Source Direct 10QSB 2008 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended December 31, 2007

COMMISSION FILE NUMBER     333-69414

SOURCE DIRECT HOLDINGS, INC.

 (Exact name of registrant as specified in charter)

Nevada	20-0858264
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4323 Commerce Circle, Idaho Falls, Idaho	83401
Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code (877) 529-4114

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yesx         No¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.     Yes¨         Nox

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 7, 2008, the Company had outstanding 9,044,516 shares of its common stock, no par value.

Transitional Small Business Disclosure Format (check one):     Yes¨         Nox

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TABLE OF CONTENTS

ITEM NUMBER AND CAPTION	PAGE
PART I
ITEM 1.     Financial Statements	3
ITEM 2.     Management'sDiscussion And Analysis Or Plan Of Operation	8
ITEM 3.     Controls And Procedures	20
PART II
ITEM 1.     Legal Proceedings	21
ITEM 2.     Unregistered Sales Of Equity  Securities And Use Of Proceeds	21
ITEM 5.     Other Information	23
ITEM 6.     Exhibits	23

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PART I

ITEM 1. FINANCIAL STATEMENTS

Source Direct Holdings, Inc.

Condensed Consolidated Balance Sheets

	December 31, 2007		June 30, 2007
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	9,892	$	3,215
Accounts receivable		36,724		31,963
Inventory		240,445		257,095
Total Current Assets		287,061		292,273
Property and Equipment
Property and equipment		101,843		101,843
Less:  Accumulated depreciation		(49,679)		(41,809)
Net Property and Equipment		52,164		60,034
Other Assets
Deposits		8,333		8,333
Intangible assets		115,000		115,000
Accumulated amortization		(31,306)		(27,473)
Net Other Assets		92,027		95,860
TOTAL ASSETS	$	431,252	$	448,167
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable	$	190,061	$	138,880
Accrued expenses		40,796		69,351
Deferred gain on sale of asset		36,941		36,941
Notes payable		556,441		393,810
Total Current Liabilities		824,239		638,982
Long-Term Liabilities
Deferred gain on sale of asset		98,509		116,979
Total Long-Term Liabilities		98,509		116,979
Total Liabilities		922,748		755,961
Stockholders' Equity (Deficit)
Common stock -- $.001 par value; 200,000,000 shares authorized; 9,044,516 and 8,589,484 issued and outstanding, respectively		9,044		8,589
Additional paid-in capital		7,281,410		7,117,805
Accumulated deficit		(7,781,950)		(7,434,188)
Total Stockholders' Equity (Deficit)		(491,496)		(307,794)
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)	$	431,252	$	448,167

See accompanying notes to financial statements.

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Source Direct Holdings, Inc.

Condensed Consolidated Statements of Operations

 (Unaudited)

	For the Three		For the Three		For the Six		For the Six
	Months Ended		Months Ended		Months Ended		Months Ended
	31-Dec-07		31-Dec-06		31-Dec-07		31-Dec-06
			(Restated)				(Restated)
Revenues	$	31,462	$	65,409	$	142,706	$	292,136
Cost of Goods Sold		41,763		27,979		80,864		127,799
Gross Profit		(10,301)		37,430		61,842		164,337
General and admin. Expense		240,511		1,704,759		407,964		1,966,318
Loss from Operations		(250,812)		(1,667,329)		(346,122)		(1,801,981)
Other income (expense)		9,235		9,235		18,470		13,852
Interest income (expense)		(10,337)		(1,344)		(20,110)		(6,378)
Net Loss	$	(251,914)	$	(1,659,438)	$	(347,762)	$	(1,794,507)
Net Loss per share		(0.03)		(0.29)		(0.04)		(0.38)
Weighted average number of shares outstanding		8,799,516		5,742,045		8,669,854		4,780,187

See accompanying notes to financial statements.

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SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

For the six month periods ended December 31, 2007 and 2006

(Unaudited)

	Six Months Ended 31-Dec-07		Six Months Ended 31-Dec-06
Cash Flow Used for Operating Activities			(Restated)
Net Income (Loss)	$	(347,762)	$	(1,794,507)
Adjustments to Reconcile net loss to net cash used for operating activities:
Depreciation		7,870		11,544
Amortization expense		3,833		3,834
Issued stock for services		-		1,920,714
Deferred Gain on sale of Assets		(18,470)		161,296
(Increase)/decrease in trade receivables		(4,761)		33,414
(Increase)/decrease in inventory		16,650		(5,567)
(Increase)/decrease in prepaid expenses		-		(101,290)
(Increase)/decrease in deposits		-		(208,333)
Increase/(decrease) in accounts payable		51,181		(1,776)
Increase/(decrease) in accrued liabilities		(28,555)		(1,796)
Net Cash Flows Used for Operating Activities		(320,014)		17,533
Cash Flows used for Investing Activities
Sale of property		-		751,516
Purchase equipment		-		(14,965)
Net Cash Flows Used for Investing Activities		-		736,551
Cash Flows used for Financing Activities
Proceeds from shareholder loans		212,806		-
Payments on shareholder loans		(50,175)		-
Net borrowing (payments) on long-term debt		-		(763,962)
Increase (decrease) in note payable		-		(17,846)
Proceeds from stock issuance		164,060		28,000
Net Cash Flows Used for Financing Activities		326,691		(753,808)
Net Increase / (Decrease in cash		6,677		276
Beginning Cash Balance		3,215		-
Ending Cash Balance	$	9,892	$	276
Supplemental Disclosures
Interest paid	$	20,110	$	6,378
Income taxes paid		-		-
Shares and share equivalents issued for expenses		-		-

See accompanying notes to financial statements.

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Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

December 31, 2007

(Unaudited)

Note 1

ORGANIZATION AND INTERIM FINANCIAL STATEMENTS

Interim financial statements- The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles for complete financial statements generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of December 31, 2007. There has not been any change in the significant accounting policies of Source Direct Holdings, Inc., for the periods presented. The results of operations for the three month and six months periods ended December 31, 2007, are not necessarily indicative of the results for a full-year pe riod.  It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007, filed with the U.S. Securities and Exchange Commission (the “SEC”).

Note 2

INVENTORY

Inventories are stated at lower of cost or market and consist of the following:

Raw Materials	$	182,113
Finished Goods		58,332
Total Inventory	$	240,445

Note 3

ISSUANCE OF COMMON SHARES AND WARRANTS

During the period from July 1, 2007, through December 31, 2007, 455,032 additional shares of common stock and 260,032 warrants were issued. The Company received $164,060 in proceeds.

Note 4

NOTES PAYABLE

On January 13, 2006, an amendment was executed upon the note secured by a deed of trust on the Company’s building located at 4323 N. Commerce Circle, Idaho Falls, Idaho, 83401.  Effective January 14, 2006, the amendment changed the following loan components for the remaining principal of $763,594.09:  accruing interest was changed from 8.5% to 11.25%, and monthly payments were changed from $5,882.19 to $6,681.45, of which the first payment was due on February 3, 2006. The amendment further stated that no principal payments could be made unless in full.  A late fee of 5% would be charged on any amount overdue by 30 days.  The Company was to transfer 160,000 shares of the Company’s common stock to the creditor in lieu of warrants given as part of the original loan transaction. In August 2006, the Company sold the building and the note was paid in full.

