UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2008





Commission
File Number: #000-51046





SARS
CORPORATION


(Exact
name of small business issuer as specified in its charter)





Nevada


(State or
other jurisdiction of incorporation or organization)





33-0677545


(IRS
Employer Identification Number)





19119
North Creek Parkway, Suite 201


Bothell,
WA 98011


(Address
of principal executive offices)(Zip Code)





866-276-7277


(Registrant's
telephone no., including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]





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





The
number of shares of the Company's common stock issued and outstanding on June
30, 2008 is 38,771,917.





Indicate
by check mark whether the registrant is a large 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 [
]                                           Accelerated
filer [ ]   Non-accelerated filer [
]    Smaller reporting company [X]




1





SARS
CORPORATION


FORM
10-Q




TABLE OF
CONTENTS


PagePART I
            
            FINANCIAL INFORMATION
            3Item 1
            
            Financial Statements
            3Item 2
            
            Management's Discussion and Analysis or Plan of
      Operation
            12Item 3
            
            Quantitative and Qualitative Disclosures about Market
      Risk
            17Item 4T
            
            Controls and Procedures
            17PART II
            
            OTHER INFORMATION
            18Item 1
            
            Legal Proceedings
            18Item 1A
            
            Risk Factors
            18Item 2
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            19Item 3
            
            Defaults Upon Senior Securities
            19Item 4
            
            Submission of Matters to a Vote of Security
      Holders
            19Item 5
            
            Other Information
            19Item 6
            
            Exhibits
            19SIGNATURES
            
            
            20




2





PART I - FINANCIAL INFORMATION


Item
1.                                Financial
Statements


SARS
Corporation and its subsidiaries


Condensed
Consolidated Balance Sheets


Unaudited


(in
thousands, except share data)




June
      30,
              
              
              September
      30,2008
              
              
              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              112
              
              
              $
              31Receivable
      for cash in escrow for common stock sold
              
              
              66
              
              
              
              890Accounts
      receivable, net
              
              
              299
              
              
              
              89Inventory
              
              
              365
              
              
              
              142Prepaid
      expenses and other current assets
              
              
              387
              
              
              
              54Total
      Current Assets
              
              
              1,228
              
              
              
              1,206Property,
      equipment and software, net
              
              
              3,111
              
              
              
              4,179Identifiable
      intangible assets
              
              
              3,023
              
              
              
              -Goodwill
              
              
              -
              
              
              
              568Advances
      to and receivables from Andronics
              
              
              -
              
              
              
              854Other
      assets
              
              
              35
              
              
              
              35Total
      Assets
              
              $
              7,398
              
              
              $
              6,842LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable and other accrued expenses
              
              $
              616
              
              
              $
              467Accounts
      payable - related party
              
              
              134
              
              
              
              420Accrued
      liabilities
              
              
              1,430
              
              
              
              93Notes
      payable current portion
              
              
              44
              
              
              
              40Convertible
      notes payable
              
              
              867
              
              
              
              -Deferred
      revenue
              
              
              25
              
              
              
              12Total
      Current Liabilities
              
              
              3,115
              
              
              
              1,032Notes
      payable, net of current portion
              
              
              47
              
              
              
              83Other
      non-current liabilities
              
              
              189
              
              
              
              -Total
      Liabilities
              
              
              3,352
              
              
              
              1,115Commitments
      and ContingenciesStockholders'
      EquityPreferred
      Stock - $0.001 par value; 50,000,000 shares authorized;Series
      A Convertible Preferred Stock - 1 share issued andoutstanding;
      liquidation value of $950
              
              
              950
              
              
              
              950Common
      Stock and additional paid-in capital - $0.001 par value,500,000,000
      shares authorized, 39,099,393 and 31,850,198shares
      issued and issuable, respectively
              
              
              34,674
              
              
              
              25,680Other
      comprehensive income
              
              
              (69
              )
              
              
              -Accumulated
      deficit
              
              
              (31,509
              )
              
              
              (20,903
              )Total
      Stockholders' Equity
              
              
              4,046
              
              
              
              5,727Total
      Liabilities and Stockholders' Equity
              
              $
              7,398
              
              
              $
              6,842See
      accompanying notes to condensed consolidated financial
      statements.


3




SARS
Corporation and its subsidiaries


Condensed
Consolidated Statements of Operations


Unaudited


(in
thousands, except share and per share data)




Three
      months ended June 30,
              
              
              Nine
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
              
              $
              485
              
              
              $
              131
              
              
              $
              801
              
              
              $
              515Cost
      of revenues
              
              
              346
              
              
              
              115
              
              
              
              622
              
              
              
              415Gross
      profit
              
              
              139
              
              
              
              16
              
              
              
              179
              
              
              
              100Operating
      ExpensesSales
      and marketing expense
              
              
              142
              
              
              
              732
              
              
              
              688
              
              
              
              1,465General
      and administrative expense
              
              
              2,667
              
              
              
              1,608
              
              
              
              7,217
              
              
              
              3,023Impairment
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              2,818
              
              
              
              -Total
      operating expenses
              
              
              2,809
              
              
              
              2,340
              
              
              
              10,723
              
              
              
              4,488Loss
      from operations
              
              
              (2,670
              )
              
              
              (2,324
              )
              
              
              (10,544
              )
              
              
              (4,388
              )Other
      Income (Expense)Interest
      expense
              
              
              (62
              )
              
              
              (21
              )
              
              
              (90
              )
              
              
              (636
              )Interest
      income
              
              
              3
              
              
              
              5
              
              
              
              28
              
              
              
              5Total
      other income (expense)
              
              
              (59
              )
              
              
              (16
              )
              
              
              (62
              )
              
              
              (631
              )Loss
      before income taxes
              
              
              (2,729
              )
              
              
              (2,340
              )
              
              
              (10,606
              )
              
              
              (5,019
              )Income
      taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              (2,729
              )
              
              
              (2,340
              )
              
              
              (10,606
              )
              
              
              (5,019
              )Preferred
      stock dividends
              
              
              (19
              )
              
              
              -
              
              
              
              (57
              )
              
              
              -Net
      loss attributable to holders of common stock
              
              $
              (2,748
              )
              
              $
              (2,340
              )
              
              $
              (10,663
              )
              
              $
              (5,019
              )Basic
      and diluted net loss attributable to holdersof
      common stock per common share
              
              $
              (0.07
              )
              
              $
              (0.09
              )
              
              $
              (0.29
              )
              
              $
              (0.23
              )Weighted
      average basic and diluted shares outstanding
              
              
              38,962,736
              
              
              
              25,025,642
              
              
              
              37,281,203
              
              
              
              22,047,893See
      accompanying notes to condensed consolidated financial
      statements.
  4


SARS
Corporation and its subsidiaries


Condensed
Consolidated Statement of Stockholders’ Equity


Unaudited


(in
thousands, except share data)




Common
      StockSeries
      A Preferred Stock
              
              
              and
      additional paid-in capital
              
              
              Other

                    Comprehensive
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Income
              
              
              Deficit
              
              
              TotalBalance
      at September 30, 2007
              
              
              1
              
              
              $
              950
              
              
              
              31,850,198
              
              
              $
              25,680
              
              
              $
              -
              
              
              $
              (20,903
              )
              
              $
              5,727Shares
      issued for cash received
              
              
              
              
              
              
              
              
              
              
              6,363,750
              
              
              
              6,364
              
              
              
              
              
              
              
              
              
              
              
              6,364Stock
      issue costs paid or payable in cash
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,497
              )
              
              
              
              
              
              
              
              
              
              
              (1,497
              )Shares
      issued upon cashless exercise of warrants
              
              
              
              
              
              
              
              
              
              
              27,257
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -Shares
      issuable for services provided recorded as stock issue
    costs
              
              
              
              
              
              
              
              
              
              
              308,188Preferred
      stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (57
              )
              
              
              
              
              
              
              
              
              
              
              (57
              )Common
      stock and warrants issuable for Andronics purchase
              
              
              
              
              
              
              
              
              
              
              50,000
              
              
              
              2,174
              
              
              
              
              
              
              
              
              
              
              
              2,174Increase
      in paid-in capital relating to fair value of beneficial
      conversionfeature
      of convertible notes payable issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              876
              
              
              
              
              
              
              
              
              
              
              
              876Shares
      and warrants issued for services
              
              
              
              
              
              
              
              
              
              
              500,000
              
              
              
              1,135
              
              
              
              
              
              
              
              
              
              
              
