UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10–Q
 
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
quarterly period endedJune 30,
2010
  or
   ̈
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from ____________ to ________________
 
 Commission
file number 000-52089
 
 DESIGN SOURCE, INC.(Exact
      name of registrant as specified in its charter)Nevada
                
                36-4528166(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification No.)100 Europa Drive, Suite 455, Chapel Hill, North
      Carolina 27517(Address
      of principal executive offices)(919) 933-2720(Registrant’s
      telephone number, including area
code)
 
 Indicate
by check mark whether the issuer (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, and (2) has been subject to such filing requirements for
the past 90 days. Yesx   No ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes ̈   No ̈
 
 Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
One):
 
 Large accelerated
      filer ̈
                
                Accelerated filer ̈
                
                Non-accelerated filer ̈
                
                Smaller reporting
      companyx(Do
      not check if a smaller
                  reporting
      company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yesx  No ̈
 
 As of
August 11, 2010 there were 11,218,457 shares of the issuer’s common stock, par
value $0.00001, outstanding.
  
  DESIGN
SOURCE, INC.
 
 FORM
10-Q
 FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2010
 TABLE
OF CONTENTS
 
 PAGEPART
      I - FINANCIAL INFORMATIONItem
      1.
                    Financial
      Statements
                    3Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    13Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    14Item
      4T.
                    Controls
      and Procedures
                    15PART
      II - OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    15Item
      1A.
                    Risk
      Factors
                    15Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    15Item
      3.
                    Defaults
      Upon Senior Securities
                    15Item
      4.
                    (Removed
      and Reserved)
                    16Item
      5.
                    Other
      Information
                    16Item
      6.
                    Exhibits
                    16SIGNATURES
                    17
  2
  PART
I – FINANCIAL INFORMATION
  ITEM
1.           FINANCIAL
STATEMENTS
 
 Balance
      Sheets as of June 30, 2010 and March 31, 2010 (Unaudited)
                  4Statements
      of Operations for the three months ended June 30, 2010 and June 30, 2009
      and for the period from April 2, 2003 (Inception) through June 30, 2010
      (Unaudited)
                  5Statements
      of Cash Flows for the three months ended June 30, 2010 and June 30, 2009
      and for the period from April 2, 2003 (Inception) through June 30, 2010
      (Unaudited)
                  6Notes
      to Financial Statements (Unaudited)
                  7
  3
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 BALANCE
SHEETS
 
 
 June
      30,
                                
                                
                                March
      31,2010
                                
                                
                                2010(Unaudited)
                                
                                
                                (Audited)ASSETSCURRENT
      ASSETSCash
                                
                                $
                                38,865
                                
                                
                                $
                                -TOTAL
      ASSETS
                                
                                $
                                38,865
                                
                                
                                $
                                -LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                                
                                $
                                13,216
                                
                                
                                $
                                23,195Convertible
      debt (including accrued interest)
                                
                                
                                87,558
                                
                                
                                
                                -TOTAL
      CURRENT LIABILITIES
                                
                                
                                100,774
                                
                                
                                
                                23,195Convertible
      debt (including accrued interest)
                                
                                
                                76,048
                                
                                
                                
                                85,912TOTAL
      LIABILITIES
                                
                                
                                176,822
                                
                                
                                
                                109,107STOCKHOLDERS'
      DEFICITCommon
      stock, $0.00001 par value, 100,000,000 shares authorized, 11,218,457
      shares issued and outstanding
                                
                                
                                113
                                
                                
                                
                                113Additional
      paid-in capital
                                
                                
                                585,810
                                
                                
                                
                                585,810Accumulated
      deficit during development stage
                                
                                
                                (723,880
                                )
                                
                                
                                (695,030
                                )TOTAL
      STOCKHOLDERS' DEFICIT
                                
                                
                                (137,957
                                )
                                
                                
                                (109,107
                                )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                
                                $
                                38,865
                                
                                
                                $
                                -
  4
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 STATEMENTS
OF OPERATIONS
 