The Company has borrowed funds for operating purposes from an individual pursuant to a note.  The terms of the note include principal of $50,000, and the note bears a 10% interest rate.  If the principal was not paid within 60 days of June 15, 2005, then interest of 10% annually would be due on original amounts. The Company made a $15,000 payment on the note which was applied to interest and then principal during the current year, leaving a principal balance of $44,779 as of June 30, 2007. This note is currently in default. The Company is working with the individual to work out a monthly payment program. The balance on the note ending December 31, 2007, was $44,779.

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The Company has borrowed funds for operating purposes from another individual in the amount of $100,000.  We entered into this loan transaction on July 24, 2007.  In connection with this loan, we paid a 2% loan fee and issued a note, due October 15, 2007, that bears interest at 14%.  In connection with the transaction, we also issued 100,000 shares of restricted stock.  On September 24, 2007, the Company made a payment of $8,416 for the interest on the loan.  The loan was due on October 15, 2007.  The principal balance of the note at December 31, 2007, was $100,000. As of the date of this report, we were working on a contract to repay the note.

The Company has borrowed funds for operating purposes from another individual in the amount of $76,000. The loan is unsecured, due on demand, and non-interest bearing.  The Company repaid $5,000 during the period ended December 31, 2007, and the remaining unpaid balance at December 31, 2007, was $71,000.

The Company has borrowed funds for operating purposes from another individual in the amount of $181,031. The loan is unsecured, due on demand, and non-interest bearing.

The Company has borrowed funds for operating purposes from another individual in the amount of $32,306. The loan is unsecured, due on demand, and bears a 15% interest rate. The unpaid balance at December 31, 2007, was $9,631.

The Company has borrowed funds for operating purposes from another individual in the amount of $150,000. The loan is unsecured, due on demand, and bears a 2% interest rate. The unpaid balance at December 31, 2007, was $150,000.

Note 5

PROPERTY AND EQUIPMENT

Source Direct purchased a manufacturing facility and headquarters building in February 2005 located at 4323 Commerce Circle, Idaho Falls, Idaho.  The property consists of approximately 3,780 square feet of office space, and approximately 10,000 square feet of warehouse and manufacturing space.  In August 2006, this manufacturing facility was sold.  Also in August 2006, the Company signed a new agreement to lease this facility for 60 months.  The lease agreement calls for monthly payments of $8,333.

Note 6

GOING-CONCERN

The Company has accumulated losses since inception totaling $7,781,950 and was still developing operations as of December 31, 2007.  Financing for the Company’s activities to date has been provided primarily by the issuance of stock, by advances from Stockholders, and by borrowing funds.  The Company’s ability to achieve a level of profitable operations and/or additional financing impacts the Company’s ability to continue as it is presently organized.  Management’s plans are to continue the development of the Company’s principal operations.  Should management be unsuccessful in developing the Company’s operating activities, the Company may experience material adverse effects.

Note 7

REVERSE STOCK SPLIT AND STOCK ISSUANCES

On November 16, 2006, the Company’s Board of Directors and majority of the Company’s shareholders approved a reverse split of the Company’s common stock on the basis of 1 share for each 25 shares outstanding.  This stock split is reflected in the current year financial statements presented herein.

Note 8

RESTATEMENT

The Company has restated its financial statements for the six month period ended December 31, 2006. The Company determined that generally accepted accounting principles had not been followed for the recording of certain types of transactions. The type and impact of the changes to these transactions are as follows:

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On August 22, 2006, the Company sold its new headquarters building for a total sales price of $1,000,000, which resulted in a net profit to the Company of $175,148 net of settlement expenses. In conjunction with the sale, the Company signed a new agreement to lease this facility for 60 months. The Company erroneously reported the entire gain of $175,148 in its financial statements for the six month period ended December 31, 2006 instead of deferring the gain and amortizing the balance over the term of the new lease agreement as required by generally accepted accounting principles. The amortized portion of the gain should have been reported as $13,852 with the remaining balance of $170,852 being recorded as a deferred gain in the balance sheet. The restatement has been reflected in the accompanying financial statements.

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

Forward Looking Statements

This Quarterly Report contains forward-looking statements about the business, financial condition and prospects of Source Direct Holdings, Inc. (“we” or the “Company”), that reflect management’s assumptions and beliefs based on information available at the time of the preparation of this Report.  Additionally, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing.  Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer, or in various filings made by the Company with the Securities and Exchange Commission. Words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project or projected," or similar expressions are intended to identify "forward-looking statements."  Statements relating to business or financial projections or estimates, potential business strategies, product pricing or marketing strategies, future financing opportunities, or related topics may also constitute forward-looking statements.  Such statements are qualified in their entirety by reference to and are accompanied by the below discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.  The Company disclaims any obligation or intention to update any forward-looking statement.

Management is currently unaware of any trends or conditions other than those mentioned in this management's discussion and analysis that could have a material adverse effect on the Company's consolidated financial position, future results of operations, or liquidity. However, investors should also be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue, (ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so, (iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future (vi) a very competitive and rapidly changing operating environment, (vii) changes in business strategy, (viii) market acceptance of our products, and (ix) a failure to successfully market the Company’s products.

The risks identified here are not all-inclusive. New risk factors emerge from time to time, and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.

All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934.

COMPANY HISTORY

Source Direct Holdings, Inc., was incorporated under the laws of the state of Nevada on July 21, 1998, under the name Global Tech Capital Corp. (“GTCC”), and began filing public reports with the filing of a registration statement on Form SB-2 on September 4, 2001.  From July 1998 until October 2003, GTCC had minimal business operations.  GTCC was in the development stage and seeking profitable business opportunities.

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On October 14, 2003, GTCC and Source Direct, Inc., an Idaho corporation (“SDI”), entered into an Agreement and Plan of Merger (the “Merger”), under which a wholly owned subsidiary of GTCC was merged with and into SDI, with SDI being the surviving entity.  Under the agreement, we acquired 100% of the outstanding shares of SDI, in exchange for 63,030,000 shares of GTCC, making SDI our wholly owned subsidiary.  In connection with this transaction, we changed our name to Source Direct Holdings, Inc.   

References in this report to the “Company” refer to Source Direct Holdings, Inc., and its subsidiary, Source Direct, Inc., unless otherwise stated.

SUMMARY OF OUR BUSINESS

In connection with the Merger, we acquired the formulas for two cleaning products. These products are Simply Wow® and Stain Pen®. The formulas for these products were developed by Deren Z. Smith, the President of Source Direct and one of its directors.  Kevin Arave, the Secretary/Treasurer of Source Direct and a director, also assisted in the funding for the development of the formulas.  Any and all rights and interests of these parties in and to the formulas or the trademarks were transferred to the Company for 460,000 shares each of SDI. These shares converted into 700,000 common shares of the Company as a result of the Merger. These shares were issued on a pre-split basis.  Additionally, the Company has developed new products based on the formulas acquired.

We have applied for the trademarks to all of our products but have not made application for any patents. Management believes it would be difficult, if not impossible, to duplicate the formulas for the Company’s products. We maintain confidentiality agreements with all parties who have access to the formulas.  Nevertheless, there is no assurance that someone could not duplicate the formulas and directly compete with the company.  The cost of litigating the issue of illegal competition may preclude us from being able to protect the secrecy of the formulas.

Our business is currently organized into three operational divisions: Household products, Automotive products and Industrial products.