              1,135Other
      comprehensive income - foreign currency translation loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (69
              )
              
              
              
              
              
              
              (69
              )Net
      loss for the nine months ended June 30, 2008
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (10,606
              )
              
              
              (10,606
              )Comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,675
              )Balance
      at June 30, 2008
              
              
              1
              
              
              $
              950
              
              
              
              39,099,393
              
              
              $
              34,674
              
              
              $
              (69
              )
              
              $
              (31,509
              )
              
              $
              4,046See
      accompanying notes to condensed consolidated financial
      statements.
 5


SARS
Corporation and its subsidiaries


Condensed
Consolidated Statements of Cash Flows


Unaudited


(in
thousands)


Nine
      months ended June 30,2008
              
              
              2007Cash
      Flows From Operating ActivitiesNet
      loss
              
              $
              (10,606
              )
              
              
              (5,019
              )Adjustments
      to reconcile net loss to net cash used inoperating
      activitiesDepreciation
      and amortization of property and equipment
              
              
              986
              
              
              
              919Amortization
      of intangible assets
              
              
              1,178
              
              
              
              -Impairment
      of intangible assets
              
              
              2,818
              
              
              
              -Non-cash
      interest expense
              
              
              41
              
              
              
              582Share-based
      payments included in general and administrative expense
              
              
              421
              
              
              
              208Changes
      in operating assets and liabilities, exclusive of Andronics
      acquisitionAccount
      receivable
              
              
              251
              
              
              
              (123
              )Inventories
              
              
              (142
              )
              
              
              (22
              )Prepaid
      expenses and other current assets
              
              
              26
              
              
              
              (14
              )Accounts
      payable
              
              
              (506
              )
              
              
              (439
              )Accrued
      liabilities
              
              
              (444
              )
              
              
              -Other
              
              
              57
              
              
              
              18Net
      cash used in operating activities
              
              
              (5,920
              )
              
              
              (3,890
              )Cash
      Flows From Investing ActivitiesAdvances
      to Andronics. Ltd.
              
              
              -
              
              
              
              (282
              )Purchases
      of property, equipment, and software
              
              
              (112
              )
              
              
              (358
              )Net
      cash used in investing activities
              
              
              (112
              )
              
              
              (640
              )Cash
      Flows From Financing ActivityBorrowings
      on notes payable
              
              
              200
              
              
              
              129Payments
      on notes payable
              
              
              (32
              )
              
              
              -Proceeds
      from sale of common stock and warrants, net of cash fees
              
              
              6,609
              
              
              
              5,474Preferred
      stock dividends
              
              
              (57
              )
              
              
              -Stock
      issue costs
              
              
              (606
              )
              
              
              -Net
      cash provided by financing activities
              
              
              6,114
              
              
              
              5,603Effect
      of exchange rate changes on cash and cash equivalents
              
              
              (1
              )
              
              
              -Net
      increase in cash and cash equivalents
              
              
              81
              
              
              
              1,073Cash
      and cash equivalents, beginning of period
              
              
              31
              
              
              
              66Cash
      and cash equivalents, end of period
              
              $
              112
              
              
              $
              1,139Supplemental
      disclosure of cash flow informationCash
      paid for interest
              
              $
              57
              
              
              $
              35Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -Non-Cash
      Investing and Financing ActivitiesCommon
      shares issued for stock issue costs
              
              $
              636
              
              
              $
              -Warrants
      issued for services
              
              $
              2,201
              
              
              $
              -Amounts
      payable to related party for stock issue costs
              
              $
              308
              
              
              $
              -Securities
      issued for purchase of Andronics:Convertible
      debentures, net of fair value premiumrecorded
      as an increase in paid-in capital
              
              $
              722
              
              
              $
              -Common
      stock
              
              $
              104
              
              
              $
              -Warrants
              
              $
              2,070
              
              
              $
              -See
      accompanying notes to condensed consolidated financial
      statements.


6


SARS
Corporation and its subsidiaries


Notes
to Unaudited Condensed Consolidated Financial Statements


June
30, 2008





Note
1.                       Description
of Business





SARS
Corporation, a Nevada corporation, (formerly Mycom Group, Inc. prior to the
August 2007 acquisition of Veritas Solutions, Inc. (“VSI”) and its wholly-owned
subsidiary, Secure Asset Reporting Services, Inc., and subsequently renamed),
and together with its subsidiary (the “Company”) is headquartered near Seattle,
Washington U.S.A., and provides remote asset management and telematics solutions
that deliver business intelligence about fixed and mobile assets anywhere in the
world, which includes providing global tracking services of high-value, mobile
assets, including vessels, cargo containers, trucks, and aircraft, and the
monitoring of high-value fixed assets, including fuel tanks, bridges, and
pipelines. In December 2007, the Company acquired Andronics Ltd., renamed SARS
Andronics, a company located in Northern Ireland, which provides global two-way
data solutions for monitoring and controlling remote assets such as vehicles and
liquefied petroleum gas tanks.





Note
2.                       Liquidity





Since
inception, the Company has funded its operations and business development and
growth primarily through sales of its common stock and warrants to purchase
common stock. In this regard, during the fiscal year ended September 30, 2007
the Company raised approximately $7.0 million of net proceeds pursuant to sales
of equity securities, and during the nine months ended June 30, 2008, the
Company received additional net proceeds of approximately $5.2 million through
sales of approximately 6.4 million shares of its common stock, received $827,000
from its receivable for cash in escrow for common stock sold, and received
$200,000 from short-term convertible borrowings.  Company management
continues to be engaged in additional fund-raising activities to fund future
operations, capital expenditures, potential acquisitions of businesses, and
provide additional working capital, and in this regard has entered into a
funding arrangement providing for borrowings of up to $2.5 million pursuant to
convertible promissory notes collateralized by a pledge of substantially all of
the Company’s assets.  Subsequent to June 30, 2008, the Company has
received approximately $300,000 pursuant to this funding
arrangement.   There can be no assurance that this or other
additional financing will be available on favorable terms or at
all.  If the Company does not raise additional capital, then the
Company may be forced to severely curtail or cease operations. Consequently, the
Company is actively working with investment banks and institutional investors to
obtain additional capital through various financing options; however, the
Company does not have any additional financing agreements. If the Company raises
additional capital through the sale of equity or convertible debt securities,
the issuance of such securities may result in dilution to existing
stockholders.  At June 30, 2008, the Company does not have sufficient
cash to meet its needs for the next twelve months.





The
Company’s consolidated financial statements are prepared consistent with
accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business.  The
Company has incurred significant losses since inception, including approximately
$10.6 million during the fiscal year-to-date nine months ended June 30, 2008 and
approximately $6.3 million during the year ended September 30, 2007, and has an
accumulated deficit at June 30, 2008 of approximately $31.5 million, and has
relied on proceeds from sales of its common stock and warrants to purchase
common stock, as supplemented by bridge loan and convertible note borrowings, to
fund operations and business development and growth. Further, it is expected
that the Company will continue to experience net losses throughout this current
fiscal year, and beyond.  The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company have to curtail operations or be unable to continue in
existence.





Note
3.                       Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated. The unaudited
interim condensed consolidated financial statements and related notes are
presented in accordance with the rules and regulations of the Securities and
Exchange Commission with regard to interim financial information. Accordingly,
the condensed consolidated financial statements do not include all of the
information and notes to financial statements required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
Company’s financial position, results of operations and cash flows for the
interim periods presented have been included. Results of operations for the June
30, 2008 interim periods are not necessarily indicative of the results to be
expected for the entire fiscal year ending September 30, 2008 or for any other
future interim period. The accompanying unaudited interim condensed consolidated
financial statements should be read in conjunction with the audited annual
financial statements included in the Company’s September 30, 2007 Annual Report
on Form 10-KSB/A.




7








Note
4.                      Summary
of Significant Accounting Policies




Significant
accounting policies used in preparation of the Company's consolidated
financial statements are disclosed in the notes to our audited annual
consolidated financial statements for the fiscal year ended September 30, 2007.
A condensed summary of disclosures regarding certain of such policies are set
forth below.





Inventory – Inventory
consists primarily of tracking equipment held for resale.





