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: October 31, 2008




or




oTRANSITION REPORT
PURSUANT TO SECTION 13 0R 15(D) OF THE SECURITIES


EXCHANGE
ACT OF 1934




For the
transition period from _____________ to ____________




Commission File Number:000-51308


CHATSWORTH
DATA SOLUTIONS, INC.


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




Nevada
              98-0427221(State
      or Other jurisdiction of
                Incorporation
      or organization)
              (IRS
      Employer
                Identification
      No.)





321
      South Boston Ave. Suite 218, Tulsa, OK
            74103(Address
      of Principal Executive Offices)
            (Zip
      Code)





(918)
645-3701


(Issuer's
telephone number including area code)




Check
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
(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 xNo o





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.





Large
      accelerated filer o
              Accelerated
      filer  oNNon-accelerated
      filer  o  (Do
      not check if a smaller reporting company)
              Smaller
      reporting companyx





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




Yes oNo x




State the
number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date.




As of
November 30, 2008, the issuer had 56,896,000 shares of common stock, $0.00001
par value, issued and
outstanding.





CHATSWORTH
DATA SOLUTIONS, INC.





INDEX TO
FORM 10-Q





PART
      I
                        FINANCIAL
      INFORMATIONItem
      1.
                        Condensed
      Consolidated Financial Statements
                        3Condensed
      consolidated balance sheets as of October 31, 2008(Unaudited)
      and January 31, 2008
                        3Condensed
      consolidated statements of operations for the three andnine
      months ended October 31, 2008 and 2007 – Unaudited
                        4Condensed
      consolidated statement of changes in stockholders'equity
      (deficiency) for the nine months ended October 31, 2008 –
      Unaudited
                        5Condensed
      consolidated statements of cash flows for the nine monthsended
      October 31, 2008 and 2007 – Unaudited
                        6Notes
      to condensed consolidated financial statements – Unaudited
                        7Item
      2.
                        Management's
      Discussion and Analysis or Plan of Operations
                        16Item
      3.
                        Controls
      and Procedures
                        23PART
      II
                        OTHER
      INFORMATION
                        24Item
      1.
                        Legal
      Proceedings
                        24Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        24Item
      3.
                        Defaults
      Upon Senior Securities
                        25Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        25Item
      5.
                        Other
      Information
                        26Item
      6.
                        Exhibits
                        26SIGNATURES
                        27


2





CHATSWORTH
DATA SOLUTIONS, INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS




October
31 2008 (Unaudited) and January 31, 2008





October 31,
                  2008
                  (Unaudited)
                
                
                January 31,
                  2008ASSETSCurrent
      AssetsCash
                
                $
                181,804
                
                
                $
                72,329Accounts
      receivable, less allowance for doubtful accounts of $16,193 and
      $16,367
                
                
                601,818
                
                
                
                1,377,486Inventories
                
                
                1,431,261
                
                
                
                1,550,974Prepaid
      expenses
                
                
                28,329
                
                
                
                40,457Total
      current assets
                
                
                2,243,212
                
                
                
                3,041,246Property
      and equipment, net
                
                
                328,773
                
                
                
                377,061Goodwill
                
                
                -
                
                
                
                3,926,643Intangible
      assets, net
                
                
                -
                
                
                
                1,639,640Other
      assets
                
                
                58,182
                
                
                
                24,734Total
      assets
                
                $
                2,630,167
                
                
                $
                9,009,324LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      LiabilitiesAccounts
      payable
                
                $
                1,181,906
                
                
                $
                1,181,750Accrued
      liabilities
                
                
                320,751
                
                
                
                285,955Line
      of credit
                
                
                1,049,892
                
                
                
                1,797,593Current
      portion of notes payable
                
                
                1,720,000
                
                
                
                1,000,000Registration
      payment penalty promissory note
                
                
                754,600
                
                
                
                -Total
      current liabilities
                
                
                5,027,149
                
                
                
                4,265,298Notes
      payable, long term
                
                
                -
                
                
                
                500,000Registration
      payment penalty promissory notes
                
                
                -
                
                
                