HOUSEHOLD PRODUCTS

Simply Wow®

Organic Simply Wow® is an all-purpose cleaner that safely and effectively cleans any washable surface.  Simply Wow® is developed with nonionic surfactants that contain penetrating and suspending agents that dissolve the toughest grease, protein, dirt, and oil stains.  The product is a water-based, multipurpose, biodegradable, nontoxic degreaser with a pleasant lemon fragrance that effectively replaces flammable or combustible solvent cleaners. It contains no hazardous solvents or acidic-type chemicals, and its formulation safely accomplishes the cleaning that previously required solvent or acid cleaners, which exposed the user and the environment to the inherent hazards of such chemicals. The following are what we believe to be specific advantages of using Simply Wow®:

1.

It is designed with nonionic surfactants and wetting, penetrating, and suspending agents to dissolve the toughest grease, protein, dirt and oil stains.

2.

It replaces most or all cleaners in a person’s home and can be used to clean stains on various surfaces, including walls and cars.

3.

It will keep carpets cleaner longer by removing previously uncleanable spots.

4.

It is biodegradable and nontoxic, making this product environmentally safe and friendly.

5.

It removes all types of spots and stains including ink, permanent marker, fingernail polish, scuff marks, crayon, coke, coffee, tea, grease, oil, mildew, pet stains and food stains from materials ranging from clothing to upholstery.

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Stain Pen®

Stain Pen® is an on-the-spot stain remover. The convenient size makes it easy to keep at home, in the car, or at the office. This product has a proprietary formula that safely removes food stains, oil paint (wet or dry), makeup, wine, blood, grass stains, grease, coffee and tea stains and copy machine stains with no harmful fumes or large quantities of liquid to spill. Stain Pen® works simply by applying a small amount of stain pen solution to the stain and applying a damp cloth.

Simply WoW® Odor Annihilator®

We recently introduced the Odor Annihilator® into the market and have applied for a trademark. The Odor Annihilator® is an organic, biodegradable cleaning product designed to eliminate household odors. Odor Annihilator® does more than just remove the odor, it annihilates the source of the odor.

Odors are caused by organisms that send off molecules that a person’s nose detects. Air fresheners try to overpower odors by covering them up. Fabric refreshers try to remove odors, but Simply WoW® Odor Annihilator® goes further by removing the source of the odor so that it doesn't return.  Typical odor control consists of perfumes or other masking agents that are applied to hide odors.  This, however, does not decrease the odor itself, but adds to it in an effort to make it less objectionable.  Unfortunately, the odor often becomes overpowering, or only less objectionable than before.  Odor Annihilator® annihilates the source of the odor in two steps. First, it applies a fast-acting neutralizer that binds the odor-causing molecules.  This reduces their volatility and prevents them from becoming airborne.  Then, a special select bacteria degrades the odor-causing molecules, destroying them by converting them into microbial cell components, carbon dioxide and water, thereby eliminating the odor at its source.

Simply WoW® Laundry Detergent

We recently introduced the Simply WoW® Laundry Detergent into the market and have applied for a trademark. Simply WoW® Laundry Detergent will join Source Direct's family of all-organic, biodegradable cleaning products used in everyday "green" living. The trademark application for the Laundry Detergent is being reconsidered by management, in light of the broad nature of words used in its description.

AUTOMOTIVE PRODUCTS

Simply Wow® Tuff Buff™

In November 2005, Source Direct launched its newest all-organic, waterless, wash-n-wax product. Tuff Buff™ provides solutions for the discerning driver, professional and hobbyist alike, who demand the highest quality for all their automotive needs -- and it does so at a price point that could mean exceptional volume sales for Source Direct through its rapidly expanding distribution network. Tuff Buff™ contains no acids, V.O.C.s (volatile organic compounds), petroleum distillates, Hexane, or Silicone, eliminating annoying "fish eyes" in the paint and making it safe for even the most prestigious automotive retailers. Tuff Buff™ restores factory shine, safely removes bugs and bird droppings, cleans and protects all finishes including plexiglass and black chrome, is safe for aftermarket window tint, and will not leave white residue in seams. Tuff Buff™ polishes & protects virtually any hard nonporous surface including windshields.

Tuff Buff™ has been designed to improve the appearance of car paint, engine, trim and components. It is intended to restore dull or faded rubber, tires, trim, vinyl, paint, chrome, and other surfaces. Tuff Buff is safe to use on most surfaces and leaves no caking or residue.  Most important, Tuff Buff works to protect and shine virtually any surface and is as organic as an apple.

Simply WoW® Odor Annihilator®

We recently introduced the Odor Annihilator® into the automotive market as well as the household market.

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Simply WoW® Auto Care Kit

During the quarter ended December 31, 2006, we introduced our Simply WoW® Auto Care Kit. It is a sampling program that we anticipate will generate brand name recognition and market penetration. It is intended to allow consumers the ability to have cleaning items available in their vehicles. The kit contains 1.25 oz. samples of our cleaning products. We anticipate that the kit can be relabeled for motorcycles, RVs, and private labels for automotive distributorships. We are currently working toward that goal, but do not have a set timeframe for completion of this project.

Simply WoW® for Motorcycles

We recently introduced Simply WoW® for Motorcycles into the market. We now offer a new, green cleaning product for the motorcycle industry. We introduced Simply WoW® for motorcycles at the 67th Annual Motorcycle Rally in Sturgis, South Dakota, August 6-12, 2007. We believe the product is great for all motorcycle paint jobs because it is all organic, restores factory shine and removes bugs. It is safe for virtually all surfaces including black chrome and aftermarket window tint. It contains no harmful agents such as acid, hexane, silicone or petroleum distillates.  As of the date of this Report, the motorcycle kit was selling well. Many of the major companies in the motorcycle industry such as Arlen Ness, Nitro Syndicate, Rat’s Hole and Russell Marlowe, along with West Coast Customs, have placed orders. Other Companies such as British Petroleum, Anderson Nissan and D’Arcy Motors are using Simply WoW® produ cts as a promotional item to help with customer relations.

Impossible Shine™

We recently introducedImpossible Shine™ for autos, trucks, recreational vehicles, aircraft, off road vehicles and bikes.  Impossible Shine™ contains no petroleum distillates, oils, or silicones.  Impossible Shine™ dries to the touch in seconds.We believe that this new product has superior UV blockers to protect against ozone and the drying effects of the sun. We believe some of the important attributes of this product are as follows:  

·

Impossible Shine™ does not to leave any oily or sticky residue that will attract dust and dirt.

·

It contains an antistatic formula to easily remove dust and dirt when washed.

·

It has 300% elasticity, allowing adhesion to the surface where it is being applied whether it is leather, vinyl or rubber.

·

It is formulated as a water-based coating which allows for the easy clean up.

·

It is environmentally safe and fits the Simply WoW® Automotive detail line.

·

It is a super thin coating that will not build up a residue even after repeated applications.

·

It stands up to repeated high-pressure washes.

·

Impossible Shine™ creates a semi gloss (1 to 2 coats) or a high gloss finish (3 to 4 coats).  Application is easy as it is applied with an applicator sponge, or a lint free cloth.

·

It allows for absorption into cracks and crevices to seal and protect.

·

One 8 oz. bottle of Impossible Shine™ will coat approximately 10 passenger tires allowing for 2 coats per tire, and less product is required for touch-ups.