Concentration of Credit
Risk – The Company derives its revenues from certain major
customers.  The loss of major customers could create a significant
financial hardship for the Company.  During the nine months ended June
30, 2008 and 2007, the Company had revenues of over 10% of total revenue from
individual customers as follows (“*” means < 10%):




2008
              
              2007Customer
      A
              14%
              
              *Customer
      B
              *
              
              24%


Geographic
Information – At June 30, 2008, approximately 73% of the Company’s total
assets represented assets relating to the business of Andronics, which the
Company acquired in December 2007, comprised of current assets of approximately
$519,000 and $4.9 million of non-current assets, primarily software and
identifiable intangible assets.  Approximately 63% of the Company’s
revenues for the nine months ended June 30, 2008 were from customers of the
Company’s Northern Ireland subsidiary, which results of operations are included
in the Company’s consolidated operating results for the period December 20, 2007
through June 30, 2008.





Goodwill - Goodwill
consisted of the excess of purchase price over fair value of assets acquired
related to the purchase of certain assets of Sentinela, LLC (“Sentinela”) in
2006. Goodwill was not amortized, but was subject to periodic review for
impairment in value.  As described in Note 8, during the three months
ended March 31, 2008, as a result of, among other things, departure of former
Sentinela personnel, the goodwill was written off due to its value being
impaired.





Impairment of Long-Lived
Assets - The Company’s long-lived assets, including property, equipment
and software, goodwill and customer list, are reviewed for carrying value
impairment annually or more frequently when events or changes in circumstances
indicate that the carrying amount may not be recoverable. The Company evaluates
the recoverability of its goodwill and other intangible assets in accordance
with SFAS 142. As described in Note 8, due to the migration of a portion of
previously acquired Veritas software to the software platform utilized by
recently acquired Andronics, the remaining estimated net book value of this
portion of acquired software was deemed to have no future value and the Company
recorded a provision for impairment of intangible assets of approximately $2.25
million during the three months ended March 31, 2008.





Business Combination andIdentifiable
Intangible Assets - In connection with the acquisition in December 2007
of certain assets of Andronics, Ltd., the Company acquired certain identifiable
intangible assets including intellectual property, trademarks and customer-based
intangibles. This acquisition has been accounted for in accordance with
Statement of Financial Accounting Standards No. 141, “Business Combinations”
(“SFAS No. 141”). Amounts allocated to intangible assets were identified by
management and have been valued on a number of factors based upon preliminary
estimates. The estimate of useful lives of each intangible asset of two years
was based on an analysis by management of all pertinent factors.  The
identifiable intangible assets are amortized on a straight-line basis over their
estimated useful lives. At June 30, 2008, these identifiable intangible assets
approximated $3.0 million, net of accumulated amortization of approximately $1.2
million.  Amortization expense for these intangible assets will
approximate $1.6 million in the fiscal year ending September 30, 2008, $1.8
million in the fiscal year ending September 30, 2009 and $200,000 in the fiscal
year ending September 30, 2010.





Loss per share
-  Common stock equivalent shares excluded from loss per share
computations because the effect would be antidilutive include 11,578,948 and
8,287,553 shares for warrants at June 30, 2008 and 2007, respectively, and
949,909 and 1,089,909 shares for convertible preferred stock at June 30, 2008
and 2007, respectively, and 1,522,000 shares for convertible promissory notes at
June 30, 2008.





Note
5.   Advances to and Acquisition of Andronics, Ltd.





In
December 2007, the Company, through its wholly-owned United Kingdom subsidiary,
Jinkhold, Ltd., renamed SARS Andronics, closed a material definitive agreement
with Andronics, Ltd., a company formed under the laws of Northern Ireland
(“Andronics”), pursuant to which the Company purchased substantially all of the
assets of Andronics in exchange for (i) the assumption of substantially all of
its liabilities, (ii) 50,000 shares of Company common stock valued at $104,000,
(iii) $722,000 of 10% convertible debentures, and (iv) options to purchase
1,000,000 shares of Company common stock and the obligation to issue an
additional 500,000 options contingent on attaining certain quarterly revenue
amounts (which such revenue targets have not been met).  The shares of
common stock were valued at $2.08 per share, the weighted average closing/last
price quoted during a relatively short period before and after the December 20,
2007 acquisition date.  The options to purchase Company common stock
have a one-year term to purchase stock at $0.01 per share vesting monthly over a
12-month period, and were valued at approximately $2.1 million as determined
utilizing the Black-Scholes pricing model with assumptions of a $2.08 market
price, volatility of 79%, dividend yield of 0%, expected term of 1.3 years and a
risk-free interest rate of 3.2%.  The convertible debentures are
convertible into shares of Company common stock at a conversion price of $1.00
per share, and if not converted or repaid prior to the maturity date, which is
twelve months from date of issuance, the debentures and related accrued interest
will convert into shares of Company common stock.  The convertible
debentures were valued at approximately $1.5 million based upon receiving
722,000 shares of common stock using the acquisition date quoted value of
$2.08.  Additionally, the Company executed a five-year facilities
lease agreement with certain shareholders of Andronics pursuant to which the
Company will pay monthly rent of 10,000 pounds sterling.  To the
extent that contractual lease obligations exceed market rents, the Company has
recorded lease obligations of approximately $215,000 as a liability included in
purchase price consideration.





8


In
contemplation of the asset acquisition, in February 2007, the Company entered
into an Operating Agreement with Andronics pursuant to which, among other
things, the Company operated the business of Andronics and provided funding to
Andronics for operating expenses and equipment purchases, with such fundings
evidenced with promissory notes payable by Andronics to the Company, and the
Company would receive all proceeds of gross revenues Andronics derived from
providing and operating the services and assets. The Company and Andronics
further entered into a License Agreement for intellectual property, and agreed
to exchange consulting services.  Pursuant to the agreements, the
Company provided management services to Andronics and sold equipment to
Andronics in connection with Andronics sales to its customers.  As of
the acquisition date, the Company had accounts, notes and other advances
receivable from Andronics of approximately $1.0 million resulting from sales and
cash advances, which are included as part of the purchase price allocated in
purchase accounting.





Andronics,
which delivers two-way data solutions for monitoring and managing remote assets
such as vehicles and liquefied petroleum gas tanks, is a part of the Company’s
commitment to deliver real-time business intelligence about fixed and mobile
assets located anywhere in the world.  This acquisition has been
accounted for in accordance with Statement of Financial Accounting Standards No.
141, “Business Combinations” (“SFAS No. 141”).  The total purchase price of
approximately $7.1 million, including liabilities assumed of approximately $2.4
million, has been allocated to assets acquired based on preliminary
estimates of fair values, which resulted in the majority being allocated to
identifiable intangible assets, including customer relationships, intellectual
property and trademarks, and to software, and which is summarized as follows (in
thousands):




Current
      assets
            
            $
            565Property,
      equipment and software
            
            
            2,238Identifiable
      intangible assets
            
            
            4,283Total
            
            $
            7,086




Operating
results for Andronics are included in the Company’s operating results from the
date of acquisition. The following supplemental pro forma information has been
presented on the basis as if the asset acquisition had occurred at the beginning
of the nine months ended June 30, 2008 and 2007 (in thousands):




2008
              
              
              
              2,007Revenues
              
              $
              1,344
              
              
              $
              2,547Net
      loss
              
              $
              (11,286
              )
              
              $
              (8,238
              )Net
      loss per common share
              
              $
              (0.30
              )
              
              $
              (0.37
              )


Note
6.  Convertible Notes Payable





Convertible
debentures issued in December 2007 include a conversion price of $1.00 per
common share as compared to the market quoted close/last price during a
relatively short period before and after the issuance date of $2.08 per
share.  In accordance with Accounting Principles Board Opinion No. 14,
the intrinsic value of this beneficial conversion feature of approximately
$780,000 has been recorded as premium, which reduces the carrying value of the
recorded obligation and increases paid-in capital.





During
May 2008, the Company received cash of $200,000 and issued $200,000 of
convertible notes payable, bearing interest at 10%, due in 90 days, and
convertible into shares of Company common stock at an exercise price of $0.25
per share.  The market quoted close/last price of the Company’s common
stock at the note issuance date of $0.37 per share was in excess of the exercise
price.  Accordingly, the Company has recorded the beneficial
conversion feature of $96,000 as debt discount to be amortized to interest
expense over the related debt term, which such amortization resulted in interest
expense of $41,000 during the three months ended June 30, 2008.  The
remaining $55,000 of unamortized debt discount is expected to be recognized as
expense during the three months ending September 30, 2008.  In July
2008, the holder of this $200,000 convertible note payable, together with
approximately $2,000 of accrued interest, exchanged this note for the same
amount of two year convertible notes payable as disclosed in Note
11.





