UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549



FORM 10-Q



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

SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period ended September 30, 2008



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 of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x         No  ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                          |                     |                                               |                            
|------------------------- | ------------------- | --------------------------------------------- | ---------------------------
|Large accelerated filer
o | Accelerated filer
o | Non-accelerated filer
o                       | Smaller reporting company
þ
|                          |                     | (Do not check if a smaller
reporting company) |                            



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.     Yes  ̈         No x



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: As of November 12, 2008, the Company had outstanding 11,422,085 shares of its common stock.





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TABLE OF CONTENTS



|                                                                         |      | 
|------------------------------------------------------------------------ | ---- | 
|ITEM NUMBER AND CAPTION                                                  | PAGE
|                                                                         |      | 
|PART I  FINANCIAL INFORMATIONS                                           |      | 
|                                                                         |      | 
|ITEM 1.     FINANCIAL STATEMENTS                                         | 3   
|ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION    | 9   
|ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   | 13  
|ITEM 4T.   CONTROLS AND PROCEDURES                                       | 13  
|                                                                         |      | 
|PART II  OTHER INFORMATION                                               |      | 
|                                                                         |      | 
|ITEM 1.     LEGAL PROCEEDINGS                                            | 15  
|ITEM 1A.  RISK FACTORS                                                   | 15  
|ITEM 2.     UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS | 17  
|ITEM 3.     DEFAULTS UPON SENIOR SECURITIES                              | 18  
|ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          | 18  
|ITEM 5.     OTHER INFORMATION                                            | 18  
|ITEM 6.     EXHIBITS                                                     | 18  









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PART I

ITEM 1. FINANCIAL STATEMENTS



Source Direct Holdings, Inc.

Condensed Consolidated Balance Sheets



|                               |                    |          |               |   |         
|------------------------------ | ------------------ | -------- | ------------- | - | --------
|                               | September 30,
2008 |          | June 30,
2008
|                               | (Unaudited)        |          | (Audited)    
|ASSETS                         |                    |          |               |   |         
|Current Assets                 |                    |          |               |   |         
|Cash                           | $                  | 4,498    |               | $ | 1,248   
|Accounts receivable            |                    | 12,092   |               |   | 14,571  
|Inventory                      |                    | 197,363  |               |   | 196,725 
|Total Current Assets           |                    | 213,953  |               |   | 212,544 
|                               |                    |          |               |   |         
|Property and Equipment         |                    |          |               |   |         
|Property and equipment         |                    | 104,769  |               |   | 104,226 
|Less: Accumulated depreciation |                    | (61,650) |               |   | (57,751)
|Net Property and Equipment     |                    | 43,119   |               |   | 46,475  
|                               |                    |          |               |   |         
|Other Assets                   |                    |          |               |   |         
|Deposits                       |                    | 8,364    |               |   | 8,364   
|Intangible assets              |                    | 115,000  |               |   | 115,000 
|Accumulated amortization       |                    | (37,057) |               |   | (35,140)
|Net Other Assets               |                    | 86,307   |               |   | 88,224  
|                               |                    |          |               |   |         
|TOTAL ASSETS                   | $                  | 343,379  |               | $ | 347,243 



See accompanying notes to financial statements.





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Source Direct Holdings, Inc.

Condensed Consolidated Balance Sheets

(continued)