INDUSTRIAL PRODUCTS

Simply WoW® Industrial Cleaner   

The Wow Industrial Cleaner has been designed to remove grease, oil, wax, tar, and dirt, and to meet other industrial cleaning needs. It is a highly concentrated cleaning solution that can be diluted up a 40:1 ratio. The following are what we believe to be specific advantages of using the Wow Industrial Cleaner:

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•

Safe and effective

•

Biodegradable

•

Non-abrasive

•

Non-flammable

•

Industrial strength

PRODUCT PRODUCTION

We currently produce our products in-house. We also have agreed with other production facilities to help in manufacturing of our products, in the event we could not produce anticipated future needs.  We also believe other production facilities are available if needed to meet any demand for production. We also believe sufficient quantities of raw materials for our products are reasonably available such that production would not be unreasonably delayed, although we do not have any contracts for production of these raw materials. We have not secured any form of financing for significant production of our products. We will attempt to secure funding either from private sources or through a bank loan or some other form of financing arrangement. In June 2006, the Company entered into an agreement to factor a portion of its receivables to enable the quicker receipt of cash for sales on account.  This factoring agreement was terminat ed on July 28, 2007. There is no assurance that we will be able to obtain any additional sources of financing, or that if we could obtain it that the financing terms would be favorable to the Company.

Since inception, we have spent approximately $1,871,902 on research and development of the business, our products, and our marketing strategy.

PRODUCT DISTRIBUTION

Management believes that the most critical phase of our operations is the marketing of our products. We market our products using both current management personnel and outside independent marketing companies.  We currently have several outside marketing arrangements, which we consider significant. These agreements are with the following organizations:

•

Morgan & Sampson SCA,

•

Daymon Associates, Inc.

•

Bridgeworks  Marketing & Sales, Inc. (Canada)

•      Koval Marketing Association

•      West Coast Customs

The Morgan & Sampson agreement grants to Morgan & Sampson SCA the exclusive marketing and distribution rights to Source Direct's proprietary Stain Pen® Twin Pack to more than 5,000 grocery retailers in the Western United States and Hawaii. In January 2005, through this agreement, we began shipments of our Stain Pen® product to all Safeway® stores and Kmart Super Centers® nationwide.  Additionally, Odor Annihilator® has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful Morgan & Sampson and ATA Retail Services network.

The Daymon Associates broker contract designates Daymon Associates, Inc., as the exclusive sales agent and broker in connection with all sales and/or contracts for merchandise designated to Costco® Warehouses in the following regions:

•

Domestic: Bay Area; Los Angeles Region; Midwest Region; Northeast Region; Northwest Region; San Diego Region; Southeast Region; Texas Region; Mexico Region; Eastern Canada Region; and the Western Canada Region.

•

International: Japan; Korea; Taiwan; and United Kingdom.

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The Daymon Associates agreement provides that the Company will pay to Daymon a commission on the Company's products sold, shipped, and invoiced to Costco® within the above-defined territory. The Commissions paid will be based on the gross amount of sales generated, defined as the amount of the invoice, less any cash discounts. The Company agreed to pay a 3% commission.

Under the Daymon Associates agreement, Daymon agreed to devote its efforts to the sale of the Company's products during the term of the agreement, which is one year, with automatic one-year renewals unless terminated by either party on 90 days' written notice.  The current term of the Daymon Associates agreement expired April 11, 2007, subject to the automatic renewal. Subsequent to the expiration of this agreement, we have a verbal agreement to renew this arrangement for an extended period of time.  Daymon agreed to provide weekly sales data, by location, as well as analytical reviews of such data. Daymon agreed to devote adequate facilities and personnel to perform the services required in the Agreement.

The Bridgeworks agreement, which we entered into on May 1, 2005, designates Bridgeworks Marketing & Sales, Inc. (“Bridgeworks”), as our exclusive Canadian agents.  Bridgeworks has over 15 years of industry experience marketing and selling to a variety of retailers, wholesales and industrial accounts in Canada. With a proven track record of generating business by establishing and maintaining positive working relationships, Bridgeworks will continue to expand into other territories and increase customer base where networking will become the foundation in developing Bridgeworks and its clients as industry leaders. As a national company, Bridgeworks offers flexibility and diversification to both customer and client in an always growing and changing industry.

Though our agreement with Bridgeworks, we have received orders and began shipments in March 2006 of the Simply WoW® organic cleaner, Simply WoW® Odor Annihilator®, and the Stain Pen® to Army & Navy Department Stores Ltd., which operates stores in downtown Vancouver, British Columbia; New Westminster, British Columbia; Langley, British Columbia; Calgary, Alberta; and Edmonton's historic Strathcona District, as well as a new 60,000 sq. ft. store in Edmonton's popular Londonderry Mall, both in Alberta.

The agreement with Bridgeworks was not renewed due to lack of marketing production.

In December 2006, we entered into a representative agreement with Koval Marketing Association (KMA), a full service sales, service, and marketing company, established in 1982 that is today the largest representative in their field in the Western United States. KMA will be responsible for expanding our sales force to better serve our factories and customers.

In September 2007, we entered into a representative agreement with West Coast Customs, a California corporation with its principal place of business in California. This Agreement took effect September 19, 2007, and will remain in effect for two years through September 19, 2009. The agreement may be extended by mutual agreement of the parties for an additional two-year period unless a party notifies the other any time before the expiration of the then current terms that it does not wish to extend the term.

The Company agreed to grant to West Coast Customs the rights to sell, market, and place Simply WoW® Automotive Care products (the "Products") through West Coast Custom's marketing and distribution channels. The Company will provide to West Coast Customs complimentary Product, in an amount agreed to by the parties, for use in the West Coast Customs shop during the shop's hours of operation. In return, West Coast Customs will provide mentions of the Product and banners will advertise the Product in key areas of its shop.

West Coast Customs can purchase Product for resale ("Product for Resale") at the latest distributor price minus 10 percent. West Coast Customs may also distribute to its own retail outlets purchased Product For Resale at whatever price it deems appropriate. The Company may sell the West Coast Customs Cleaning Line to any and all retailers and resellers.

The Company agreed to pay to West Coast Customs a royalty of ten percent (10%) of all gross sales of West Coast Customs Cleaning Line that the Company sells. Royalties shall be paid quarterly.

The Company has the right to promote and advertise West Coast Customs' licensed cleaning products based on its good faith expertise within the cleaning industry.

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In addition to the above agreements, we also utilize internal marketing efforts to advertise and distribute our products.

Our internal marketing staff recently entered into a verbal arrangement with Bi-Mart Membership Discount Stores for the distribution of our products. We do not have any formal agreements with Bi-Mart, and they are not obligated to purchase any of our products. The Company has begun shipments of our proprietary 3-ounce Stain Pen® to all Bi-Mart Membership Discount Stores throughout the northwest region.

Bi-Mart stores are membership-only stores, which means that customers must join Bi-Mart or be a guest of a member before shopping. Bi-Mart currently has over one million members at more than 60 stores in Washington, Oregon, and Montana, with plans to continue aggressive expansion throughout the greater Northwest. Each store is approximately 30,000 square feet and deals mainly in hard goods in the following departments: photo, house-wares, sporting goods, automotive, hardware, health & beauty, toys, clothing/shoes, beer/food/wine, and a full service pharmacy.

Our internal marketing staff has also expanded our distribution into the Home Shopping Network catalogue, Improvements. Home Shopping Network is a global, multi-channel retailer reaching more than 85 million U.S. households. Management believes this will offer greater distribution opportunities with this mega-retailer, as HSN expands its catalogue portfolio through numerous acquisitions currently under way.  