9




Note
7.  Common Stock and Warrants





Common
stock – In connection with private placement sales of securities, the
Company agreed to file with the Securities and Exchange Commission a
registration statement covering the resale of common stock and the common stock
issuable upon exercise of warrants no later than 60 days following the closing
of the private placement, which was December 28, 2007.  In addition,
the Company is required to use its best efforts to cause the registration
statement to be declared effective by the Securities and Exchange Commission as
soon as possible and, in any event, within 150 days following the close of the
private placement.  This requirement was subsequently waived by
investors.





In June
2008, the Company’s Board of Directors ratified a restricted stock agreement
with the Company’s Interim Chief Financial Officer pursuant to which the Company
has issued and will issue shares of its common stock for services provided and
to be provided.  A total of 200,000 shares are to be issued, of which
150,000 have been issued and are fully-vested as of June 30, 2008, and of which
50,000 will be issued and fully-vested as of September 30,
2008.  During the three months ended June 30, 2008, the Company
recorded expense of approximately $40,000 related to vested shares based on the
closing market price of the stock as of the date of the Board ratification, and
expects to record additional expense of $14,000 during the three months ending
September 30, 2008.





Warrants-As of June 30,
2008, there are 1,000,000 warrants issuable with an exercise price of $0.01 and
a term of approximately 0.5 year, 9,428,448 warrants issued and issuable with an
exercise price of $1.00 and a weighted average remaining term of approximately
4.0 years and 1,150,500 warrants issued and issuable with an exercise price of
$1.25 and a weighted average remaining term of approximately 2.0
years.  As of June 30, 2008, the aggregate intrinsic value of
outstanding warrants, based on a closing stock price of $0.23 at that date is
approximately $220,000


.


Changes
in warrants outstanding during the nine months ended June 30, 2008, is as
follows:




weighted
      averagenumber
      of
              
              
              exercise
              
              
              term
              
              
              exercise
              
              
              remaining
      termwarrants
              
              
              price
              
              
              (in
      years)
              
              
              price
              
              
              (in
      years)Outstanding
      at October 1, 2007
              
              
              8,977,601
              
              
              
              
              
              
              
              
              $
              1.03
              
              
              
              3.9Exercised
              
              
              (63,600
              )
              
              $
              1.00
              
              
              
              3.9Issued
      to placement agents
              
              
              1,364,947
              
              
              
              1.00
              
              
              
              5.0Issuable
      in connection with Andronics acquisition
              
              
              1,000,000
              
              
              
              0.01
              
              
              
              1.0Issued
      for services
              
              
              300,000
              
              
              
              1.00
              
              
              
              10.0Outstanding
      at June 30, 2008
              
              
              11,578,948
              
              
              
              
              
              
              
              
              
              
              $
              0.94
              
              
              
              3.3


The
weighted average fair value of warrants issued and issuable during the interim
periods ended June 30, 2008 and 2007, as determined using the Black-Scholes
pricing model, was approximately $1.78 and $0.97, respectively, utilizing the
following assumptions:




interim
      periods ended June 30,2008
              
              2007Expected
      life in years
              
              
              
              
              
              1.3
      to 10.0
              
              5.0Volatility
              
              
              
              
              
              79%
      to 105%
              
              145%
      to 152%Interest
      rate
              
              
              
              
              
              3.2%
      to 3.5%
              
              4.5%Dividend
      yield rate
              
              
              
              
              
              0%
              
              0%


Share-based
payments relating to warrants included in general and administrative expense for
the nine months ended June 30, 2008 and 2007 were approximately $421,000 and
$208,000, respectively.  The value of warrants issued to the placement
agents was approximately $2.2 million, which is accounted for as stock issue
costs, and which has the effect of both increasing common stock and additional
paid-in capital for recognition of fair value and decreasing common stock and
additional paid-in capital for recognition of the issue costs.  The
value of warrants issued in connection with the Andronics acquisition was
approximately $990,000, which is accounted for as an increase in common stock
and additional paid-in capital and as a portion of the Andronics purchase
price.





Note
8.                      Impairment
of Intangible Assets





During
the three months ended March 31, 2008, the Company recorded a provision for
impairment of intangible assets of approximately $2.8 million.  The
provision was comprised of approximately $2.25 million recorded as an impairment
provision for the estimated net book value of previously acquired Veritas
software due to the migration from that software platform to that utilized by
recently acquired Andronics, and approximately $568,000 previously recorded as
goodwill related to the purchase of certain assets of Sentinela in September
2006, which was written off due to its value being impaired as a result of,
among other things, departure of former Sentinela personnel.





10




Note
9.                      Related
Party Transactions





One of
the Company’s stockholders, a member of the Company’s Board of Directors, and
its Secretary, is the managing partner of a law firm, which provides legal
services to the Company.  The Company incurred approximately $1.3
million in legal fees from this firm during the nine months ended June 30, 2008,
of which $108,000 is included in accounts payable-related party at June 30,
2008.








Note
10. Commitments and Contingencies





In
connection with the December 2007 acquisition of Andronics, the Company entered
into a facilities lease agreement with certain shareholders of Andronics,
pursuant to which the Company will pay monthly rent of 10,000 pounds sterling
(which at an exchange rate near year-end approximates USD $20,000 per month, or
$240,000 per year) for a five year term.





During
the three months ended June 30, 2008, the Company entered into agreements with
placement agents in connection with the Company’s proposed offer and private
placement of its preferred stock, common stock, other equity or equity-linked
interests of the Company or debt securities of the Company, pursuant to which,
among other things, the placement agents would receive fees and expenses based,
in part, on the amount of funds raised and securities issued.





The
Company is subject to lawsuits and other claims in the normal course of
business.  The Company establishes accruals for specific liabilities
in connection with legal actions deemed to be probable and reasonably
estimable.  No material amounts have been accrued as of June 30, 2008
in these accompanying condensed consolidated financial statements with respect
to any legal matters.  Company management does not expect that the
ultimate resolution of pending legal matters in future periods will have a
material effect on the Company’s financial condition or results of
operations.





Note
11. Subsequent Events





On July
1, 2008, the Company entered into a Convertible Promissory Note and related
Security Agreement with an investor (the “Holder”), which provide for, among
other things, the Company to borrow up to $2.5 million, which may be loaned from
time to time upon the mutual agreement of both the Company and the
Holder.  The notes accrue interest at a rate of ten percent per annum
with quarterly payments of interest to be made on the first day of each fiscal
quarter commencing September 1, 2008 until July 1, 2011 at which date the
entire principal balance together with any accrued and unpaid interest shall be
due and payable in full.  The Holder shall have the right at any time
to convert all or any portion of the note and all accrued but unpaid interest
thereon into common stock of the Company at the rate of $0.25 per share, which
was a conversion rate not less than the market quoted/last price of the
Company's common stock at the note issuance date.   Pursuant to
terms of the Security Agreement, the Company has granted a security interest in
all of the Company’s accounts receivable, inventory and intellectual property,
including, but not limited to all rights, title and interest in all computer
software, program formats and databases, patents, patent applications and the
like, registered trademarks and service marks, logos, internet domain names,
copyrights, designs, data and database rights and registrations, inventions and
other proprietary rights and goodwill associated with any of the
foregoing.  In addition, the Company granted to the Holder a warrant
to purchase Company common stock at an exercise price of $0.50 per share for up
to a maximum of 5,000,000 shares.  The number of warrants exercisable
at any date is 50% of the number of shares that the Company issued to the Holder
upon conversion of the Convertible Promissory Notes.  The warrants are
exercisable for a period of three years following conversion of the Convertible
Promissory Notes. Subsequent to June 30, 2008, the Company received
approximately $300,000 pursuant to this funding arrangement, and approximately
$202,000 of these Convertible Promissory Notes were issued in exchange for
short-term convertible notes payable issued in May 2008.





In July
2008, the Company issued 100,000 shares of its common stock to an individual in
exchange for financing and marketing services.  Additionally, in July
2008, the Company amended the consulting services agreement with its recently
appointed Chief Executive Officer such that, among other things, the Company
issued 200,000 shares of its common stock to the executive.  Further,
in July 2008, the Company also granted five-year common stock warrants to
purchase 500,000 shares of Company common stock at a per share price of $0.19,
the market quoted/last price on the date of grant, to each of the Company’s
Chief Executive Officer and Interim Chief Financial Officer (who recently became
a member of the Board of Directors) in consideration of the performance of
duties as Chief Executive Officer and as Director, respectively.  The
fair value of these common stock issuances and warrant grants will be recorded
as general and administrative expense during the three months ended September
30, 2008.