 
 From
      Inception(April
      2, 2003)Three
      Months Ended
                                                  
                                                  
                                                  throughJune
      30,
                                                  
                                                  
                                                  June
      30,
                                                  
                                                  
                                                  June
      30,2010
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2010(Unaudited)
                                                  
                                                  
                                                  (Unaudited)
                                                  
                                                  
                                                  (Unaudited)REVENUES
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -EXPENSESGeneral
      and administrative
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  426
                                                  
                                                  
                                                  
                                                  64,739Professional
      fees
                                                  
                                                  
                                                  26,161
                                                  
                                                  
                                                  
                                                  34,094
                                                  
                                                  
                                                  
                                                  293,326Taxes
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,036Management
      fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  29,155Stock
      based compensation
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  327,500Total
      Expenses
                                                  
                                                  
                                                  26,161
                                                  
                                                  
                                                  
                                                  34,520
                                                  
                                                  
                                                  
                                                  715,756LOSS
      FROM OPERATIONS
                                                  
                                                  
                                                  (26,161
                                                  )
                                                  
                                                  
                                                  (34,520
                                                  )
                                                  
                                                  
                                                  (715,756
                                                  )OTHER
      INCOME (EXPENSE)Interest
      income
                                                  
                                                  
                                                  5
                                                  
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  
                                                  2,133Interest
      expense
                                                  
                                                  
                                                  (2,694
                                                  )
                                                  
                                                  
                                                  (958
                                                  )
                                                  
                                                  
                                                  (10,257
                                                  )Total
      Other Income (Expense)
                                                  
                                                  
                                                  (2,689
                                                  )
                                                  
                                                  
                                                  (956
                                                  )
                                                  
                                                  
                                                  (8,124
                                                  )NET
      LOSS
                                                  
                                                  $
                                                  (28,850
                                                  )
                                                  
                                                  $
                                                  (35,476
                                                  )
                                                  
                                                  $
                                                  (723,880
                                                  )NET LOSS PER SHARE, BASIC AND
      DILUTED
                                                  
                                                  $
                                                  (0.00
                                                  )
                                                  
                                                  $
                                                  (0.00
                                                  )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND
    DILUTED
                                                  
                                                  
                                                  11,218,457
                                                  
                                                  
                                                  
                                                  11,218,457
  5
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 STATEMENTS
OF CASH FLOWS
 
 
 From
      Inception(April
      2, 2003)Three
      Months Ended
                                      
                                      
                                      throughJune
      30,
                                      
                                      
                                      June
      30,
                                      
                                      
                                      June
      30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010(Unaudited)
                                      
                                      
                                      (Unaudited)
                                      
                                      
                                      (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                      
                                      $
                                      (28,850
                                      )
                                      
                                      $
                                      (35,476
                                      )
                                      
                                      $
                                      (723,880
                                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Increase
      (decrease) in:Accounts
      payable
                                      
                                      
                                      (9,979
                                      )
                                      
                                      
                                      (35,413
                                      )
                                      
                                      
                                      13,216Accrued
      interest
                                      
                                      
                                      2,694
                                      
                                      
                                      
                                      958
                                      
                                      
                                      
                                      8,606Stock
      issued for compensation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      327,500Stock
      issued for reimbursement of expenses
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25,923Net
      cash used in operating activities
                                      
                                      
                                      (36,135
                                      )
                                      
                                      
                                      (69,931
                                      )
                                      
                                      
                                      (348,635
                                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from stockholder loans
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      21,560Repayment
      of stockholder loans
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (21,560
                                      )Proceeds
      from convertible note
                                      
                                      
                                      75,000
                                      
                                      
                                      
                                      80,000
                                      
                                      
                                      
                                      155,000Proceeds
      from issuance of common stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      232,500Net
      cash provided by financing activities
                                      
                                      
                                      75,000
                                      
                                      
                                      
                                      80,000
                                      
                                      
                                      
                                      387,500NET
      INCREASE IN CASH
                                      
                                      
                                      38,865
                                      
                                      
                                      
                                      10,069
                                      
                                      
                                      