Our Stain Pen® product has also been featured in the popular LTD Commodities Catalog, which is known for shopping the world in order to sell the best merchandise from house wares, gifts, toys and apparel.

We also have a relationship with ATA Retail Services, Inc. ATA Retail Services is a privately owned, national company with 15 years in operation as a supplier of full-service merchandising programs to over 6,500 stores in 48 states, including the country's three largest supermarket chains, many regional supermarket chains and numerous drug stores. ATA Retail Services is headquartered in the San Francisco Bay area, employing more than 1,000 people.

During the quarter ended June 30, 2006, Source Direct received an initial purchase order for our Stain Pen® product by one of America's larger corporations, Bed Bath & Beyond, with over 700 retail outlets that specialize in domestic merchandise. The product was shipped in June 2006. Since that initial shipment, Bed Bath & Beyond has continued to request and receive additional shipments of our Stain Pen® product.

Sponsorships and Advertising:

Source Direct became a title sponsor on a NASCAR sponsorship agreement with Erik Darnell and Darnell Motor Sports for the 2004 and 2005 NASCAR racing seasons. Erik Darnell was a featured competitor in "Roush Racing: Driver X," a 13-week series debuting on the Discovery Channel.  After 13 weeks of intense competition, competing on two of the toughest racetracks in NASCAR, selected out of 1,700 applicants and winning the approval of ROUSH RACING's toughest judges, Erik Darnell was recognized as the best talent for 2006. In addition, Source Direct sponsored Roush Racing's No. 99 Ford F-150 and NASCAR driver Erik Darnell in the NASCAR Craftsman Truck Series races at the Martinsville Speedway on April 1, 2006, and at the Gateway International Raceway on April 29, 2006.  As a result of these two races, the Company is in negotiations with two major distributors to sell the Simply WoW® products. The Company is one of Erik Darnell’s primary sponsors.

In April 2007, we announced that Simply WoW® would sponsor Roush Fenway Racing's No. 99 Ford Fusion in the ARCA RE/MAX Series at Kansas Speedway on April 27, 2007, and at Kentucky Speedway on May 12, 2007.  We believe that these types of sponsorship deals give our brand name products greater visibility in the automotive arena.

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In March 2006, Source Direct became a sponsor for the Simply WoW® Lacey Racers, the only all-female professional race team competing for more than $250,000 in prize money in the National Guard Great Race 2006, the world’s richest, transcontinental vintage car rally. The event began June 24, 2006, in Philadelphia, Pennsylvania; crosses 15 states, with stops in 50 cities; and finished 14 days and 4,200 miles later in San Rafael, California. Through this sponsorship, exposure for Source Direct's Simply WoW® family of organic, biodegradable cleaning products will spanned the continent, with Simply WoW® product sampling taking place at overnight stops in York and Washington, Pennsylvania; Dublin, Ohio; Indianapolis, Indiana; Saint Louis, and Springfield Missouri; Wichita, Kansas; Pueblo and Durango, Colorado; Page, Arizona; Tonopah, Nevada; Sacramento, Vallejo, and San Rafael, California; and at free, family-focused act ivities including parades, local car shows, and festivals throughout the route.

In May 2007, we announced that Simply WoW® added one more venue that will further increase brand name awareness by entering the World Series of Off Road Racing. Simply WoW®, is a new entry in Off Road Racing, and Probst Motor sports, having over 190 Career Victories and 16 Class championships, have teamed up with us for the 2007 season. We debuted the Simply WoW® Off Road Racing team at the inaugural event in Owatonna, Minnesota, in November, 2007. Kevin Probst and the Simply WoW team finished 3rd overall for the season, and all the races were shown on Speed T.V. starting November 3, 2007. There will be eighteen races in all and can be viewed weekly on the Speed Channel ending on March 22, 2008.  We believe these events will help develop brand awareness for our product line.

In August 2007, we introduced Simply WoW® for motorcycles at the 67th Annual Motorcycle Rally in Sturgis, South Dakota. The Sturgis Motorcycle Rally traditionally attracts more than 450,000 motor cyclists and has grown to become one of the largest motorcycle events. Enthusiasts are drawn to the unique combination of scenic riding, entertainment and camaraderie with fellow bikers.

OTHER AGREEMENTS

During the quarter ended March 31, 2006 we entered into agreements with four firms for professional services including corporate governance guidance, legal services, public relations and development of business and marketing support. These agreements provide for the issuance of shares and warrants of our common stock in lieu of cash payments for the services rendered. The agreements are for a period of 2 years.

In August 2006, we entered into a factoring arrangement with Riviera Finance. The agreement allows the Company to receive financing in advance of the collection of certain accounts receivable that are acceptable to Riviera Finance. The accounts that are financed are pledged as collateral for the loans. The agreement was for six months and was automatically renewable for additional six month terms unless cancelled by either party. This agreement was terminated on July 28, 2007.

During the quarter ended December 31, 2006, we entered into a contract with Capital Media Partners. Capital Media Partners is a media agency formed for the sole purpose of providing emerging growth companies access to effective marketing techniques and processes developed for Fortune 500 companies, coupled with mass media to build long term value in their enterprises and increase liquidity in their stock.

Primary Customers

For the six months ended December 31, 2007, a majority of the Company’s sales were to two different customers. A majority of these sales were for our Stain Pen® product. We received revenues through sales of our products through orders received from ATA Retail Services, and recently we have continued shipments of our Stain Pen® product to Bed Bath and Beyond® retail outlets. Additionally, we have received purchase orders from British Petroleum and Arlen Ness.  We introduced the Green line of Motorcycle care kits at the 67^th Annual Sturgis Rally held in Sturgis, South Dakota.  Additionally, we have signed a contract to license our brand with West Cost Customs, which has a show on TLC, “Street Customs.”

We continue to develop many different outlets for our unique line of products.  Our Odor Annihilator®, has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful ATA Retail Services network.

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In September 2007, we received an initial purchase order for Simply WoW® Cleaner and Degreaser, Simply WoW® Stain Pen® and Simply WoW® Laundry Detergent for delivery by September 15, 2007, to Intermountain Natural LLC of Idaho Falls, Idaho. All three products will be private labeled and shipped to Intermountain Natural and its 14,000 distributors for retail sales. As of February 7, 2008 feedback on the sales are very positive, and Intermountain Natural is considering adding additional products to there line that will be supplied by the Company.

With the addition of these new customers and increased sales, we view this as positive steps in making the company profitable. The loss of any of these current customers would have a significant negative impact on sales.

Principal Suppliers

The principal suppliers of the raw materials we use to manufacture our products include Michelman Incorporated, Norman Fox & Co., Chemcentral Inc., and VoPak USA.  We believe that we have good relationships with our suppliers.

COMPETITION

The market for cleaning products is intensely competitive and dominated by a small number of large, well-established and well-financed companies. Many if not all of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than does the Company. In addition, we also face competition from potential new entrants into the market who may develop new cleaning products. We cannot guarantee that the Company will be able to compete successfully against current and future competitors or that competitive pressures will not result in price reductions, reduced operating margins and loss of market share, any one of which could seriously harm our business.  We also cannot guarantee that the life cycle of the products of the Company will be sufficient for us to realize profitability.