11


Item 2.   Management’s discussion and analysis or
plan of operations





FORWARD
LOOKING STATEMENTS CAUTIONARY


This
Item 2 and the June 30, 2008 Quarterly Report on Form 10-Q may contain
"forward-looking statements." In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These forward-looking statements include, without limitation,
statements about our market opportunity, our strategies, competition, expected
activities and expenditures as we pursue our business plan, and the adequacy of
our available cash resources. Although we believe that the expectations
reflected in any forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Actual results
may differ materially from the predictions discussed in these forward-looking
statements. Changes in the circumstances upon which we base our predictions
and/or forward-looking statements could materially affect our actual results.
Additional factors that could materially affect these forward-looking statements
and/or predictions include, among other things: (1) our limited operating
history; (2) our ability to pay down existing debt; (3) our ability to retain
the professional advisors necessary to guide us through our corporate
restructuring; (4) the risks inherent in the investigation, involvement and
acquisition of a new business opportunity; (5) unforeseen costs and expenses;
(6) potential litigation with our shareholders, creditors and/or former or
current investors; (7) the Company's ability to comply with federal, state and
local government regulations; and (8) other factors over which we have little or
no control.





We
do not undertake any obligation to publicly update any forward-looking
statement, whether as a result of new information, future events, or otherwise,
except as required by law. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results or achievements to be materially different from any future results or
achievements expressed or implied by such forward-looking statements. Such
factors include the factors described in our audited consolidated financial
statements and elsewhere in the Company’s September 30, 2007 Annual Report on
Form 10-KSB/A.





Further,
in connection with, and because we desire to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, we
caution readers regarding certain forward looking statements in the following
discussion and elsewhere in this report and in any other statement made by, or
on our behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward looking statements are statements not based on historical
information and which relate to future operations, strategies, financial results
or other developments. Forward looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by, or on our behalf.





Overview–





Organization –
SARS Corporation, a Nevada corporation, (formerly Mycom Group, Inc. prior to the
August 2007 merger with Veritas Solutions, Inc. and its wholly-owned subsidiary,
Secure Asset Reporting Services, Inc., and subsequently renamed), and together
with its subsidiaries (“SARS” or the “Company”) is headquartered near Seattle,
Washington U.S.A.  Utilizing a network of satellite, cellular and VHF
radio systems, SARS provides remote asset management and telematics solutions
that deliver real-time business intelligence about fixed and mobile assets
including vessels, cargo containers, trucks, aircraft, fuel tanks, bridges, and
pipelines anywhere in the world.  With the SARS Tracpoint ® software
suite, business and government organizations in the marine, energy,
transportation and other industries can track, monitor and manage assets for
improved safety, better security and increased business
efficiency.   In December 2007, the Company closed its asset
purchase agreement of Andronics Ltd., a company located in Northern Ireland, and
which provides global two-way data solutions for monitoring and controlling
remote assets.





Business – Veritas
Solutions, Inc. (“VSI” and also known in the industry as VSI Wireless, Secure
Asset Reporting Services and SARS) was formed to capitalize on the
well-established trend toward remote asset management in the tracking and
operation of capital assets. Our mission is to become the leader in this broad,
highly fragmented market. Today, the worldwide infrastructure for the tracking
of assets consists of disparate satellite and cellular communications networks,
VHF radio-based systems, and hardware devices and software applications that
apply predominantly to specific classes of assets (for example, only to ships or
only to road trailers). Within this market, we believe that we offer the only
complete remote asset management solution, one that is both customizable and
independent of the type of communications or hardware. Our solution can track
assets anywhere in the world, providing timely, accurate and pertinent
information to our customers in real time. The Company has initially targeted
asset tracking in four industries: marine, upstream and downstream oil and gas
production, cargo trailers/containers and aviation.





In June
and again in August 2008, the Company announced that its revenue projections for
the fiscal years ending September 30, 2008 and 2009 were revised downward due to
the time, expense and effort associated with (i) completion of product design
and development; (ii) introduction of its UtilityEye® product to a commercial
market; and (iii) establishment of a strategic relationship with a manufacturing
partner.  In connection with restructuring its operations and
redesigning its products, sales strategy and manufacturing relationships, and
due to higher than anticipated costs associated with the launch of its
products,  it is expected that SARS will continue to experience net
losses throughout this current fiscal year, and beyond into fiscal
2009.  During 2008, SARS has improved its operations facilities to
vastly increase production capabilities, restructured its management team,
including the hiring of a new CEO/COO, and acquired new technology that will
increase the quality and demand of its products.  As a result of these
actions, SARS has cut costs, created a strong distribution network, standardized
its technology to make it world class, and added “best of breed” partners, such
as RackSpace and Flextronics, to meet the expectations of its
customers.





12




During
2008 we combined Andronics Leocate and SARS’ Intellitrax business intelligence
software into one system Tracpoint ®.  Tracpoint is a centralized
platform for the acquisition, aggregation and dissemination of intelligence on
mobile and fixed assets.  The technology behind the system is a
hardware-indifferent foundation for tracking remote assets that are engaged in
the distribution of goods in commerce, through terrestrial and satellite
communications platforms.  The technology provides for the
acquisition, data warehousing and subsequent presentation of multiple data sets,
including location, maintenance records, security status, control data and state
of goods while in storage or transit.   The Company intends to
seek patent protection for a number of aspects of its proprietary
technology.  With Tracpoint, we gather tracking and other data from
disparate sources on various assets such as ships, planes and containers, and
present them to our customers in one place in an easy-to-use
format.  For these services, customers pay us an ongoing access
fee.  SARS can source data from third-party hardware that the Company
can resell and install, or from hardware that is already in use by the business
operator or government agency.  Our software, which consists of
proprietary and licensed software, allows our customers to track their assets
anywhere in the world, in real time, 24 hours a day.





In a
market where most firms utilize a global positioning satellite, or GPS, message
to provide basic information on the location of an asset, the Company
distinguishes its product by going beyond just asset tracking.  Asset
location is the first piece of data and it becomes the launching point for a
more extensive set of data about the usage and condition of the asset, its
financial impact on the customer’s business and other critical operational
parameters.  SARS believes that taking GPS data, merging it with key
performance expectations and presenting the results to a fleet manager provides
a powerful edge in safety and security, administrative cost reduction and in
revenue and margin enhancement.





The
Company does not manufacture hardware products.  All hardware utilized
in the remote asset management solutions is provided by third-party vendors or
directly from manufacturers.  During 2008, we condensed our Andronics
supply chain and moved our manufacturing relationship to Flextronics, pursuant
to which we can have more unit volume capacity as compared to prior limitations,
and will be able to reduce unit costs.  In terms of research and
development, as technology advances and new hardware equipment becomes available
the Company maintains the flexibility to develop essential connection software
to process the data that these new units produce.  In this regard, in
2008, we have been re-engineering our UtilityEye® LPG units with Flextronics and
are continuing to produce smaller, lighter and less costly units.  The
Company also continues to improve the software displays of its application layer
and the processing of existing data in the core platform layer in order to grow
as new customers and assets come online.





Our
revenue model is comprised of (i) a monthly recurring software usage fee for
access to Tracpoint including long-range identification tracking display,
automatic identification system display, alarm notifications and alarm
monitoring; (ii) a monthly recurring airtime and data delivery fee for the cost
of airtime from our service providers, plus mark-ups; and (iii) one-time fees
for hardware, installation, shipping, customization and special programming
requirements. As demand dictates, we resell and install hardware from third
parties to facilitate data flow and, in turn, we expect revenues from such
resale and installations to be a large part of our initial revenue
base.  Our objective is to migrate new customers to a recurring
revenue model, one that imposes a software usage fee. We expect revenues to
continue to increase in most, if not all, revenue sources. We are adding new
customers to our system and with new customers there is the potential
for an additional recurring revenue source.





Major
Customers  – The Company derives its revenues from certain
major customers.  The loss of major customers could create a
significant financial hardship for the Company.  During the nine
months ended June 30, 2008, revenues from one customer represented approximately
14% of total revenues.