                                      38,865CASH,
      BEGINNING OF PERIOD
                                      
                                      
                                      -
                                      
                                      
                                      
                                      12
                                      
                                      
                                      
                                      -CASH,
      END OF PERIOD
                                      
                                      $
                                      38,865
                                      
                                      
                                      $
                                      10,081
                                      
                                      
                                      $
                                      38,865SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,653Income
      taxes paid
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
  6
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 NOTES
TO THE FINANCIAL STATEMENTS
 As
of and for the three months ended June 30, 2010
 (Unaudited)
 
 NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
 
 Design
Source, Inc. (hereinafter “the Company”) was incorporated on April 2, 2003 under
the laws of the State of Nevada for the purpose of offering textiles to the
commercial designer market utilizing the internet. The Company’s headquarters is
located in Chapel Hill, North Carolina.  The Company is a development
stage enterprise.
 
 The
Company’s year end is March 31.
  The
foregoing unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, these financial statements do not include all of the disclosures
required by generally accepted accounting principles in the United States of
America for complete financial statements. These unaudited interim financial
statements should be read in conjunction with the audited financial statements
for the period ended March 31, 2010. In the opinion of management, the unaudited
interim financial statements furnished herein include all adjustments, all of
which are of a normal recurring nature, necessary for a fair statement of the
results for the interim period presented. Operating results for the three-month
period ending June 30, 2010 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2011.
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 This
summary of significant accounting policies is presented to assist in
understanding the accompanying financial statements. The financial statements
and notes are representations of the Company’s management, which is responsible
for their integrity and objectivity.  These accounting policies
conform to accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the financial
statements.
 
 Accounting
Method
 The
Company’s financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.
 
 Development Stage
Activities
 The
Company has been in the development stage since its formation and has not
realized any revenue from operations.  The Company is a shell
corporation which has yet to engage in its intended business of offering
commercial upholstery, drapery, bedspread, panel and wall covering
fabrics.
 
 Going
Concern
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As reflected in the financial statements, the
Company incurred a net loss of $28,850 for the three months ended June 30,
2010.  In addition, the Company had an accumulated deficit of $723,880
at June 30, 2010.  Since its inception, the Company has not generated
any revenues and has minimal cash resources.
 
 These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern.  The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.  Management's efforts have been directed towards the
development and implementation of a plan to generate sufficient revenues to
cover all of its present and future costs and expenses.  For the
twelve-month subsequent period, the Company anticipates that its minimum
operating cash requirements to continue as a going concern will be approximately
$60,000.
  7
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 NOTES
TO THE FINANCIAL STATEMENTS
 As
of and for the three months ended June 30, 2010
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 The
Company has determined that it cannot continue with its business operations as
outlined in its original business plan because of a lack of financial resources;
therefore, although it may return to its intended business operations at a later
date, management has redirected their focus towards identifying and pursuing
options regarding the development of a new business plan and
direction.  The Company intends to explore various business
opportunities that have the potential to generate positive revenue, profits and
cash flow in order to financially accommodate the costs of being a publicly held
company.  However, the Company cannot assure that there will be any
other business opportunities available nor the nature of the business
opportunity, nor indication of the financial resources required of any possible
business opportunity.
 
 The
Company has minimal operating costs and expenses at the present time due to its
limited business activities.  The Company, however, will be required
to raise additional capital over the next twelve months to meet its current
administrative expenses, and it may do so in connection with or in anticipation
of possible acquisition transactions. This financing may take the form of
additional sales of equity securities and/or loans from
directors.  There is no assurance that additional financing will be
available, if required, or on terms favorable to the Company.
 
 On May
10, 2010 the Company received funding amounting to $75,000 in connection with
the issuance of a convertible note.
 
 The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
 
 The
accompanying financial statements have been prepared, in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”) and
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”).
 
 Cash and Cash
Equivalents
 For
purposes of the statement of cash flows, the Company considers all short-term
debt with original maturities of three months or less to be cash
equivalents.
 