|                                                                                                                               |                    |             |               |   |            
|------------------------------------------------------------------------------------------------------------------------------ | ------------------ | ----------- | ------------- | - | -----------
|                                                                                                                               | September 30,
2008 |             | June 30,
2008
|                                                                                                                               | (Unaudited)        |             | (Audited)    
|LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)                                                                                   |                    |             |               |   |            
|Current Liabilities                                                                                                            |                    |             |               |   |            
|Accounts payable                                                                                                               | $                  | 258,687     |               | $ | 237,898    
|Accrued expenses                                                                                                               |                    | 101,493     |               |   | 61,588     
|Deferred gain on sale of asset                                                                                                 |                    | 36,941      |               |   | 36,941     
|Notes payable                                                                                                                  |                    | 306,810     |               |   | 296,810    
|Notes payable  related party                                                                                                  |                    | 55,552      |               |   | 27,747     
|Total Current Liabilities                                                                                                      |                    | 759,483     |               |   | 660,984    
|                                                                                                                               |                    |             |               |   |            
|Long-Term Liabilities                                                                                                          |                    |             |               |   |            
|Deferred gain on sale of building                                                                                              |                    | 70,803      |               |   | 80,038     
|Total Long-Term Liabilities                                                                                                    |                    | 70,803      |               |   | 80,038     
|                                                                                                                               |                    |             |               |   |            
|Total Liabilities                                                                                                              |                    | 830,286     |               |   | 741,022    
|                                                                                                                               |                    |             |               |   |            
|Stockholders' Equity (Deficit)                                                                                                 |                    |             |               |   |            
|Common stock -- $.001 par value; 200,000,000 shares
authorized; 11,422,085 and 11,272,416 issued and outstanding, respectively |                    | 11,422      |               |   | 11,272     
|Treasury Stock at cost                                                                                                         |                    | (13,835)    |               |   | (13,835)   
|Additional paid-in capital                                                                                                     |                    | 7,829,310   |               |   | 7,808,460  
|Accumulated deficit                                                                                                            |                    | (8,313,804) |               |   | (8,199,676)
|Total Stockholders' Equity (Deficit)                                                                                           |                    | (486,907)   |               |   | (393,779)  
|TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)                                                                             | $                  | 343,379     |               | $ | 347,243    



See accompanying notes to financial statements.





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Source Direct Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)



|                                              |                                               |            |                                               |   |          
|--------------------------------------------- | --------------------------------------------- | ---------- | --------------------------------------------- | - | ---------
|                                              | For the Three
Months Ended
September 30,
2008 |            | For the Three
Months Ended
September 30,
2007
|Revenues                                      | $                                             | 41,033     |                                               | $ | 111,244  
|Cost of goods sold                            |                                               | 29,845     |                                               |   | 39,101   
|Gross Profit                                  |                                               | 11,188     |                                               |   | 72,143   
|                                              |                                               |            |                                               |   |          
|General and administrative expense            |                                               | 125,414    |                                               |   | 167,453  
|                                              |                                               |            |                                               |   |          
|Income (Loss) from Operations                 |                                               | (114,226)  |                                               |   | (95,310) 
|                                              |                                               |            |                                               |   |          
|Other income                                  |                                               | 9,235      |                                               |   | 9,235    
|Interest expense                              |                                               | (9,137)    |                                               |   | (9,773)  
|                                              |                                               |            |                                               |   |          
|Net Income (Loss)                             | $                                             | (114,128)  |                                               | $ | (95,848) 
|                                              |                                               |            |                                               |   |          
|Net Loss per share                            | $                                             | (0.01)     |                                               | $ | (0.01)   
|                                              |                                               |            |                                               |   |          
|Weighted Average Number of shares outstanding |                                               | 11,302,463 |                                               |   | 8,616,914



See accompanying notes to financial statements.