Basis of presentation and
liquidity - Since inception, the Company has funded its operations
and business development and growth primarily through sales of its common stock
and warrants to purchase common stock. In this regard, during the fiscal year
ended September 30, 2007 the Company raised approximately $7.0 million of net
proceeds pursuant to sales of equity securities, and during the nine months
ended June 30, 2008, the Company received additional net proceeds of
approximately $5.2 million through sales of approximately 6.4 million shares of
its common stock, received $827,000 from its receivable for cash in escrow for
common stock sold, and received $200,000 from short-term convertible
borrowings.  Company management continues to be engaged in additional
fund-raising activities to fund future operations, capital expenditures,
potential acquisitions of businesses, and provide additional working capital,
and in this regard has entered into a funding arrangement providing for
borrowings of up to $2.5 million pursuant to 2 year convertible promissory notes
collateralized by a pledge of substantially all of the Company’s
assets.  Subsequent to June 30, 2008, the Company has received
approximately $300,000 pursuant to terms of this funding arrangement and
exchanged $202,000 of these notes for short-term convertible promissory notes
issued in May.   There can be no assurance that this or other
additional financing will be available on favorable terms or at
all.  If the Company does not raise additional capital, then the
Company may be forced to severely curtail or cease operations. Consequently, the
Company is actively working with investment banks and institutional investors to
obtain additional capital through various financing options; however, the
Company does not have any additional financing agreements. If the Company raises
additional capital through the sale of equity or convertible debt securities,
the issuance of such securities may result in dilution to existing
stockholders.  At June 30, 2008, the Company does not have sufficient
cash to meet its needs for the next twelve months.





13




The
Company’s consolidated financial statements are prepared consistent with
accounting principles generally accepted in the United States applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business.  The Company has
incurred significant losses since inception, including approximately $10.6
million during the fiscal year-to-date nine months ended June 30, 2008 and
approximately $6.3 million during the year ended September 30, 2007, and has an
accumulated deficit at June 30, 2008 of approximately $31.5 million, and has
relied on proceeds from sales of its common stock and warrants to purchase
common stock, as supplemented by bridge loan and convertible note borrowings, to
fund operations and business development and growth. Further, it is expected
that the Company will continue to experience net losses throughout this current
fiscal year, and beyond.  The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company have to curtail operations or be unable to continue in
existence.





Critical
Accounting Policies and Estimates





Management's
discussion and analysis of financial condition and results of operations are
based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
our management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
revenues and expenses during the reporting periods. On an ongoing basis,
estimates and assumptions are evaluated. Estimates are based on historical
experience and on various other factors believed reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. A summary of significant accounting policies is
presented in Note 1 to our consolidated financial statements included in our
September 30, 2007 Annual Report on Form 10-KSB. The following accounting
policies are considered the more critical to aid in understanding and evaluating
our results of operations and financial condition.





Use of estimates in the
preparation of financial statements - Preparation of financial
statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates. The more significant accounting
estimates inherent in the preparation of the Company's financial statements
include estimates as to the depreciable lives of property, equipment and
software, recoverability of receivables, valuation and recoverability of
inventories, recoverability of long-lived assets, valuation of intangible assets
and allocation of purchase price, valuation of equity related instruments
issued, and valuation allowance for deferred income tax
assets.





Revenue Recognition -
The Company recognizes revenue when it has persuasive evidence of an
arrangement, the product has been shipped or the services have been provided to
the customer, title and risk of loss for products has passed to the customer,
the sale price is fixed and determinable, no significant unfulfilled Company
obligations exist, and collectability is reasonable
assured.   Revenue from hardware sales is generally recognized
when products are shipped and/or the revenue is fully earned and ownership had
passed to the customer. Revenue from tracking services are recorded in the month
the service is provided. Revenue from custom programming services, which are all
short-term, is recognized using the completed-contract method.





Share-Based
Payments-
The Company has granted warrants to purchase shares of the Company’s Common
stock to various parties for consulting services and in connection with fund
raising activities. The fair values of the warrants issued have been estimated
using the Black-Scholes option valuation model in accordance with the Financial
Accounting Standards Board’s Emerging Issue Task Force Abstract, EITF 96-18,
Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services (“EITF 96-18”).





Impairment of Long-lived
Assets - The Company’s long-lived assets, including property, equipment
and software, goodwill and customer list, are reviewed for carrying value
impairment annually or more frequently when events or changes in circumstances
indicate that the carrying amount may not be recoverable. The Company evaluates
the recoverability of its goodwill and other intangible assets in accordance
with SFAS 142. Due to the migration of a portion of previously acquired Veritas
software to the software platform utilized by recently acquired Andronics, the
remaining estimated net book value of this portion of acquired software was
deemed to have no future value and the Company recorded a provision for
impairment of intangible assets of approximately $2.25 million during the three
months ended March 31, 2008. Additionally, during the three months ended March
31, 2008, as a result of, among other things, departure of personnel from a
prior business acquisition pursuant to which goodwill was recorded, the goodwill
was written off due to its value being impaired.





14




Results
of Operations





Three
months ended June 30, 2008 and 2007





Revenues–Revenues for the three months
ended June 30, 2008 increased $354,000 to $485,000 as compared to $131,000 for
the comparative prior year period.  Revenues are comprised primarily
of sales of equipment and revenues from tracking and other services provided to
customers.  The increase in revenues was due to Andronics revenues for
the current year period, as compared to no Andronics revenues during the prior
year before the December 2007 acquisition.





Cost of
revenue -Cost
of revenues includes the cost of equipment sold and of services provided, which
includes compensation costs.  Cost of revenues for the three months
ended June 30, 2008 increased to $346,000 as compared to $115,000 for the
comparative prior year period.  Cost of revenues for the three months
ended June 30, 2008 approximated 71% as a percent of revenues as compared to 88%
during the comparative prior year period. The decrease in cost of revenues as a
percent of revenues was due primarily to revenues from Andronics, which have a
higher gross profit margin as compared to SARS.





Gross
Profit - Gross profit increased to $139,000 for the three months ended June 30,
2008 as compared to $16,000 for the comparative prior year period. The increase
in gross profit was due primarily to increased revenue volumes.





Sales and
marketing expenses – Sales and marketing expenses for the three months ended
June 30, 2008 decreased approximately $590,000 to $142,000 as compared to
$732,000 for the comparative prior year period.  Sales and marketing
expenses decreased due primarily to reduced personnel associated with such
activities.





General
and administrative expenses – General and administrative expenses increased $1.1
million for the three months ended June 30, 2008 as compared to the prior year
period primarily due to approximately $1.3 million incurred at Andronics during
2008 as compared to none in the 2007 period.





Depreciation
and amortization – Depreciation and amortization expense, which is included in
general and administrative expenses, for the three months ended June 30, 2008
increased to $1.1 million as compared to $272,000 for the comparative prior year
period, due to having more assets in service as a result of the Andronics
acquisition in December 2007.





Loss from
operations – Loss from operations for the three months ended June 30, 2008
increased to approximately $2.7 million as compared to $2.3 million for the
comparative prior year period.  The increase in loss from operations
is primarily due to increased general and administrative expenses.





Nine
months ended June 30, 2008 and 2007





Revenues– Revenues for the nine
months ended June 30, 2008 increased $286,000 to $801,000 as compared to
$515,000 for the comparative prior year period.  Revenues are
comprised primarily of sales of equipment and revenues from tracking and other
services provided to customers.  The increase in revenues was
primarily due to Andronics revenues for the current year period, as compared to
no Andronics revenues during the prior year before the December 2007
acquisition, offset by decreased SARS sales of approximately $221,000 as a
result of decreased sales to Andronics during the prior year
period.





Cost of
revenue -Cost
of revenues includes the cost of equipment sold and of services provided, which
includes compensation costs.  Cost of revenues for the nine months
ended June 30, 2008 increased to $622,000 as compared to $415,000 for the
comparative prior year period.  Cost of revenues for the nine months
ended June 30, 2008 approximated 78% as a percent of revenues as compared to 81%
during the comparative prior year period. The decrease in cost of revenues as a
percent of revenues was due primarily to revenues from Andronics, which have a
higher gross profit margin as compared to SARS.





Gross
Profit - Gross profit increased to $179,000 for the nine months ended June 30,
2008 as compared to $100,000 for the comparative prior year period. The increase
in gross profit was due primarily to increased revenue volumes.





Sales and
marketing expenses – Sales and marketing expenses for the nine months ended June
30, 2008 decreased $777,000 to $688,000 as compared to $1.5 million for the
comparative prior year period.  Sales and marketing expenses decreased
due primarily to the 2007 period including advertising and marketing related
consulting fees of approximately $1.2 million as compared to $120,000 in
2008.





General
and administrative expenses – General and administrative expenses increased
approximately $4.2 million for the nine months ended June 30, 2008 as compared
to the prior year period primarily due to, among other things, $2.7 million
incurred at Andronics during 2008 as compared to none in the 2007 period, as
well as increases in consulting expenses, including legal, accounting and public
relations costs, partially due to increased costs relating to being a public
company in 2008.