Employees

As of the date of this Report, we had six full time employees. A majority of our marketing and distribution efforts are handled through the distribution agreements noted above. Our production efforts are also mostly outsourced through our manufacturing arrangement.  We believe that our relationships with our employees are good.

DESCRIPTION OF PROPERTY

Source Direct purchased a manufacturing facility in February 2005 located at 4323 Commerce Circle, Idaho Falls, Idaho. The property consists of approximately 3,780 square feet of office space, and approximately 10,000 square feet of warehouse and manufacturing space. In August 2006, we sold this manufacturing facility. Also in August of 2006, the Company signed a new agreement to lease this facility for 60 months.  The lease agreement calls for monthly payments of $8,333. The Company anticipates that the facility will be suitable, appropriate, and adequate for its needs for the foreseeable future.

In August 2007, we launched our new web site which features all the Simply Wow Organic Cleaning Household Products, Simply WoW® Automotive and Motorcycle Cleaning Kits, and Simply WoW® Industrial Products through our Online Store. The new user-friendly site has improved navigation to the Household, Automotive, Motorcycle, and Industrial Products. The on-site icons lead to improved product descriptions and uses. Source Direct's Brand Name Awareness Campaign for the automotive product line can also be viewed. Product purchases are easily made through the Online Store.

We currently own the following trademarks and web domains:

Trademarks:

Simply Wow®

Stain Pen®

Prompt®

Works On The Spot®

Tuff Buff™

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Web Domains:

·

http://www.simplywow.com

·

http://www.worksonthespot.com

·

http://www.multipurposecleaner.com

·

http://www.stainpen.com

·

http://www.stainstick.com

·

http://www.laundrystain.com

·

http://www.organicsimplywow.com

·

http://www.tuffbuff.com

·

http://www.allpurposecleaner.com

Financial Condition and Changes in Financial Condition

RESTATEMENT

In accordance with Financial Accounting Standards Board (“FASB”) Statement 154, the Company has restated its financial statements for the three and six month periods ending December 31, 2006. The Company determined that generally accepted accounting principles had not been followed for the recording of certain types of transactions. The type and impact of the changes to these transactions are as follows:

On August 22, 2006, the Company sold its new headquarters building for a total sales price of $1,000,000, which resulted in a net profit to the Company of $175,148 net of settlement expenses. In conjunction with the sale, the Company signed a new agreement to lease this facility for 60 months. The Company erroneously reported the entire gain of $175,148 in its financial statements for the three month period ended September 30, 2006, instead of deferring the gain and amortizing the balance over the term of the new lease agreement as required by generally accepted accounting principles. The amortized portion of the gain should have been reported as $4,617 with the remaining balance of $170,531 being recorded as a deferred gain in the balance sheet.

  As noted below, the restatement was also reflected in the financial statements in the quarterly report for the period ended September 30, 2007, in the quarterly report for the period ended March 31, 2007, as amended, and is restated in this report.

By way of background, in May 2007, the Company received notice from the SEC that the Commission’s Staff had reviewed certain of the Company’s periodic filings and had several comments relating to the financial statements and notes included in the Company’s annual report for the year ended June 30, 2006.

In connection with preparing its response to the Staff’s comment letter, on June 15, 2007, the Company’s Board of Directors concluded that the consolidated financial statements included in the Company’s quarterly reports on Form 10-QSB for the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, should no longer be relied upon due to errors contained therein.  After consultation with the Company’s management and the Company’s former independent registered public accounting firm, Mantyla McReynolds (“Mantyla”), the Board of Directors determined that restatements of the consolidated financial statements for the affected periods were required. These restatements relate to the deferred gain on the sale of the Company’s headquarters and manufacturing building which took place in August 2006.

As a result of these errors, the Company’s condensed consolidated statements of operations for the quarters ended March 31, 2006, and September 30, 2006, have been corrected in subsequent filings by the Company.  The information relating to the deferred gain on the sale of the building in the Company’s quarterly report for the period ending September 30, 2006, was corrected in the quarterly report for the period ending September 30, 2007.  Additionally, the information relating to the deferred gain on the sale of the building in the Company’s quarterly report for the period ending March 31, 2006, was corrected in an amended quarterly report on Form 10-QSB/A for the period ending March 31, 2007, filed June 21, 2007.  Similarly, the information relating to the deferred gain on the sale of the building in the Company’s quarterly report for the period ending December 31, 2006, has been corrected in thi s filing.

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During the three quarterly filing periods (September 30, 2006, December 31, 2006, and March 31, 2007) that the net gain was realized from the sale of the building, the gain was recognized as a reduction to the Company’s rent expense. The remaining balance will be deferred and recognized in the future periods as per the guidance found in SFAS 13, Accounting for Leases.

The Company’s Chief Executive Officer and Chief Financial Officer, under authority granted to them by the board of directors, discussed all of the foregoing and reviewed it with HJ & Associates, LLC, our independent registered public accounting firm.  (As disclosed by the Company in a Current Report filed June 28, 2007, Mantyla resigned as our independent public accounting firm as of June 18, 2007.  On June 27, 2008, the Company engaged HJ& Associates, LLC, as its new independent public accounting firm.)

In connection with responding to the Staff’s comments in the review, and in light of the corrections required to the accounting treatment of the deferred gain on the sale of the building, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s controls and procedures were not effective as of the dates of the reviews conducted in connection with the periods ending September 30, 2006, December 31, 2006, and March 31, 2007, although at the time, the Company’s executive officers believed that such controls and procedures were effective.  Management of the Company has taken and intends to take steps to improve the effectiveness of its disclosure controls and procedures, including working with outside contract accountants in connection with reviewing the financial information and preparing financial statements of the Company; continuing to improve our working relationship wi th HJ & Associates; and implementation of better systems, methods, and software for tracking and recording the Company’s transactions. With these changes in the Company’s controls and procedures, management believes that past material deficiencies can be cured and will not be repeated.

Six Months ended December 31, 2007 and 2006

Revenues for the six months ended December 31, 2007, totaled $142,706. We received revenues through sales of our products through orders received from ATA Retail Services and recently we have continued shipments of our Stain Pen® product to Bed Bath and Beyond® retail outlets. Additionally, we have received purchase orders from British Petroleum and Arlen Ness. We anticipate receiving additional orders from these sources as well as from the other distribution agreements that are in place, but we can give no assurance that such sales will occur.  Our cost of goods sold for these sales totaled $80,864, which resulted in a gross profit margin of $61,842 or 43.3% of sales. Revenues for the prior year six month period totaled $292,136 with a gross margin of $164,337. The decrease in revenues was attributable to the initial orders during the six months ended December 31, 2006, to the Bed Bath and Beyond�� retail outl ets for the initial stocking of their inventory of our products.

Operating expenses for the six months ended December 31, 2007, totaled $407,964. Compensation related expenses were $127,802. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $77,120. We incurred $47,396 in consulting, legal and accounting related expenses as a result of various marketing efforts and expenses related to fulfilling our filing requirements with the SEC. The remaining expenses were incurred for general business purposes.

Operating expenses for the six months ended December 31, 2006, totaled $1,966,318. Compensation related expenses were $157,998. We incurred a non-cash charge of $139,875 for the issuance of shares of common stock for board of director services. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $323,295 of which $122,440 were non-cash charges for issuances of common stock for services in lieu of cash. We incurred $44,673 consulting, legal and accounting related expenses as a result of various marketing efforts and expenses related to fulfilling our filing requirements with the SEC. We also incurred $1,200,000 in a non-cash charge for the issuance of common shares to officers of the Company for research and development expenses during the six month period. The remaining expenses were incurred for general business purposes. In addition, as discussed in the section “Rest atement”, we restated our financial statements.   