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Source Direct Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                             |                                               |           |                                               |   |          
|---------------------------------------------------------------------------- | --------------------------------------------- | --------- | --------------------------------------------- | - | ---------
|                                                                             | For the Three
Months Ended
September 30,
2008 |           | For the Three
Months Ended
September 30,
2007
|Cash Flow Used for Operating Activities                                      |                                               |           |                                               |   |          
|Net (Loss)                                                                   | $                                             | (114,128) |                                               | $ | (95,848) 
|Adjustments to Reconcile net loss to net cash used for operating activities: |                                               |           |                                               |   |          
|Depreciation                                                                 |                                               | 3,899     |                                               |   | 3,935    
|Amortization expense                                                         |                                               | 1,917     |                                               |   | 1,916    
|Contributed interest                                                         |                                               | -         |                                               |   | 4,526    
|Decrease in trade receivables                                                |                                               | 2,479     |                                               |   | (33,593) 
|(Increase)/decrease in inventory                                             |                                               | (638)     |                                               |   | 24,062   
|Increase/(decrease) in accounts payable                                      |                                               | 20,789    |                                               |   | (29,432) 
|Increase/(decrease) in accrued liabilities                                   |                                               | 39,905    |                                               |   | (2,659)  
|Deferred gain on sale of assets                                              |                                               | (9,235)   |                                               |   | (9,235)  
|Net Flows Provided (Used) for Operating Activities                           |                                               | (55,012)  |                                               |   | (136,328)
|                                                                             |                                               |           |                                               |   |          
|Cash Flows used for Investing Activities                                     |                                               |           |                                               |   |          
|Purchase equipment                                                           |                                               | (543)     |                                               |   | -        
|Net Cash Flows Used for Investing Activities                                 |                                               | (543)     |                                               |   | -        
|                                                                             |                                               |           |                                               |   |          
|Cash Flows used for Financing Activities                                     |                                               |           |                                               |   |          
|Increase in note payable                                                     |                                               | 37,805    |                                               |   | 55,305   
|Proceeds from stock issuance                                                 |                                               | 21,000    |                                               |   | 90,008   
|Net Cash Flows Provided (Used) for Financing Activities                      |                                               | 58,805    |                                               |   | 145,313  
|                                                                             |                                               |           |                                               |   |          
|Net Increase in Cash                                                         |                                               | 3,250     |                                               |   | 8,985    
|Beginning Cash Balance                                                       |                                               | 1,248     |                                               |   | 3,215    
|                                                                             |                                               |           |                                               |   |          
|Ending Cash Balance                                                          | $                                             | 4,498     |                                               | $ | 12,200   
|                                                                             |                                               |           |                                               |   |          
|Supplemental Disclosures                                                     |                                               |           |                                               |   |          
|Interest paid                                                                | $                                             | -         |                                               | $ | 9,773    
|Contributed interest                                                         | $                                             | -         |                                               | $ | 4,526    
|Income taxes paid                                                            | $                                             | -         |                                               | $ | -        



See accompanying notes to financial statements.





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Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(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 September 30, 2008. 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 period ended September 30, 2008, are not necessarily indicative of the results for a full-year period.  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, 2008, 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   | $ | 38,925 
|Finished Goods  |   | 158,438
|                |   |        
|Total Inventory | $ | 197,363



NOTE 3 - ISSUANCE OF COMMON SHARES AND WARRANTS



During the period from July 1, 2008, through September 30, 2008, 149,669 additional shares of common stock and 140,002 warrants were issued. The Company received $21,000 in proceeds.



NOTE 4 - NOTES PAYABLE



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 interest of $3,763. If the principal and interest was not paid within 60 days of June 15, 2005, then additional interest of 10% annually was due on original amounts.  This note is currently in default. The Company is working with the individual to make payment arrangements. The current balance of the note payable as of September 30, 2008 was $44,779.



The Company has borrowed funds for operating purposes from another individual in the amount of $84,500. The loan is unsecured, due on demand, and non-interest bearing.  At the period ended September 30, 2008, the loan balance was $71,000.



The Company has borrowed funds for operating purposes from another individual in the amount of $191,031. The loan is unsecured, due on demand, and bears interest at 15% annually.



The Company has borrowed funds for operating purposes from several related party individuals in the amount of $55,552 as of September 30, 2008. The loans are unsecured, due on demand and bear interest at 10% annually.





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Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(Unaudited)



NOTE 5  GOING CONCERN



The Company has incurred significant losses and has had negative cash flows from operations. As a result, at September 30, 2008, the Company has had a high level of equity financing transactions, and additional financing will be required by the Company to fund its future activities and to support its operations. Management is seeking to obtain sufficient funding for its operations through either debt or equity financing.  However, there is no assurance that the Company will be able to obtain additional financing. The Companys ability to achieve and maintain profitability and positive cash flows is dependent upon its ability to achieve positive sales and profit margins and control operating expenses.  Management plans to mitigate its losses in the near term through the further development and marketing of its product offerings and controlling operating expenses.





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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 or include forward-looking statements.  Such statements are qualified in their entirety by reference to and are accompanied by the discussion below 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.



OVERVIEW



The Company is a manufacturer of eco-friendly cleaning products for a variety of uses including household, automotive and industrial.  The products offered by the company currently include Simply Wow® All Purpose Cleaner, Stain Pen®, Simply WoW® Odor Annihilator®, Simply WoW® Laundry Detergent, Simply Wow® Tuff BuffTM, and Simply WoW® Industrial Cleaner.



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.  To enhance its reputation as an eco-friendly supplier of cleaning products, the Company has obtained its Green Seal Certification on the Simply Wow® All Purpose Cleaner and Simply WoW® Odor Annihilator®.