                754,600Total
      liabilities
                
                
                5,027,149
                
                
                
                5,519,898Commitments
      and contingenciesStockholders'
      Equity (Deficiency):Preferred stock,
      par value $0.00001 per share, 5,000,000 shares authorized, none
      issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, par value $0.00001 per share, 100,000,000 shares authorized,
      56,896,000 and 31,250,000 shares issued and outstanding at October 31,
      2008 and January 31, 2008, respectively
                
                
                568
                
                
                
                312Additional
      paid-in capital
                
                
                8,410,326
                
                
                
                6,493,184Accumulated
      deficit
                
                
                (10,807,876
                )
                
                
                (3,004,070
                )Total
      stockholders' equity (deficiency)
                
                
                (2,396,982
                )
                
                
                3,489,426Total
      liabilities and stockholders' equity (deficiency)
                
                $
                2,630,167
                
                
                $
                9,009,324





See
accompanying notes to condensed consolidated financial
statements.


3





CHATSWORTH
DATA SOLUTIONS, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





Three Months Ended October 31,
                    
                    
                    Nine Months Ended October 31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Net
      sales
                    
                    $
                    1,440,469
                    
                    
                    $
                    2,175,163
                    
                    
                    $
                    4,066,779
                    
                    
                    $
                    6,536,237Cost
      of sales
                    
                    
                    951,047
                    
                    
                    
                    1,458,903
                    
                    
                    
                    2,776,221
                    
                    
                    
                    4,173,837Gross
      profit
                    
                    
                    489,422
                    
                    
                    
                    716,260
                    
                    
                    
                    1,290,558
                    
                    
                    
                    2,362,400Operating
      expensesGeneral
      and administrative
                    
                    
                    711,229
                    
                    
                    
                    917,286
                    
                    
                    
                    3,153,907
                    
                    
                    
                    3,106,920Depreciation
                    
                    
                    34,491
                    
                    
                    
                    36,730
                    
                    
                    
                    115,892
                    
                    
                    
                    94,398Amortization
      of intangible assets
                    
                    
                    248,760
                    
                    
                    
                    248,760
                    
                    
                    
                    746,280
                    
                    
                    
                    746,280Loss
      from operations
                    
                    
                    (505,058
                    )
                    
                    
                    (486,516
                    )
                    
                    
                    (2,725,521
                    )
                    
                    
                    (1,585,198
                    )Other
      income (expense)Interest
      expense, net
                    
                    
                    (90,701
                    )
                    
                    
                    (61,911
                    )
                    
                    
                    (258,282
                    )
                    
                    
                    (141,015
                    )Impairment
      of goodwill and intangible assets
                    
                    
                    (4,820,003
                    )
                    
                    
                    -
                    
                    
                    
                    (4,820,003
                    )
                    
                    
                    -Registration
      penalty
                    
                    
                    -
                    
                    
                    
                    (227,000
                    )
                    
                    
                    -
                    
                    
                    
                    (337,000
                    )Other
      income (expense), net
                    
                    
                    (4,910,704
                    )
                    
                    
                    (288,911
                    )
                    
                    
                    (5,078,285
                    )
                    
                    
                    (478,015
                    )Loss
      before income taxes
                    
                    
                    (5,415,762
                    )
                    
                    
                    (775,427
                    )
                    
                    
                    (7,803,806
                    )
                    
                    
                    (2,063,213
                    )Income
      tax benefit
                    
                    
                    -
                    
                    
                    
                    (39,017
                    )
                    
                    
                    -
                    
                    
                    
                    (551,554
                    )Net
      loss
                    
                    $
                    (5,415,762
                    )
                    
                    $
                    (736,410
                    )
                    
                    $
                    (7,803,806
                    )
                    
                    $
                    (1,511,659
                    )Net
      loss per share - basic and diluted
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.05
                    )Weighted
      average shares outstanding
                    
                    
                    56,896,000
                    
                    
                    
                    31,250,000
                    
                    
                    
                    49,616,584
                    
                    
                    
                    31,250,000





See
accompanying notes to condensed consolidated financial
statements.