15




Depreciation
and amortization – Depreciation and amortization expense, which is included in
general and administrative expenses, for the nine months ended June 30, 2008
increased to $2.2 million as compared to $919,000 for the comparative prior year
period, due to having more assets in service.





Impairment
of intangible assets – During the nine months ended June 30, 2008, the Company
recorded a provision for impairment of intangible assets of approximately $2.8
million.  The provision was comprised of approximately $2.25 million
recorded as an impairment provision for the estimated net book value of
previously acquired Veritas software due to the migration from that software
platform to that utilized by recently acquired Andronics, and approximately
$568,000 previously recorded as goodwill related to the purchase of certain
assets of Sentinela in September 2006, which was written off due to its value
being impaired as a result of, among other things, departure of former Sentinela
personnel.





Loss from
operations – Loss from operations for the nine months ended June 30, 2008
increased to approximately $10.5 million as compared to $4.4 million for the
comparative prior year period.  The increase in loss from operations
is primarily due to the provision for asset impairment of approximately $2.8
million and increased general and administrative expenses.





Liquidity
and Capital Resources





Since
inception, the Company has funded its operations and business development and
growth primarily through sales of its common stock and warrants to purchase
common stock. In this regard, during the fiscal year ended September 30, 2007
the Company raised approximately $7.0 million of net proceeds pursuant to sales
of equity securities, and during the nine months ended June 30, 2008, the
Company received additional net proceeds of approximately $5.2 million through
sales of approximately 6.4 million shares of its common stock, received $827,000
from its receivable for cash in escrow for common stock sold, and received
$200,000 from short-term convertible borrowings.  Company management
continues to be engaged in additional fund-raising activities to fund future
operations, capital expenditures, potential acquisitions of businesses, and
provide additional working capital, and in this regard has entered into a
funding arrangement providing for borrowings of up to $2.5 million pursuant to
convertible promissory notes collateralized by a pledge of substantially all of
the Company’s assets.  Subsequent to June 30, 2008, the Company has
received approximately $300,000 pursuant to terms of this funding
arrangement.   There can be no assurance that this or other
additional financing will be available on favorable terms or at
all.  If the Company does not raise additional capital, then the
Company may be forced to severely curtail or cease operations. Consequently, the
Company is actively working with investment banks and institutional investors to
obtain additional capital through various financing options; however, the
Company does not have any additional financing agreements. If the Company raises
additional capital through the sale of equity or convertible debt securities,
the issuance of such securities may result in dilution to existing
stockholders.  At June 30, 2008, the Company does not have sufficient
cash to meet its needs for the next twelve months.





Net cash
used by operating activities was approximately $5.9 million during the nine
months ended June 30, 2008 and $3.9 million in the comparative prior year
period. The increase in cash used by operating activities of approximately $2.0
million was due primarily to the $1.9 million increase in net loss as adjusted
for depreciation and amortization, impairment and other non-cash expenses
relating to share-based payments to approximately $5.2 million in the nine
months ended June 30, 2008 from $3.3 million during the comparative prior year
period.





Net cash
used in investing activities was approximately $112,000 for purchases of
property, equipment and software during the nine months ended June 30, 2008, and
$640,000 during the comparative prior year period related to purchases of
property, equipment and software of $358,000 and advances to Andronics of
$282,000.





Net cash
provided by financing activities was $6.1 million during the nine months ended
June 30, 2008 and $5.6 million in the comparative prior year
period.  The increase of net cash provided during the current fiscal
year was primarily due to an increase in proceeds, net of issuance costs, from
sales of the Company’s common stock and warrants to purchase common
stock.





Inflation -Although our
operations are influenced by general economic conditions, we do not believe that
inflation had a material effect on our results of operations.





Contractual
Obligations and Off-Balance Sheet Arrangements –





In
connection with the acquisition of Andronics, the Company entered into a
facilities lease agreement with certain shareholders of Andronics, pursuant to
which the Company will pay monthly rent of ten thousand pounds sterling (which
at an exchange rate near year-end approximates USD $20,000 per month, or
$240,000 per year) for a five year term.





Regarding
Off-Balance Sheet Arrangements, the Company has not entered into any other
financial guarantees or other commitments to guarantee the payment obligations
of any third parties, nor entered into any derivative contracts that are indexed
to Company shares and classified as shareholder’s equity or that are not
reflected in the Company’s financial statements. Furthermore, the Company does
not have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to
such entity.  The Company does not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit
support to the Company or engages in leasing, hedging or research and
development services with the Company.





16




Item
3.                                Quantitative
and Qualitative Disclosures about Market Risk





We are
exposed to financial market risk resulting from changes in interest rates. We do
not engage in speculative or leveraged transactions, nor do we utilize
derivative financial instruments. Based on our cash and cash equivalent balances
at June 30, 2008, a 100 basis point increase or decrease in interest rates would
result in an immaterial increase or decrease in interest income on an annual
basis.







Item
4T.                      Controls
and Procedures




(a)
Disclosure controls and procedures.





Out
management is responsible for establishing and maintaining adequate control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(0) under the
Exchange Act. The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the
Company’s Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions in accordance with the required
"disclosure controls and  procedures" as defined in Rule
13a-15(e).  The Company’s disclosure and control procedures are
designed to provide reasonable assurance of achieving their
objectives.





On
February 15, 2008, our management after discussion with the Company’s
independent registered public accounting firm, decided to restate certain
of  the Company’s previously filed consolidated financial statements
for the correction of errors. The Company’s management, who participated in the
discussion, includes those officers and directors who are responsible for the
adequacy and accuracy of disclosures in the Company’s filings. Consolidated
financial statements as of (i) September 30, 2006 and December 31, 2005 and for
the fiscal years then ended included as Exhibit 99.1 in the Company’s Current
Report on Form 8-K date of report August 28, 2007, (ii) June 30, 2007 and 2006
and for the nine months then ended included as Exhibit 99.3 in the
Company’s  Current Report on Form 8-K/A date of report August 28,
2007, and (iii) September 30, 2007 and 2006 and for the fiscal years then ended
included in the Company’s Annual Report on Form 10-KSB for the year ended
September 30, 2007 (collectively, the “Original Financial Statements” and
“Original Reports”) have been restated.





The
restatements were required to correct errors relating to recording
amounts due for services pursuant to a March 2004 agreement, which previously
were not recorded.  Company management believes that the errors, both
of which relate to the same agreement, were inadvertent and
unintentional.  Subsequent to the filing of the Original Reports and
issuance of the Original Financial Statements, the Company determined that
shares of its common stock were, upon execution of a March 2004 engagement
agreement, due to a related party for deferral of payment of legal fees, and
that fees were due to this firm in connection with the Company’s fund raising
activities, specifically with respect to its February 2007 private placement
offering of equity securities during the year ended September 30, 2007. The
effect of restatements as of June 30, 2007 and September 30, 2007 is that
liabilities, amounts due related parties, increased by $242,000 and $347,000,
respectively, and additional paid-in capital decreased by like amounts to record
stock issue costs.  Other than restatements to the Company’s loss per
share, which decreased as a result from restatements to the number of shares
outstanding for the restated periods, there was no effect on the Company’s
results of operations or cash flows included in the Original Financial
Statements.




The
restated consolidated financial statements as of  (i) September 30, 2006
and December 31, 2005 and for the fiscal years then ended and (ii) June 30, 2007
and 2006 and for the nine months then ended are included as Exhibit 99.1 and
Exhibit 99.3, respectively, in the Company’s Current Report on Form 8-K/A date
of report August 28, 2007, filed February 19, 2008, and (iii) September 30, 2007
and 2006 and for the fiscal years then ended are included in the Company’s
September 30, 2007 Annual Report on Form 10-KSB/A, filed February 19,
2008.




Our
management, with the participation of our Chief Executive Officer and Interim
Chief Financial Officer, assessed the effectiveness of the Company’s disclosure
controls and procedures (as defined in the rules and regulations of the SEC
under the Exchange Act) as of June 30, 2008 (the “Evaluation
Date”).   Management determined that its controls over assuring
that all material agreements, obligations and commitments have been disclosed to
personnel responsible for preparation of financial statements were ineffective,
and accordingly, has concluded that the Company’s disclosure controls over
financial reporting were not effective as of the Evaluation
Date.   Upon identification of this material weakness in February
2008, the Company initiated a review of its internal controls and processes with
respect to whether all existing material agreements and obligations have been
identified, monitored and reported, and to determine what changes, if any, are
required to prevent recurrence of this type of error.