 Fair Value of Financial
Instruments
 The
Company's financial instruments may include cash, and accounts payable. All such
instruments are accounted for on a historical cost basis, which, due to the
short maturity of these financial instruments, approximates fair value at June
30, 2010 and March 31, 2010.
 
 Use of
Estimates
 The
process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated
amounts.
  8
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 NOTES
TO THE FINANCIAL STATEMENTS
 As
of and for the three months ended June 30, 2010
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Provision for
Taxes
 Income
taxes are provided based upon the liability method of accounting. Under this
approach, deferred income taxes are recorded to reflect the tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end. A valuation allowance is
recorded against the deferred tax asset if management does not believe the
Company has met the "more likely than not" standard to allow recognition of such
an asset.
 
 Derivative
Liabilities
 The
Company accounts for its embedded conversion features in its convertible
debentures in accordance FASB ASC 815-10 (Prior authoritative literature: SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires a periodic valuation of their fair value and a corresponding
recognition of liabilities associated with such derivatives, and FASB ASC 815-40
Section 05, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock. The recognition of derivative
liabilities related to the issuance of convertible debt is applied first to the
proceeds of such issuance as a debt discount, at the date of issuance, and the
excess of derivative liabilities over the proceeds is recognized as “Loss on
Valuation of Derivative” in other expense in the accompanying financial
statements. Any subsequent increase or decrease in the fair value of the
derivative liabilities is recognized as “Other expense” or “Other income”,
respectively.
 
 Basic and Diluted Earnings
(Loss) Per Share
 Basic
earnings per share is calculated on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net income available to
common stockholders by the weighted average shares outstanding during the
period. Diluted earnings per share, which is calculated by dividing net income
available to common stockholders by the weighted average number of common shares
used in the basic earnings per share calculation, plus the number of common
shares that would be issued assuming conversion of all potentially dilutive
securities outstanding, is not presented separately as it is
anti-dilutive.
 
 Recently Issued Accounting
Pronouncements Affecting the Company
 In
October 2009, the FASB issued guidance for amendments to FASB Emerging Issues
Task Force on EITF Issue No. 09-1 “Accounting for Own-Share Lending Arrangements
in Contemplation of a Convertible Debt Issuance or Other Financing” ( Subtopic
470-20 ) “Subtopic”. This accounting standards update establishes the accounting
and reporting guidance for arrangements under which own-share lending
arrangements issued in contemplation of convertible debt issuance. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2009. Earlier adoption is not
permitted. Management believes this Statement will have no impact on the
consolidated financial statements of the Company once adopted.
 
 In
December 2009, the FASB issued guidance for Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (
Topic 810 ). The amendments in this update are a result of incorporating the
provisions of SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The
provisions of such Statement are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15, 2009. Earlier
adoption is not permitted. The presentation and disclosure requirements shall be
applied prospectively for all periods after the effective date. Management
believes this Statement will have no impact on the consolidated financial
statements of the Company once adopted.
  9
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 NOTES
TO THE FINANCIAL STATEMENTS
 As
of and for the three months ended June 30, 2010
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements,
which enhances the usefulness of fair value measurements. The amended guidance
requires both the disaggregation of information in certain existing disclosures,
as well as the inclusion of more robust disclosures about valuation techniques
and inputs to recurring and nonrecurring fair value measurements. The amended
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disaggregation requirement for the
reconciliation disclosure of Level 3 measurements, which is effective for fiscal
years beginning after December 15, 2010 and for interim periods within those
years. The Company does not anticipate that this pronouncement will have a
material impact on its results of operations or financial position.
 