4


CHATSWORTH
DATA SOLUTIONS, INC.





STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)





For the
nine months ended October 31, 2008


(Unaudited)





Common Stock
                
                
                AdditionalNumber of
                  Shares
                
                
                Amount
                
                
                Paid-in
                  Capital
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance,
      January 31, 2008
                
                
                31,250,000
                
                
                $
                312
                
                
                $
                6,493,184
                
                
                $
                (3,004,070
                )
                
                $
                3,489,426Sale
      of common stock
                
                
                25,646,000
                
                
                
                256
                
                
                
                1,282,044
                
                
                
                -
                
                
                
                1,282,300Fair
      value of vested stock options
                
                
                -
                
                
                
                -
                
                
                
                112,108
                
                
                
                -
                
                
                
                112,108Fair
      value of stock-based employee compensation
                
                
                -
                
                
                
                -
                
                
                
                522,990
                
                
                
                -
                
                
                
                522,990Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (7,803,806
                )
                
                
                (7,803,806
                )Balance,
      October 31, 2008
                
                
                56,896,000
                
                
                $
                568
                
                
                $
                8,410,326
                
                
                $
                (10,807,876
                )
                
                $
                (2,396,982
                )





See
accompanying notes to condensed consolidated financial
statements.


5


CHATSWORTH
DATA SOLUTIONS, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





Nine Months Ended October 31,2008
                      
                      
                      2007(Unaudited)
                      
                      
                      (Unaudited)Cash
      Flows from Operating ActivitiesNet
      loss for the period
                      
                      $
                      (7,803,806
                      )
                      
                      $
                      (1,511,659
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      827,681
                      
                      
                      
                      803,947Fair
      value of stock based employee compensation
                      
                      
                      522,990
                      
                      
                      
                      -Fair
      value of vested stock options
                      
                      
                      112,108
                      
                      
                      
                      182,175Impairment
      of goodwill and intangible assets
                      
                      
                      4,820,003
                      
                      
                      
                      -Income
      tax benefit
                      
                      
                      -
                      
                      
                      
                      (551,554
                      )Changes
      in operating assets and liabilitiesAccounts
      receivable
                      
                      
                      775,668
                      
                      
                      
                      (146,876
                      )Inventories
                      
                      
                      119,713
                      
                      
                      
                      (878,135
                      )Other
      assets
                      
                      
                      (33,448
                      )
                      
                      
                      16,937Prepaid
      expenses
                      
                      
                      12,128
                      
                      
                      
                      6,445Accounts
      payable
                      
                      
                      156
                      
                      
                      
                      837,338Accrued
      liabilities
                      
                      
                      34,796
                      
                      
                      
                      (402,423
                      )Accrued
      registration penalty payment
                      
                      
                      -
                      
                      
                      
                      337,000Net
      cash used in operating activities
                      
                      
                      (612,011
                      )
                      
                      
                      (1,306,805
                      )Cash
      Flows from Investing ActivitiesPurchase
      of property and equipment
                      
                      
                      (33,113
                      )
                      
                      
                      (183,798
                      )Net
      cash used in investing activities
                      
                      
                      (33,113
                      )
                      
                      
                      (183,798
                      )Cash
      Flows from Financing ActivitiesProceeds
      from issuance of common stock
                      
                      
                      1,282,300
                      
                      
                      
                      1,577,593Proceeds
      from Note payable – MKM Opportunity Master Fund Ltd.
                      
                      
                      220,000
                      
                      
                      
                      -Net
      borrowings (repayments) on line of credit
                      
                      
                      (747,701
                      )
                      
                      
                      -Principal
      payments on notes payable
                      
                      
                      -
                      
                      
                      
                      (250,000
                      )Net
      cash provided by financing activities
                      
                      
                      754,599
                      
                      
                      
                      1,327,593Increase
      (decrease) in cash and cash equivalents
                      
                      
                      109,475
                      
                      
                      
                      (163,010
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      72,329
                      
                      
                      
                      341,676Cash
      and cash equivalents , end of period
                      
                      $
                      181,804
                      
                      
                      $
                      178,666Supplemental
      cash flow informationCash
      paid for income taxes
                      
                      $
                      
                      
                      
                      $
                      -Cash
      paid for interest
                      
                      $
                      126,104
                      
                      
                      $
                      145,326





See
accompanying notes to condensed consolidated financial
statements


6


CHATSWORTH
DATA SOLUTIONS, INC.





NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





As of
October 31, 2008 and for the three and nine months ended October 31, 2008 and
2007


(Unaudited)





NOTE
1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES




Description
of business





Chatsworth
Data Solutions, Inc. (the "Company"), through its wholly owned subsidiary
Chatsworth Data Corporation ("CDC"), manufactures equipment for optical readers
and read heads, impact recorders and indicators.  The Company's fiscal
year-end is January 31.  On June 13, 2008, shareholders holding
approximately 72% of the issued and outstanding common stock of the Company
approved an amendment to the Company’s articles of incorporation to change the
name of the Company from Chatsworth Data Solutions, Inc. to International Data
Solutions, Inc. A certificate of amendment reflecting the name change will be
filed after dissemination of the Company’s definitive information statement to
its shareholders is complete.





Going
Concern





The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern which contemplates, among
other things, the realization of assets and settlement of liabilities in the
normal course of business.





On
December 11, 2008, the CDC received a notice of default from the Bank of
Oklahoma, N.A. (“BOK”) regarding its revolving credit agreement (see Note
3).  BOK advised CDC that it was not in compliance with certain
provisions of the credit agreement and had a 20 day period to cure the
default.  In the event that CDC fails to cure the default within the
20 day cure period, BOK may pursue further action including acceleration of all
amounts due and/or foreclosure of BOK’s security interest in substantially all
of CDC’s assets.  The Company, as guarantor, and CDC are currently in
discussions with BOK to seek a waiver or forbearance of the default or to amend
the credit agreement.





In
addition, the Company is in default on $1,500,000 of notes payables due to
predecessor shareholders (see Note 2), is in default on $220,000 note payable to
MKM Opportunity Fund (see Note 2), and is deemed to be in default on $754,600
registration payment penalty promissory note (see Note 4).





As of
October 31, 2008, the Company had cash on hand of $181,804 and had no
availability under its financing arrangements. During the nine months ended
October 31, 2008, the Company incurred a net loss of $7,803,806 and used cash in
operations of $612,011. Based on third quarter operating results resulting from
slower than anticipated sales and the Company’s assessment of the business
environment for the balance of 2008, management does not believe that the
Company will achieve positive cash flow from operations until at least the
second quarter of 2009.





Existing
cash balance at October 31, 2008 will not be sufficient to meet its obligations
under the Company’s revolving credit agreement, note payable to MKM, obligations
under notes payable to predecessor shareholders, working capital requirements,
and capital expenditure and investment requirements for the next 12
months.  If the Company is not able to obtain some liquidity, either
from loans or other means, the Company may be forced to cease activity and seek
bankruptcy protection.


7


The
Company is exploring alternatives to improve liquidity, including raising
capital, refinancing outstanding debt, or the potential sale of
assets.  There can be no assurance that the Company will be able to
obtain a waiver, forbearance or amendment from BOK, MKM, or predecessor
shareholders, or that such a waiver, forbearance or amendment would be on terms
acceptable to the Company.  There is also no assurance that additional
financing will be available at all or that, if available, such financing will be
obtainable on terms favorable to the Company or that any additional financing
will not be dilutive.





As of
October 31, 2008, these items among others, raise substantial doubt about the
Company’s ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of this
uncertainty.





Basis
of presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and pursuant to the
rules and regulations of the United States Securities and Exchange Commission
(SEC). Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended
January 31, 2008, filed with the SEC. The results of operations for interim
periods are not necessarily indicative of the results expected for a full year
or for any future period. Certain prior year's amounts have been reclassified to
conform to the current period presentation.





Use
of estimates





The
preparation of financial statements in conformity with U.S. 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.