We believe we will continue to incur substantial expenses for the near term as we increase our marketing efforts to introduce our products to the market.

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Liquidity and Capital Resources:

Since inception to December 31, 2007, we have funded our operations primarily from the sale of securities and loans.

During the six months ended December 31, 2007, we sold a total of 455,032 shares of our common stock for total cash proceeds of $155,008. We have utilized the proceeds from these stock sales to fund our various marketing and promotion efforts and general business activities.  

We have also funded our operations with loans from shareholders and other individuals. As of December 31, 2007, we were indebted to these note holders for a total amount of $556,441. The notes consist of the following:   

·

The Company has borrowed funds for operating purposes from an individual pursuant to a note.  The terms of the note include principal of $50,000.  If the principal and interest was not paid within 60 days of June 15, 2005, then additional interest of 10% annually would be due on original amounts. The Company made a $15,000 payment on the note which was applied to interest and then principal during the current year, leaving a principal balance of $44,779 as of June 30, 2007. This note is currently in default. The Company is working with the individual to work out monthly payment program. The balance on the note as of December 31, 2007, was $44,779.

·

The Company has borrowed funds for operating purposes from another individual in the amount of $100,000.  We entered into this loan transaction on July 24, 2007.  In connection with this loan, we paid a 2% loan fee and issued a note, due October 15, 2007, that bears interest at 14%.  In connection with the transaction, we also issued 100,000 shares of restricted stock.  On September 24, 2007, the Company made a payment of $8,416 for the interest on the loan.  The loan was due on October 15, 2007.  The principal balance of the note at December 31, 2007, was $100,000. As of the date of this report, we were working on a contract to repay the note.

·

The Company has borrowed funds for operating purposes from another individual in the amount of $76,000. The loan is unsecured, due on demand, and non-interest bearing.  The balance on the note as of December 31, 2007, was $71,000.

·

The Company has borrowed funds for operating purposes from another individual in the amount of $181,031. The loan is unsecured, due on demand, and non-interest bearing.

·

The Company has borrowed funds for operating purposes from another individual in the amount of $32,306. The loan is unsecured, due on demand, and bears a 15% interest rate. The unpaid balance at December 31, 2007, was $9,631.

·

The Company has borrowed funds for operating purposes from another individual in the amount of $150,000. The loan is unsecured, due on demand, and bears a 2% interest rate. The unpaid balance at December 31, 2007, was $150,000.

On August 22, 2006, the Company sold its new headquarters building for a total sales price of $1,000,000, which resulted in a net profit to the Company of $175,148 net of settlement expenses. In conjunction with the sale, the Company signed a new agreement to lease this facility for 60 months.  The lease agreement calls for monthly payments of $8,333.

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In June 2006, we entered into a new factoring arrangement with Riviera Finance. The agreement allowed the Company to receive financing in advance of the collection of certain accounts receivable that were acceptable to Riviera Finance. The accounts that were financed were pledged as collateral for the loans. Riviera withheld a reserve amount of 6% of each invoice submitted which was reimbursed to the Company upon receipt of all funds due under the invoice. In addition, Riviera charged a factoring fee based on the total value of invoices submitted and approved for each month. The maximum amount that could be financed was $200,000 per month. The factoring fee was based on the monthly volume of invoices submitted for financing and ranged from 9% for up to the first $10,000 of financed invoices to 3.9% up to $250,000 of financed invoices. The agreement was for six months and was automatically renewable for additional six month terms unles s cancelled by either party. This agreement was terminated on July 28, 2007.

At December 31, 2007, we had cash balances of $9,892 and a net working capital deficit of $537,178. Our cash requirements for the next twelve months will depend significantly on the number of purchase orders we receive for our products and our ability to secure financing for these orders. We anticipate that we will be able to secure either a business loan or other form of financing for any purchase order that exceeds our current ability to fund internally. However, we have no current agreements or arrangements which would provide such funding. We have also not negotiated the terms of any other forms of funding and cannot provide any assurance that the terms will be favorable for the company. We are also unable to predict the number of orders for our products, or if we receive additional orders, the amount of operating profit such orders would generate. Therefore, we are unable to predict our future cash requirements until we secure ad ditional purchase orders.

We continue to perform research and development to improve our existing cleaning products and to provide new cleaning products. We anticipate that we will continue to spend funds for research and development during the next twelve months, but we are unable to predict or anticipate the total amount of these future research and development expenses.  In many instances, new products are developed as a result of interest expressed by a potential retail client in similar or ancillary products to the ones initially presented.  This may occur especially in our private label products.  Many retail outlets require a set of related private label cleaning products before ordering any cleaning products.  Such was the case in our automotive cleaning products.  Our wheel cleaning and tire cleaning products were developed as a result of responses from potential clients for our automotive vinyl-cleaning product who required a set of automotive cleaning products rather than the single vinyl-cleaning product.

We believe we will need additional funding. We are assessing the possibilities for financing our business plan and trying to determine what sources of financing we might explore to raise the needed capital. We have no outside sources for funding our business plan at this time. We will need additional capital for any current or future expansion of our operations we might undertake. If we do not obtain funding, we will have to discontinue our current business plan. We do not believe traditional sources of funding such as bank loans would be available for these expenses, and therefore anticipate that if additional funding is required, such funding would be in the form of private lending arrangements or equity investment in the company.

Plan of Operation

The operating subsidiary has embarked on a two-fold growth program, which includes the following strategies and plans:

Our plan of operation includes the implementation of a multi-pronged marketing strategy to distributors, retail stores, and cleaning professionals, and direct to consumers to position the Company to become a major supplier in the U.S. all-purpose cleaning solution market.  Management’s business model is to position the Company as an authority in this area, based on (i) its potential as a market innovator and future leader, (ii) careful attention to product quality, (iii) the Company’s tested and proven products, (iv) its ethical business practices, and (v) the confidence of a large number of loyal consumers.

We also intend to seek acquisitions or co-branding arrangements with small, under-capitalized suppliers of cleaning products whose products would compliment or extend our product line, and which could be acquired readily to support the corporate objectives. We intend to acquire only companies whose market presence, product mix, and profitability meet certain acquisition criteria, and to incorporate their products into the existing product line or into lines of supporting or related products.

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In order to achieve the planned level of growth in both sales and profitability, we anticipate the need for a substantial amount of external capital, either from the sale of securities or incurring of debt, to permit us to execute the next stages of our business plan.  We have no firm commitments or arrangements for this funding and there is no assurance that we will be able to secure the funding necessary to implement the business plan.  

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS #157, “Fair Value Measurements,” which replaces and amends various other pronouncements.  This statement establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies to other pronouncements that fair value is the relevant measurement attribute.  This pronouncement is effective for financial statements for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Early adoption is allowed.  Management is in the process of evaluating the effect this pronouncement will have of the financial statements of the Company.

In September 2006, the FASB issued SFAS #158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans.”  This pronouncement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income.  Management does not expect this pronouncement to have a material effect on the Company’s results from operations or financial position because the Company does not have a defined benefit plan.

ITEM 3.  CONROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Certifying Officers carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2007. Their evaluation was carried out with the participation of other members of the Company’s management. Based upon their evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.  