 Effective
May 10, 2010, the Company adopted FASB ASC Topic No. 815 – 40, Derivatives and
Hedging - Contracts in Entity’s Own Stock (formerly Emerging Issues Task Force
Issue No. 07-5, Determining Whether an Instrument or Embedded Feature is Indexed
to an Entity’s Own Stock ). The adoption of FASB ASC Topic No. 815 –40’s
requirements can affect the accounting for warrants and many convertible
instruments with provisions that protect holders from a decline in the stock
price (or “down-round” provisions). As a result of the Company issuing a
convertible note on May 10, 2010, the Company adopted ASC Topic No. 815 – 40,
Derivatives and Hedging - Contracts in Entity’s Own Stock (formerly Emerging
Issues Task Force Issue No. 07-5, Determining Whether an Instrument or Embedded
Feature is Indexed to an Entity’s Own Stock ). See Note 4 for further
discussion.
 
 In
February 2010, the FASB issued Accounting Standards Update (ASU) No.
2010-08—Technical Corrections to Various Topics. This update’s purpose is to
eliminate GAAP inconsistencies, update outdated provisions, and provide
needed clarifications. The adoption of ASU No. 2010-08 will not have a material
impact on the Company’s financial statements.
 
 Management
does not believe that any other recently issued, but not yet effective,
accounting standards, if currently adopted, could have a material effect on the
accompanying financial statements.
 
 NOTE
3 – EQUITY TRANSACTIONS
 
 The
Company is authorized to issue 100,000,000 shares of $0.00001 par value common
stock.  All shares have equal voting rights, are non-assessable and
have one vote per share.  Voting rights are not cumulative and,
therefore, the holders of more than 50% of the common stock could, if they
choose to do so, elect all of the directors of the Company.
 
 Upon
incorporation, the Company issued 435,000 shares of common stock at a price of
$0.05 per share as reimbursement of a cash advance in the amount of $1,000 and
expenses paid personally by a director totaling $20,750.
 
 During
the period ending March 31, 2004, an additional 283,457 shares of common stock
were issued at $0.05 per share for reimbursement of expenses paid personally by
a director totaling $4,173 and for cash totaling $10,000.
 
 During
the period ending March 31, 2006, an additional 3,320,000 shares of common stock
were issued at $0.05 per share for cash totaling $160,000 and subscription
receivable of $6,000.
  10
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 NOTES
TO THE FINANCIAL STATEMENTS
 As
of and for the three months ended June 30, 2010
 (Unaudited)
 
 NOTE
3 – EQUITY TRANSACTIONS (continued)
 
 During
the year ended March 31, 2007, 130,000 shares of common stock were issued at
$0.05 per share for cash totaling $6,500 to outside investors; 6,550,000 share
of common stock were issued to its officers for compensation at $0.05 per share
for $327,500 and $6,000 subscription receivable was received.
 
 During
the year ended March 31, 2008, 500,000 shares of common stock were issued at
$0.10 per share for cash totaling $50,000 to Milestone Enhanced Fund
Ltd;
 
 During
the years ended March 31, 2010 and 2009, the Company had issued no additional
shares of common stock.
 
 During
the three months ended June 30, 2010, the Company had issued no additional
shares of common stock.
 
 NOTE
4 – CONVERTIBLE DEBT AND DERIVATIVES
 
 On May 8,
2009, the Company issued a convertible promissory note in the principal amount
of $80,000.  This note is payable on November 8, 2010 and bears an
interest rate of 8.25% per annum payable at the end of the term.  The
debt balance and accrued interest balance as of June 30, 2010 amounts to $80,000
and $7,558, respectively.  The terms of conversion have not been
determined as of the date of the filing of the 10 Q for the period ended June
30, 2010.
 
 On May
10, 2010 the Company received funding amounting to $75,000 from an investor and
in connection therewith issued a 10%, $75,000 convertible note dated May 10,
2010 (the “Note”).  Subject to prepayment, interest and principal are
due on November 9, 2011, unless its term is mutually extended by both
parties.  At all times while the Note is outstanding, the Note is
convertible into shares of our common stock at the rate of $0.10 per share,
subject to adjustment for stock splits, business combinations, mergers,
reclassifications, sales of assets and similar transactions (the “Fixed
Conversion Price”). Further, if at any time while the Note is outstanding we
issue shares of our common stock at a price below the then Fixed Conversion
Price, the Fixed Conversion Price shall be reduced to such lower issue
price.
 