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The Company's earnings are primarily dependent upon distribution agreements and ultimately the sales of their products.  Management is in discussion with several nationally recognized retail outlets for potential distribution agreements.  If successful, the Companys revenue should increase significantly with the receipt of the initial purchase orders.  However, there can be no guarantees that the revenue will be sustainable until consumer demand for the products can be determined by the retail outlets.  The Companys competitors have significantly more financial resources allowing them to advertise their products to the ultimate consumer, putting the Company at a competitive disadvantage.



To address this disadvantage, the Company has initiated a sales campaign aimed at large industrial cleaners.  Many of these companies are looking for eco-friendly products to use in their cleaning process.  Because this market is more focused on the quality of the product and cost and is less likely to be influenced by advertising, the Company believes it can be competitive in this market.



The Company is currently in discussion with various parties in an attempt to increase the capital of the company.  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.   At this time, management is uncertain if this process will be successful.



If the Company is not successful, and possibly even if it is successful, in implementing these actions, it may continue to experience operating losses, which would hinder its ability to pay down existing indebtedness, fund future growth and provide returns to stockholders.



Financial Condition and Changes in Financial Condition:



RESULTS OF OPERATIONS



Revenues were approximately $41,000 and $111,000 for the three months ended September 30, 2008 and 2007, respectively. The decrease in revenues was attributable to the decrease in orders during the period from Bed Bath and Beyond® for our Stain Pen product.  This was due to several factors, including problems with the packaging of the product and a change in display locations within the stores, as well as a revised marketing plan for eco-friendly cleaning products at Bed Bath and Beyond®.  Management believes there is significant opportunity to sell additional products to Bed Bath and Beyond® in the future.  We started selling the Simply WoW® Odor Annihilator® product to a limited number of stores on a trial basis.  Replacement orders have been placed, but as of the date of this report, management was unable to determine what the ultimate success of this relationship will be.  In addition, subsequent to the end of the quarter, the Company fulfilled a large order of the Simply WoW® Odor Annihilator® to a different national retail chain.



Cost of goods sold for these sales for the three months ended September 30, 2008 and 2007 totaled approximately $30,000 and $39,000, respectively, which resulted in a gross profit margin of $11,000 and $72,000 for three months ended September 30, 2008 and 2007, respectively.  The increase in cost of goods sold, and corresponding decrease in gross profit margin, was caused by the expense of expedited delivery of inventory.  This is due to the general lack of liquidity of the Company.



General and administrative expenses for the three months ended September 30, 2008 and 2007, totaled approximately $125,000 and $167,000, respectively. The decrease of $42,000 was due to a decrease in wages and a reduction in advertising expense. These reductions were primarily the result of cost cutting measures due to lack of available liquidity.  The remaining fluctuations were dispersed among numerous categories and were attributable to managements diligent monitoring of expenses.





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Liquidity and Capital Resources:



Since inception to September, 2008, we have funded our operations primarily from the sale of securities and loans.  During the three months ended September 30, 2008, we sold a total of 149,669 shares of our common stock for total cash proceeds of $21,000. 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 September 30, 2008, we were indebted to these note holders for a total amount of $362,362. 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 and interest of $3,763. If the principal and interest was not paid within 60 days of June 15, 2005, then additional interest of 10% annually was due on original amounts.  This note is currently in default. The Company is working with the individual to make payment arrangements. The current balance of the note payable as of September 30, 2008 was $44,779.



·

The Company has borrowed funds for operating purposes from another individual in the amount of $84,500. The loan is unsecured, due on demand, and non-interest bearing.  At the period ended September 30, 2008, the loan balance was $71,000.



·

The Company has borrowed funds for operating purposes from another individual in the amount of $191,031. The loan is unsecured, due on demand, and bears interest of 15% annually



·

The Company has borrowed funds for operating purposes from several related party individuals in the amount of $55,552 as of September 30, 2008. The loans are unsecured, due on demand and bears interest of 10% annually.



At September 30, 2008, we had cash balances of $4,498.  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 additional 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.





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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.



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 on 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.



In February 2007, the FASB issued  SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities.  SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and must be applied to the entire instrument and not to specified risks, specific cash flows or portions of that instrument.  An entity is restricted in choosing the date to elect the fair value option for an eligible item.  Management is in the process of evaluating the effect this pronouncement will have on the financial statements of the Company.



