outstanding options (a)	Weighted-average exercise price of outstanding options (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders	--	--	--
Equity compensation plans not approved by security holders	1,211,104	1.27	N/A
Total	1,211,104	1.27	N/A

The Company issued warrant shares at an average exercise price of $1.27 per share as compensation to several consultants for their services in the year 2006. A total of 1,211,104 warrant shares were outstanding as of end of the year.

ITEM 13. Certain Relationships and Related Transactions; and Director Independence

The Company has 1,875,000 shares of Series “A” preferred stock outstanding at December 31, 2008. These shares are owned by our majority shareholders.

The Company has the following amount due to a major shareholder and two related companies as at December 31, 2008.

Shareholder

Amount due to Tam Wei Keung: $396,331

Related companies

Amount due to Arcotect HK Limited: $231,787

Amount due to Manta Finance Limited: $222,768

Director Independence.

Since we trade our securities on the OTC Bulletin Board, our Board of Directors is not subject to any independence requirements. Assuming we were subject to the Nasdaq Stock Market independence requirements, our Board considered transactions and relationships between each director or any member of his or her immediate family and our company, subsidiaries and affiliates. The purpose of this review was to determine which of our directors were independent, and whether any such relationships or transactions existed that were inconsistent with a determination that the director is independent. As a result of this review, the Board affirmatively determined that during 2008 Ms. Chen was independent of us under the standards of the independent director requirements of the Nasdaq Stock Market. Messrs. Ng and Chen are not independent directors under the standards of the independent director requirements of the Nasdaq Stock Market.

Our Board of Directors does not have an audit committee, compensation committee, or nominating committee, and as such the actions normally taken by these committees is taken by the Board as a whole.

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Item 14. Principal Accountant Fees and Services

Fees Billed For Audit and Non-Audit Services

The following table represents the aggregate fees billed for professional audit services rendered to the independent auditor, Jimmy C.H. Cheung and Co., Certified Public Accountants (“Jimmy”), for our audit of the annual financial statements for the years ended December 31, 2008 and 2007. Audit fees and other fees of auditors are listed as follows:

Year Ended December 31	2008		2007

Audit Fees (1)	$	58,762	$	54,600
Audit-Related Fees (2)		--		--
Tax Fees (3)		--		--
All Other Fees (4)		--		--
Total Accounting Fees and Services	$	58,762	$	54,600

(1)

Audit Fees. These are fees for professional services for our audit of the annual financial statements, and for the review of the financial statements included in our filings on Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements.

(2)

(3)

Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.

(4)

All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax Fees.

Pre-Approval Policies and Procedures

The Company’s Board of Directors acts as its audit committee and on an annual basis reviews audit and non-audit services performed by the independent auditors. All audit and non-audit services are pre-approved by the Board of Directors, which considers, among other things, the possible effect of the performance of such services on the auditors' independence.

ITEM 15. Exhibits

Exhibits

31.1. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer

31.2. Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer

32.1. Section 1350 Certifications of Chief Executive Officer

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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: March 30, 2009

/s/ Ng Chi Shing

Ng Chi Shing

President, CEO and Director

/s/ Chen Lu

Chen Lu

Director

/s/ Chen Juan

Chen Juan

Director

/s/ Ng Chi Shing

Ng Chi Shing

Chief Financial Officer