Goodwill
and intangible assets





Goodwill
and other intangible assets are related to the Company's acquisition of CDC in
August 2006.  Intangible assets with finite lives are amortized over
their estimated useful lives, which are three years for customer relations and
five years for propriety technology.





In
accordance with Statement of Financial Accounting Standards  (SFAS)
No. 142, “Goodwill and Other Intangible Assets,” the Company evaluates goodwill
for impairment at least annually at January 31, or more frequently if events or
circumstances indicate that the assets may be impaired.  The Company
previously evaluated its goodwill at January 31, 2008, and determined that there
was no impairment of goodwill.





In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, long-lived assets, including intangible assets with finite
lives are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount should be assessed.  The Company
previously evaluated its other intangible assets with finite lives at January
31, 2008, and determined that there was no impairment of other intangible
assets.


8


Based on
a combination of factors, including deterioration in the economic environment, a
significant decrease in the Company’s market capitalization as a result of a
decrease in the trading price of its common stock, and the Company’s continuing
operating losses, the Company has determined that indicators of impairment exist
at October 31, 2008.  The Company performed an assessment of the fair
value of its goodwill and other intangible assets at October 31, 2008 and
determined they were impaired.  The assessment included the
determination of the fair value of CDC, the reporting unit, using a discounted
cash flow approach.  Accordingly, the Company recorded an impairment
loss of goodwill and other intangible assets of $4,820,003 during the three and
nine months ended October 31, 2008.  There was no impairment charges
recorded during the three and nine months ended October 31, 2007.





Basic
and diluted net income (loss) per share





Basic
earnings (loss) per share are computed by dividing net income (loss) available
to common shareholders (numerator) by the weighted average number of shares
outstanding (denominator) during the period. Diluted earnings per share reflects
the potential dilution that could occur if options or other securities or
contracts entitling the holder to acquire shares of common stock were exercised
or converted, resulting in the issuance of additional shares of common stock
that would then share in earnings. However, diluted loss per share does not
consider such dilution as its effect would be anti-dilutive. In computing
basic and diluted earnings (loss) per share, the Company considers shares to be
issued as outstanding from the date the shares were sold.





At
October 31, 2008 potentially dilutive securities entitling the holder thereof to
acquire shares of common stock are summarized as follows:





Options
      to purchase common stock
                  
                  
                  7,787,500Warrants
      to purchase common stock
                  
                  
                  12,103,000





For the
three and nine months ended October 31, 2008, these options and warrants were
not included in the computation of diluted loss per share as their effects are
anti-dilutive.





Stock
compensation costs





The
Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs. The Company adopted SFAS No. 123R, “Share Based Payment”, effective
February 1, 2006, and is using the modified prospective method in which
compensation cost is recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS No. 123R for all awards
granted to employees prior to the effective date of SFAS No. 123R that remained
unvested on the effective date.





The
Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18: "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and EITF No. 00-18: "Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees" whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.





Registration
payment arrangements





The
Company accounts for registration payment arrangements under Financial
Accounting Standards board (FASB) Staff Position EITF 00-19-2, Accounting for
Registration Payment Arrangements ("FSP EITF 00-19-2"). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments under a
registration payment arrangement should be separately recognized and measured in
accordance with SFAS No. 5, Accounting for Contingencies. FSP EITF 00-19-2 was
issued in December, 2006. Early adoption of FSP EITF 00-19-2 is permitted and
the Company adopted FSP EITF 00-19-2 effective November 1,
2006.


9





Financial
assets and liabilities measured at fair value





Effective
February 1, 2008, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements. This Statement defines
fair value for certain financial and nonfinancial assets and liabilities that
are recorded at fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. This guidance applies to
other accounting pronouncements that require or permit fair value measurements.
On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.
157-2, Effective Date of FASB Statement No. 157. This Staff Position delays
the effective date of SFAS No. 157 for nonfinancial assets and liabilities
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years, except for those items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
The adoption of SFAS No. 157 had no effect on the Company's consolidated
financial position or results of operations.





Recent
accounting pronouncements





In
December 2007, the FASB issued FASB Statement No. 141 (R), "Business
Combinations" (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited.