In November 2007, the FASB issued SFAS 160, Non-controlling Interest in Consolidated Financial Statements  an amendment to ARB No. 51.  SFAS 160 changes the way consolidate net earnings are presented.  The standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest and will require disclosure on the face of the consolidated statement of earnings amounts attributable to the parent and non-controlling interest.  The adoptions of this statement will result in more transparent reporting of the net earnings attributable to non-controlling interest.  The statement establishes a single method of accounting for changes in a parents ownership interest in a subsidiary that do not result in deconsolidation.  The statement also requires that a parent recognize a gain or loss in net earnings when a subsidiary is deconsolidated.  Management does not expect this pronouncement to have a material effect on the Companys results from operations or financial position.





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In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.SFAS 161 requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves on the transparency of financial reporting. In adopting SFAS 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial positions, financial performance and cash flows. Because this pronouncement affects only disclosures, this pronouncement will not have an impact on the Companys consolidated financial condition, results of operation or liquidity. The adoption of SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. Management does not expect this pronouncement to have a material effect on the Companys results from operations or financial position.



In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles.SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). The adoption of SFAS 162 will be effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.Management does not expect that the adoption of this statement will have a material impact of this Companys results of operation or financial position.



In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60.SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. The statement also clarifies how SFAS 60 applies to financial guarantee insurance contracts by insurance enterprises. The statement also requires expanded disclosures about financial guarantee insurance contracts. The adoption of SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods of those years, except for some disclosures about the risk-management activities. Management does not expect that the adoption of this statement will have a material impact of this Companys results of operation or financial position.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



This item is not applicable.



ITEM 4T.  CONTROLS 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 a consultant performing services for the Company commonly performed by a Chief Financial Officer (the Consultant, and with the Chief Executive 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 September 30, 2008. Based upon their evaluation, the Certifying Officers concluded that the Companys disclosure controls and procedures were effective.





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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 and 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.



During the performance of their annual audit, our auditors identified two material weaknesses.  The first weakness resulted in pricing errors related to inventory valuation.  The second material weakness identified balance sheet accounts that were not reconciled resulting in audit adjustments.  Based on these matters, our Chief Executive Officer and the Consultant concluded that our disclosure controls and procedures during the fiscal quarter ended September 30, 2008, were not effective.  Those deficiencies were disclosed to our Board of Directors.



Changes in Internal Control over Financial Reporting



During the quarter ended September 30, 2008, we took steps to improve our internal controls over financial reporting by hiring a consultant to assist in the preparation of all public filings. We have also made significant changes to out internal processes and procedures.  Our management and directors will continue to work with our auditors and outside advisors to remediate and eliminate the material weaknesses identified above and to ensure that our controls and procedures are adequate and effective.



Management's Report on Internal Control over Financial Reporting



Management of the Company is responsible for establishing and maintaining adequate internal control of over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of September 30, 2008, using the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control - Integrated Framework as a basis for our assessment.



Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.



A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected.





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Based on our evaluation of internal control over financial reporting, our management concluded that our internal control over financial reporting was not effective as of September 30, 2008, in light of the material weaknesses described above



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 defendants, 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.



ITEM 1A.  RISK FACTORS



The financial statements of the Company include a "Going Concern" Limitation.



The financial statements of the Company have been prepared based upon the assumption that it will achieve a level of profitable operations and/or obtain additional financing.  The Company has not yet established a source of revenues sufficient to cover its operating costs and allow it to continue as a going concern.  Since inception and through September 30, 2008, it has had accumulated losses totaling $8,313,804.  If the Company is unable to generate revenues or obtain additional financing prior to the use of its current cash resources, it may be required to cease operations.



The Company is a developing company and may require additional funding.



The Company has only recently commenced its principal business operations. It has experienced significant losses since inception and has generated only limited revenues.  There is no assurance that it will ever achieve full operations or that it will ever be profitable.  Further, there is no assurance that the cash funds of the Company will be sufficient to continue operations or to meet its cash requirements for the near future.  The Company likely will require further funding.  It presently has no agreements or arrangements for such additional funding.  If such funding is not obtained, the Company could be required to severely cut back or cease operations. Additionally, such funding could involve our issuing additional shares of our common stock or debt instruments that are convertible into shares of our common stock. Any issuances of additional shares will result in dilution of the interests of our shareholders.