 The Note
contains ratchet provisions which adjust the conversion price of the Units if
the Company issues common stock at a price lower than the fixed conversion
prices in the 10% Convertible Note Payable.  As a result, the Company
adopted ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts
in Entity’s Own Stock (formerly Emerging Issues Task Force Issue No.
07-5,Determining Whether an
Instrument or Embedded Feature is Indexed to an Entity’s Own Stock) and
determined that the underlying Units are not indexed to the Company’s common
stock and should be valued at fair value at the date of issuance and at each
subsequent interim period.
  Down-round
provisions reduce the exercise price of a convertible instrument if a company
either issues new warrants or convertible instruments that have a lower exercise
price.
  The
Company has performed a complete assessment of its embedded conversion features
in connection with its convertible loans utilizing the Black Scholes model and
concluded that the conversion features issued in connection with the convertible
loan are within the scope of ASC 815 due to the down-round provisions included
in the terms of the agreements.
  11
  DESIGN
SOURCE, INC.
 (A
Development Stage Company)
 NOTES
TO THE FINANCIAL STATEMENTS
 As
of and for the three months ended June 30, 2010
 (Unaudited)
 
 NOTE
4 – CONVERTIBLE DEBT AND DERIVATIVES (continued)
  Based on
these calculations, the Company determined that the value of the derivative was
$0 on the date of issuance (May 10, 2010), and as a result, there was no
discount on the convertible debt as of June 30, 2010.  The Company,
every quarter, will perform a valuation of the derivative.
  The debt
balance and accrued interest balance as of June 30, 2010 amounts to $75,000 and
$1,048, respectively.
  NOTE
5 – INCOME TAXES
  At June
30, 2010 and March 31, 2010, the Company had a deferred tax asset of
approximately $294,000 and $282,000 respectively, calculated at a combined
federal and state expected rate of 40.5%.  As management of the
Company cannot determine that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset, a valuation allowance equal
to the net deferred tax asset has been recorded.
 
 The
significant components of the deferred tax assets at June 30, 2010 and March 31,
2010 were as follows:
 
 June
      30
                    
                    
                    March
      31,2010
                    
                    
                    2010Deferred
      tax asset-net operating losses
                    
                    $
                    294,000
                    
                    
                    $
                    282,000Deferred
      tax asset valuation allowance
                    
                    
                    (294,000
                    )
                    
                    
                    (282,000
                    )Net
      deferred tax asset
                    
                    $
                    -
                    
                    
                    $
                    -
 
 The
reconciliation between the statutory federal income tax rate of 35% to the
actual rate is as follows:
 
 June
      30
                    
                    
                    March
      31,2010
                    
                    
                    2010Expected
      Federal tax  (benefit)
                    
                    $
                    (10,000
                    )
                    
                    $
                    (22,000
                    )State
      tax (benefit), net of Federal effect
                    
                    
                    (2,000
                    )
                    
                    
                    (3,000
                    )Permanent
      differences
                    
                    
                    -
                    
                    
                    
                    -Valuation
      allowance
                    
                    
                    12,000
                    
                    
                    