As for
the material weakness identified, management has implemented the following
remedial actions:





·
            Obtaining
      representations in writing from directors and officers regarding full
      disclosure of agreements, and


·
            Initiated
      the formation of a financial reporting disclosure committee and
      processes.





17




(b)
Changes in internal control over financial reporting.





We are
assessing the effectiveness of our internal controls over financial reporting on
an account by account basis as a part of our on-going accounting and financial
reporting review process in order to comply with Section 404 of the
Sarbanes-Oxley Act of 2002, which requires our management to assess the
effectiveness of our existing internal controls for the fiscal year ending
September 30, 2008.  This effort includes documenting, evaluating the
design of and testing the effectiveness of our internal controls over financial
reporting.  We intend to continue to refine and improve our internal
controls on an ongoing basis.  During this process, we may identify
items for review or deficiencies in our system of internal controls over
financial reporting that may require strengthening or remediation, such as those
described in (a) above.




There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.




PART II- OTHER INFORMATION




Item
1.                                Legal
Proceedings





On May
28, 2008, E-Terra, LLC, an Alaska limited liability company (“E-Terra”), filed a
claim against SARSand
it’s wholly owned subsidiary, Secure Asset Reporting Services, Inc., in the
United State District Court, District of Alaska.  E-Terra is alleging
breach of contract of the software licensing agreement entered into between the
parties in November 2001, misappropriation of trade secrets and that it is due
fees for damages and lost revenue in excess of $75,000.  On or about
June 20, 2008, the Company filed an answer to and a counterclaim against E-Terra
alleging breach of contract and wrongful termination and that it is due fees for
damages and attorney fees.





The
Company is unaware of any other threatened or pending litigation against it not
in the ordinary course of business and that has not previously been
disclosed.







Item
1A.                      Risk
Factors





·
            We
      have no substantial history of having meaningful revenues or profitable
      operations and may incur future losses, which will likely impair our
      future stock price.


·
            Most
      of our end-users are subject to budgetary and political constraints which
      may delay or limit purchases of our products, and we will have no control
      over those decisions.


·
            We
      are dependent on a few of our larger customers and are vulnerable to
      changes in their asset tracking
requirements.


·
            Currently,
      a significant part of our revenue is attributable to contracts with
      government agencies, particularly the U.S. Coast Guard.  Changes
      in the priorities of the government may affect the level of funding
      allocated towards U.S. Coast Guard programs.  We may benefit if
      greater funds are allocated toward asset tracking to the extent that our
      business is engaged for such use.   However, changes in
      priorities in government spending may diminish the U.S. Coast Guard’s
      capacity to engage our services.


·
            Our
      revenue sources are presently concentrated in the maritime market and not
      yet diversified in other segments, which may adversely affect our business
      in an industry slump.


·
            Our
      business and operations would suffer in the event of system
      failures.


·
            From
      time to time, we install new or upgraded business management systems. To
      the extent such systems fail or are not properly implemented, we may
      experience material disruptions to our business, delays in our external
      financial reporting or failures in our system of internal controls, that
      could have a material adverse effect on our results of
      operations.


·
            The
      market price for our common stock, shares of which underlie our preferred
      stock, may be particularly volatile given our status as a relatively
      unknown company with a small and thinly traded public float, limited
      operating history and lack of profits which could lead to wide
      fluctuations in our share price.


·
            Our
      executive officers, directors and insider shareholders, and parties
      related to them, will own or control approximately 26% of our outstanding
      common stock, which may limit the ability of our other shareholders,
      whether acting alone or together, to propose or direct the management or
      overall direction of our company.  Additionally, this
      concentration of ownership could discourage or prevent a potential
      takeover that might otherwise result in receiving a premium over the
      market price of your shares.




18




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





During
May 2008, the Company received cash of $200,000 and issued $200,000 of
convertible notes payable, bearing interest at 10%, due in 90 days, and
convertible into shares of Company common stock at an exercise price of $0.25
per share.  The closing market price of the Company’s common stock at
the note issuance date of $0.37 per share was in excess of the exercise
price.





In June
2008, the Company’s Board of Directors ratified a restricted stock agreement
with the Company’s Interim Chief Financial Officer pursuant to which the Company
has issued and will issue shares of its common stock for services provided and
to be provided.  There is a total of 200,000 shares to be issued, of
which 150,000 have been issued and are fully-vested as of June 30, 2008, and
50,000 of which will be issued and fully-vested as of September 30,
2008.





On July
1, 2008, the Company entered into a Convertible Promissory Note and related
Security Agreement with an investor (the “Holder”), which provide for, among
other things, the Company to borrow up to $2.5 million, which may be loaned from
time to time upon the mutual agreement of both the Company and the
Holder.  The notes accrue interest at a rate of ten percent per annum
with quarterly payments of interest to be made on the first day of each fiscal
quarter commencing September 1, 2008 until July 1, 2011 at which date the
entire principal balance together with any accrued and unpaid interest shall be
immediately due and payable in full.  The Holder shall have the right
at any time to convert all or any portion of the note and all accrued but unpaid
interest thereon into common stock of the Company at the rate of $0.25 per
share, which was a conversion rate not less than the closing stock price as of
July 1, 2008.   Pursuant to terms of the Security Agreement the
Company has granted a security interest in all of the Company’s accounts
receivable, inventory and intellectual property.  In addition, the
Company granted to the Holder a warrant to purchase Company common stock at an
exercise price of $0.50 per share for up to a maximum of 5,000,000
shares.  The number of warrants exercisable at any date is 50% of the
number of shares that the Company issued to the Holder upon conversion of the
Convertible Promissory Notes.  The warrants are exercisable for a
period of three years following conversion of the Convertible Promissory Notes.
Subsequent to June 30, 2008, the Company received approximately $300,000
pursuant to this funding arrangement.





In July
2008, the Company issued 100,000 shares of its common stock to an individual in
exchange for financing and marketing services.  Additionally, in July
2008, the Company amended the consulting services agreement with its recently
appointed Chief Executive Officer such that, among other things, the Company
issued 200,000 shares of its common stock to the executive.  Further,
in July 2008, the Company also granted five-year common stock warrants to
purchase 500,000 shares of Company common stock at a per share price of $0.19,
the closing market price on the date of grant, to each of the Company’s Chief
Executive Officer and Interim Chief Financial Officer (who recently became a
member of the Board of Directors) in consideration of the performance of duties
as Chief Executive Officer and as Director, respectively.




Item
3.                                Defaults
Upon Senior Securities





Not
applicable.





Item
4.                                Submission
of Matters to a Vote of Securities Holders





Not
applicable.





Item
5.                                Other
Information





Not
applicable.





Item
6.                                Exhibits





[See
Exhibit Index below after signatures]





19





SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following person on behalf of the Registrant in
the capacities and on the dates indicated.








SARS
CORPORATION







/s/
Christopher Wain


Christopher
Wain


Chief
Executive Officer





DATE: 08/13/2008











20




Exhibit
Index
 
 Exhibit
      No.
              Description
              Location3.1(i)
              Articles
      of Incorporation.
              Incorporated
      by reference to Exhibit 3.0 filed with Form 10-SB12G filed by the Company
      on 2/24/99.3.2(i)
              Articles
      of Incorporation, as amended.
              Incorporated
      by reference to Exhibit 3.1.1 filed with Form 10-QSB filed by the Company
      on 8/13/07.3.3(i)
              Articles
      of Incorporation, as amended.
              Incorporated
      by reference to Exhibit 3.3(i) to the Form 10-KSB filed by the Company on
      1/15/08.3.4(ii)
              Bylaws.
              Incorporated
      by reference to Exhibit 3.1 to the Form 10-SB12G filed by the Company on
      2/24/99.3.5(ii)
              Amended
      and Restated Bylaws.
              Incorporated
      by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the
      Company on 7/10/08.4.1
              Series
      A Preferred Certificate of Designation, Second Amended
              Incorporated
      by reference to Exhibit 4.1 to the Form 10-KSB filed by the Company on
      1/15/08.31.1
              Certification
      of CEO pursuant to Section 302 of the Sarbanes-Oxley Act.
              Attached.31.2
              Certification
      of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
              Attached.32.1
              Certification
      of CEO pursuant to Section 906 of the Sarbanes-Oxley Act.
              Attached.32.2
              Certification
      of CFO pursuant to Section 906 of the Sarbanes-Oxley Act.
              Attached.





21