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The Company has not applied for a patent on its products.



The Company has not made application for a patent on any of its products.  Management believes it would be difficult, if not impossible, to duplicate the formulas for the Company's products.  The Company maintains 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 the Company from being able to protect the secrecy of the formulas.  Public disclosure or availability of the Companys formulas could have a material adverse impact on the Companys operations and its ability to sell its products.



The loss of the services of current management would have a material negative impact on the operations of the Company.



The Company will be dependent on its current management, which includes the developer of the formulas, for the foreseeable future.  The loss of the services of any member of this management group could have a material adverse effect on its operations and prospects.  At present, the Company does not have employment agreements or other agreements with management which would prevent them from leaving and competing with the Company.  The Company has not obtained "key man" insurance policies on any member of management.



The Company will be in competition with a number of other companies, which may be better financed than the Company.



The market for cleaning products is intensely competitive and dominated by a small number of large, well-established, and well-financed companies. Many of these competitors have longer operating histories and greater financial, technical, sales and marketing resources than does the Company.  In addition, the Company also faces competition from potential new entrants into the market who may develop new cleaning products. Management 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 the Companys business.  Management also cannot guarantee that the life cycle of the Companys products will be sufficient for it to realize profitability.



There is only limited trading of the common stock of the Company.



Although the common stock of the Company is quoted on the OTC Bulletin Board under the ticker symbol SODH.OB, there is only limited trading of the stock and no assurance that trading volume will increase in the future. Therefore, the nature of the Company's common stock is extremely illiquid.  The shares of the Company are appropriate only for an investor who has no need for liquidity in the shares and who has adequate means of providing for his or her current needs and contingencies, even if the receipt of such shares results in a total loss to the shareholder.





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The Companys shares are designated as penny stock.



The Companys shares are designated as "penny stock" and thus may be more illiquid.  The SEC has adopted rules (Rules 15g-2 through l5g-6 of the Exchange Act) which regulate broker-dealer practices in connection with transactions in "penny stocks."  Penny stocks generally are any non-NASDAQ equity securities with a price of less than $5.00, subject to certain exceptions.  The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customers account, to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock that is subject to the penny stock rules.  Since the Companys shares are subject to the penny stock rules, persons holding or receiving such shares may find it more difficult to sell their shares.  The market liquidity for the shares could be severely and adversely affected by limiting the ability of broker-dealers to sell the shares and the ability of shareholders to sell their stock in any secondary market.



The market for the Companys shares is volatile.



The over-the-counter market for securities, such as the one on which the Companys shares is quoted, has historically experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as acceptance of the products of the Company, and trends in the cleaning products industry, and the investment markets generally, as well as economic conditions and quarterly variations in its results of operations, may adversely affect the market price of the Companys common stock.



Future issuances of stock could adversely affect holders of the Companys common stock.



The Companys Board of Directors is authorized to issue 200,000,000 shares of common stock which can be issued without shareholder approval, of which 11,422,085 shares were outstanding as of November 12, 2008. Additional common stock may be issued or reserved for issuance on terms and at prices as may be determined by the Board of Directors. Among other things, such authority may make it more difficult for a person to acquire or take over the Company. In turn, this may make it less likely that holders of common stock will receive a premium price for their shares in any attempted take-over transaction.



The risks and uncertainties described in this section are not the only ones facing Source Direct. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the foregoing risks actually occur, our business, financial condition, or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline.



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



During the three months ended September 30, 2008, the Company sold 149,669 of its common stock for $21,000 in cash. In conjunction with these transactions, the Company issued 140,002 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 3.  DEFAULTS UPON SENIOR SECURITIES.



This item is not applicable.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



This item is not applicable.



ITEM 5.  OTHER INFORMATION.



This item is not applicable.



ITEM 6.  EXHIBITS



a.  Exhibits





31.1

Certification of Chief Executive and Accounting 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:  November 19, 2008 |  | By:                          | /s/ Deren Z. Smith                          
|                         |  |                              | Deren Z. Smith, President                   
|                         |  |                              | (Principal executive and accounting officer)







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