                    25,000Effective
      tax rate
                    
                    $
                    -
                    
                    
                    $
                    -
 
 At June
30, 2010 and March 31, 2010, the Company has net operating loss carry forwards
of $725,000 and $696,000 respectively, which begin to expire in the year
2010.  The change in the allowance account from June 30, 2010 to March
31, 2010 was $12,000.
  NOTE
6 - RELATED PARTY DEBT AND TRANSACTIONS
  In 2004
and 2005, Company directors loaned the Company a total of $21,560. The
underlying notes were unsecured with interest at 5%, and a scheduled maturity of
October 2007 for all principal and accrued interest. There were no monthly note
payments due during the term of the loans. All shareholder loans and accrued
interest had been repaid in the fiscal year 2007.
  12
  ITEM 2.           MANAGEMENT’S
DISCUSSION AND ANALYSIS
  Forward-Looking
Statements
  This
section of the report includes a number of forward-looking statements that
reflect our current views with respect to future events and financial
performance. Forward-looking statements are often identified by words like:
believe, expect, estimate, anticipate, intend, project and similar expressions,
or words which, by their nature, refer to future events. You should not place
undue certainty on these forward-looking statements, which apply only as of the
date of this report. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or our predictions.
  Plan
of Operation
  We were
incorporated on April 2, 2003, to offer a comprehensive supply of, market and
distribute commercial upholstery, drapery, bedspread, panel, and wall covering
fabrics to the interior designer industry and individual retail customers on our
proprietary Internet website. We have determined that we cannot continue with
our business operations as outlined in our original business plan because of a
lack of financial results and resources; therefore, although we may return to
our intended business operations at a later date, we have redirected our focus
towards identifying and pursuing the development of a new business plan and
direction. We intend to explore various business opportunities that have the
potential to generate positive revenue, profits and cash flow in order to
financially accommodate the costs of being a publicly held company. However, we
cannot assure that we will successfully identify a new business opportunity nor
can we provide any indication of the financial resources required to take
advantage of any possible business opportunity.
  We have
minimal operating costs and expenses at the present time due to our limited
business activities. We may, however, be required to raise additional capital
over the next twelve months to meet our current administrative expenses, and we
may do so in connection with or in anticipation of possible acquisition
transactions. This financing may take the form of additional sales of our equity
securities, loans from our directors, or other transactions. There can be no
assurance that additional financing would be available to us if required, or
that the terms would be favorable to us and our stockholders.
  We are
not currently engaging in any product research and development and have no plans
to do so in the foreseeable future. We have no present plans to purchase or sell
any plant or significant equipment. We also have no present plans to add
employees although we may do so in the future if we engage in any merger or
acquisition transactions.
  Results
of Operations
  For the
period from inception (April 2, 2003) to June 30, 2010, we had no operating
revenues and incurred a net loss of $723,880.  For the three months
ended June 30, 2010 we incurred net losses of $28,850, which consisted
principally of professional fees.  For the three months ended June 30,
2009, we incurred net losses of $35,476, which consisted principally of
professional fees and general and administrative expenses primarily incurred in
connection with the preparation and filing of our ongoing SEC
reports.
  Liquidity
and Capital Resources
  Our cash
at June 30, 2010 and March 31, 2010, was $38,865 and $0,
respectively.  In order to satisfy our cash requirements for the
current period we will have to raise additional funds as described above. There
can be no assurance that we will be able to do so.
  Net cash
used in operating activities in the three months ended June 30, 2010 and June
30, 2009 was $36,135 and $69,931, respectively.  Net cash used in
operating activities from inception through June 30, 2010 was $348,635. Net cash
provided by financing activities from inception through June 30, 2010 was
$387,500.  We had $75,000 of financing activity in the three months
ended June 30, 2010.  Our independent registered public accounting
firm has expressed the opinion that in our current condition, there is
substantial doubt about our ability to continue as a going concern. Please refer
to Note 2, Summary of Significant Accounting Policies, of the financial
statements included in this report.
  13
  Off-Balance
Sheet Arrangements
  We have
no off-balance sheet arrangements.
  Critical
Accounting Policies
  A.
Basis of Accounting
  The
Company’s financial statements are prepared using the accrual method of
accounting. The Company has elected a March 31 fiscal year-end.
  B.
Basic Earnings Per Share
  The
Company utilizes the guidance per FASB Codification “ASC 260 "Earnings Per
Share". Basic earnings per share is calculated on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted net income per share is computed by dividing net
income for the period by the weighted-average number of common share equivalents
during the period.
  Basic net