In connection with our quarterly reports for the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, management carried out an evaluation of the effectiveness of our controls and procedures, and determined, for each of the periods listed, that the controls and procedures were effective.  However, subsequent to the filing of those reports, we received notice from the SEC that the Commission’s Staff had reviewed certain of our periodic filings and had several comments relating to the financial statements and notes included in the Company’s reports.  Following a consultation with our accountants and the SEC staff, our Board of Directors concluded that the consolidated financial statements included in our quarterly reports on Form 10-QSB for the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, should no longer be relied upon due to errors contained therein.  After con sultation with the Company’s management and the Company’s independent registered public accounting firm, Mantyla McReynolds (“Mantyla”), the Board of Directors determined that restatements of the consolidated financial statements for the affected periods were required. These restatements relate to the deferred gain on the sale of the Company’s headquarters and manufacturing building which took place in August 2006.

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In connection with responding to the SEC staff’s comments in the review, and in light of the corrections required to the accounting treatment of the deferred gain on the sale of the building, our Chief Executive Officer and Chief Financial Officer determined that our controls and procedures were not effective as of the dates of the reviews conducted in connection with the periods ending September 30, 2006, December 31, 2006, and March 31, 2007, although at the time, the Company’s executive officers believed that such controls and procedures were effective.  Management of the Company has taken and intends to take steps to improve the effectiveness of its disclosure controls and procedures, including working with outside contract accountants in connection with reviewing the financial information and preparing financial statements of the Company; continuing to improve our working relationship with our current certified pub lic accounting firm, HJ & Associates; and implementation of better systems, methods, and software for tracking and recording the Company’s transactions. With these changes in our controls and procedures, management believes that past material deficiencies can be cured and will not be repeated.

The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Certifying Officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts a nd expenditures are being made only in accordance with the authorization of the Company’s Board of Directors and management; and 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 its financial statements. The Company believes that there is a material weakness in its internal controls regarding the ability to timely prepare its financial statements. Management is currently addressing this weakness and intends to resolve the issues prior to its next filing.  The Company has taken and intends to take additional steps to remedy this weakness including better communications with HJ & Associates, additional assistance from contract accountants in preparing and tracking financial statements and transactions, and implementing new systems, methods, and software for tracking and recording transactions.

The changes in the Company’s internal control over financial reporting that occurred in the period covered by this report that could materially affect, or could be reasonably likely to affect, the Company’s internal control over financial reporting, consist solely of those discussed above.

(b) Changes in Internal Controls. As noted above, management of the Company has taken and intends to take steps to improve the effectiveness of its disclosure controls and procedures, and to remedy the material weakness in the Company’s internal controls over financial reporting including working with outside contract accountants in connection with reviewing the financial information and preparing financial statements of the Company; continuing to improve our working relationship with our current certified public accounting firm, HJ & Associates; and implementation of better systems, methods, and software for tracking and recording the Company’s transactions.  The Certifying Officers have discussed the implementation of each of the changes with the Company’s Board of Directors.

Section 404 Assessment. Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal controls beginning with our Form 10-KSB for the fiscal year ending on June 30, 2008, and an attestation of the effectiveness of these controls by our independent registered public accountants beginning with our Form 10-KSB for the fiscal year ending on June 30, 2009. We plan to dedicate significant resources, including management time and effort, in connection with our Section 404 assessment. The evaluation of our internal controls will be conducted under the direction of our senior management. We will continue to work to improve our controls and procedures, and to educate and train our employees on our existing controls and procedures in connection with our efforts to maintain an effective controls infrastructure at our Company.  

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PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On December 9, 2005, Source Direct Holdings, Inc., filed a lawsuit in the Third Judicial District Court in Salt Lake County, Utah, Civil No. 050921794, against Integritas, Inc., International Marketing Group, Inc., Corporate Capital, Inc., Jonquil International, Inc., Asset Growth Strategies, Inc., Reyna Enterprises, Inc., OmniCap, Inc., Phillip Flynn and Scott Phillip Flynn. The Company’s complaint alleges that it was fraudulently induced by the defendants to enter into certain marketing, consulting, and distribution contracts.  Based on the fraudulent inducement and the Company’s rescission of the contracts, the Company seeks to recover the approximately 320,000 shares of Source Direct stock that were issued to the defendants pursuant to the contracts.  The defendants have counterclaimed against Source Direct, alleging that Source Direct was not authorized to place a stop hold order on the shares issued to the de fendants, and that that Source Direct is liable for any decline in the market value of the stock that occurred after September 7, 2005.

The Company filed a motion for a writ of attachment in order to prevent the defendants from transferring the shares.  The district court granted the motion and entered a writ of attachment, to be secured by a bond in the amount of $480,000, which Source Direct filed on December 16, 2005.  Pursuant to the writ of attachment, the defendants tendered into the court’s possession 20,000 shares of Source Direct stock on January 24, 2006, and 282,000 additional shares of Source Direct stock on February 7, 2006.  The tendered shares of stock will remain in the court’s custody until the final disposition of the litigation or until further order of the court.

The Company denies that it is liable to the defendants and intends to defend vigorously against the counterclaim and prosecute its own claims for affirmative relief against the defendants.

Gordon Sage v.Source Direct, Inc., Source Direct Holdings, Inc., and Deren Smith, US. District Court, District of Idaho, Case No. CIV06-82-E-BLW.  On April 13, 2006, we were served with a complaint filed by Gordon Sage against Source Direct, Inc., Source Direct Holdings, Inc., and Deren Smith, alleging claims including breach of contract, misrepresentations, civil conversion, tortious interference, negligence, employment discrimination, and seeking damages of approximately $470,000, plus other unspecified damages and attorneys’ fees.  We filed an answer and counterclaim, denying the plaintiff’s allegations and bringing claims against Mr. Sage, including breach of contract, civil conversion, breach of fiduciary duty, tortious interference, and punitive damages.   In October 2007, we entered into a settlement agreement with Sage, pursuant to which we agreed t o pay, and Sage agreed to accept as payment in full settlement, Fifty Thousand Dollars ($50,000) over two years, ending in September 2009.  We agreed to make an initial payment of $7,500 on November 15, 2007, and we agreed with Sage that within ten days of that payment’s being made, the case would be dismissed with prejudice.  We also agreed that in the event that we fail to make a payment and to cure such failure within the provided time period, Sage could file a Consent to Entry of Judgment in the amount of $50,000, minus any amounts paid through the filing of the consent.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

From January 1, 2007 through June 30, 2007, the Company issued a total of 922,545 shares of its common stock for various services provided to the Company. These shares were valued at $235,720.  The Company also issued 200,032 shares for $50,008 in cash.

During the six months ended December 31, 2007, the Company sold 455,032 of its common stock to five individuals for $155,008 in cash. In conjunction with these transactions, the Company issued 260,032 common stock warrants.

For each of these transactions, the Company relied on an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933 and the regulations promulgated thereunder.

We have utilized the funds received from the stock sales for our various marketing and promotion efforts and general working capital and business activities.

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ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

a.  Exhibits

31.1

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

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Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	(Registrant)      Source Direct Holdings, Inc.
Date:  February 19, 2008	By:/s/ Deren Z. Smith
	Deren Z. Smith, President (Principal executive officer)
Date:  February 19, 2008	By:/s/ Kevin Arave
	Kevin Arave, Treasurer (Principal financial officer and Principal accounting officer)

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