loss per share amounts are computed by dividing the net loss by the weighted
average number of common shares outstanding.
  C.
Cash Equivalents
  The
Company considers all highly liquid investments, if any, purchased with an
original maturity of three months or less to be cash equivalents.
  D.
Use Of Estimates and Assumptions
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
  E.
Income Taxes
  Income
taxes are accounted for in accordance with the provisions of FASB ASC-740-Income
Taxes.  ASC-740 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company’s assets and liabilities result in a deferred tax asset, ASC-740
requires an evaluation of the probability of being able to realize the future
benefits indicated by such assets. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some or the entire
deferred tax asset will not be realized.
  For
federal income tax purposes, substantially all expenses must be deferred until
the Company commences business and then they may be written off over a 60-month
period.  These expenses will not be deducted for tax purposes and will
represent a deferred tax asset.  The Company will provide a valuation
allowance in the full amount of the deferred tax asset since there is no
assurance of future taxable income.  Tax deductible losses can be
carried forward under current applicable law for 20 years until
utilized.
  ITEM
3.           QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Not
Applicable.
  14
  ITEM 4T.CONTROLS AND
PROCEDURES
  Evaluation
of Our Disclosure Controls
  Under the
supervision and with the participation of our senior management, including our
chief executive officer and chief financial officer, Peter Reichard, we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as
of the end of the period covered by this quarterly report. Based on this
evaluation, our chief executive officer and chief financial officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective such that the information relating to us,
required to be disclosed in our Securities and Exchange Commission reports (i)
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
  Limitations
on Effectiveness of Controls and Procedures
  Our
management, including Peter Reichard, our chief executive officer and chief
financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include, but are not limited to, the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
  Changes
in Internal Control Over Financial Reporting
  There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2010 that have materially affected or
are reasonably likely to materially affect our internal control over financial
reporting.
  PART
II – OTHER INFORMATION
  ITEM 1.  LEGAL
PROCEEDINGS
  In the
ordinary course of our business, we may from time to time become subject to
routine litigation or administrative proceedings which are incidental to our
business. We are not a party to nor are we aware of any existing, pending or
threatened lawsuits or other legal actions involving us.
  ITEM 1A.  RISK
FACTORS
  Not
applicable.
  ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  We did
not issue any equity securities during the quarter ended June 30,
2010.
  ITEM 3.  DEFAULTS
UPON SENIOR SECURITIES
  None.
  15
  ITEM 4.  (Removed
and Reserved)
  ITEM 5.  OTHER
INFORMATION
  None.
  ITEM
6.  EXHIBITS
  In
reviewing the agreements included as exhibits to this Form 10-Q, please remember
that they are included to provide you with information regarding their terms and
are not intended to provide any other factual or disclosure information about
the Company or the other parties to the agreements. The agreements may contain
representations and warranties by each of the parties to the applicable
agreement. These representations and warranties have been made solely for the
benefit of the parties to the applicable agreement and:
  ·
              should
      not in all instances be treated as categorical statements of fact, but
      rather as a way of allocating the risk to one of the parties if those
      statements prove to be inaccurate;
  ·
              have
      been qualified by disclosures that were made to the other party in
      connection with the negotiation of the applicable agreement, which
      disclosures are not necessarily reflected in the
  agreement;
  ·
              may
      apply standards of materiality in a way that is different from what may be
      viewed as material to you or other investors;
  and
  ·
              were
      made only as of the date of the applicable agreement or such other date or
      dates as may be specified in the agreement and are subject to more recent
      developments.
  Accordingly,
these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other time. Additional
information about the Company may be found elsewhere in this Form 10-Q and the
Company’s other public filings, which are available without charge through the
SEC’s website at http://www.sec.gov.
  The
following exhibits are included as part of this report:
  Exhibit No.
                
                Description4.1
                
                Form of $75,000 10%ConvertiblePromissoryNote31.1
      / 31.2
                
                Rule
      13(a)-14(a)/15(d)-14(a) Certification of Principal Executive and Financial
      Officer32.1
      / 32.2
                
                Rule
      1350 Certification of Chief Executive and Financial
  Officer
  16
  SIGNATURES
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
 
 Date:  August
      13, 2010
                Design
      Source, Inc.By:
                /s/ Peter ReichardPeter
      Reichard, President, Principal Executive
                  Officer,
      Treasurer, Principal Financial Officer, and
                  Principal
      Accounting Officer
  17