In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". SFAS No. 160
establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent's equity; the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income; and changes in a parent's ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently. SFAS No. 160 also requires that any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value
when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
requirements to identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure
requirements are applied retrospectively for all periods presented.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 ("SFAS No. 161"), to improve financial reporting
of derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity's financial position, financial performance and cash flows.
SFAS No. 161 applies to fiscal years and interim periods beginning
after November 15, 2008.


10





NOTE
2 – NOTES PAYABLE





Notes
payable consists of the following:





October 31,
                  2008
                
                
                January 31,
                  2008(Unaudited)Notes
      payable – predecessor shareholders
                
                $
                1,500,000
                
                
                $
                1,500,000Notes
      payable – MKM Opportunity Master Fund Ltd.
                
                
                220,000
                
                
                
                -1,720,000
                
                
                
                1,500,000Less
      current maturities
                
                
                1,720,000
                
                
                
                1,000,000Long
      term portion
                
                $
                -
                
                
                $
                500,000





Notes
payable – predecessor shareholders





Notes
payable consist of seven unsecured notes that are payable to the predecessor
shareholders of CDC in connection with the acquisition of CDC (see Note 7). The
notes were amended October 31, 2007 and March 19, 2008. Under the terms of the
notes, as amended, interest was payable quarterly at 6.54% per annum until April
1, 2008, at which time interest increased to 9.54% per annum. Principal of
$500,000 was due October 31, 2008; $500,000 is due on January 31, 2009; and
$500,000 is due April 30, 2009.  The notes payable-predecessor
shareholders are in default as the Company did not pay the required interest
payments of $25,000 due September 30, 2008 and the principal payments of
$500,000, due October 31, 2008, on notes payables to predecessor
shareholders.





Included
in the $1,500,000 notes payable is a promissory note in the original amount of
$615,384 issued to an individual who serves as a director of the
Company.  The balance outstanding under this note was $461,538 as of
October 31, 2008 and January 31, 2008, of which $153,846 was due
October 31, 2008, $153,846 is due January 31, 2009 and $153,846 is due on
April 30, 2009.




Notes
payable – MKM Opportunity Master Fund Ltd.





On June
20, 2008, the Company issued a $220,000, non-secured loan to MKM Opportunity
Master Fund, Ltd. (MKM) for working capital purposes. The loan originally bore
interest of 12% per annum, with principal and accrued interest due July 20,
2008. The loan also included a fee of $20,000, which is recorded as interest
expense on the accompanying condensed consolidated financial statements. As of
October 31, 2008, the Company had not repaid the loan and, as such, the loan was
in default. As a consequence of the default, the loan interest increased to 18%
per annum.





NOTE
3 - LINE OF CREDIT





On
September 30, 2008, the Company entered into a third amendment to its revolving
credit agreement dated December 31, 2006.  The third amendment
provides for a reduction in the amount of the credit facility from a maximum of
$3,000,000 to a maximum of $1,050,000.  The agreement is subject to a
borrowing base and is secured by all accounts receivable and inventory of the
Company.  On April 3, 2008, the Company entered into a second
amendment to its revolving credit agreement, which was effective February 29,
2008 and extended the term of the revolving credit agreement to February 28,
2009, when all amounts outstanding are due and payable. All advances bear
interest at prime plus 2% (6% at October 31, 2008) and are payable monthly in
arrears. The revolving credit agreement, as amended, provides for a standby fee
of 2% of the unused portion of the facility. At October 31, 2008, outstanding
borrowings under this agreement were $1,049,892, which was in excess of its
borrowing base by approximately $156,000.  Amounts outstanding under this
line of credit at January 31, 2008 $1,757,593.  Beginning October 31,
2008, the line of credit requires the Company to meet certain financial
covenants, which the Company did not meet.  On December 11, 2008, the
CDC received a notice of default from the Bank of Oklahoma, N.A. (“BOK”)
regarding its revolving credit agreement.  BOK advised CDC that it was
not in compliance with certain provisions of the credit agreement and had a 20
day period to cure the default.  In the event that CDC fails to cure
the default within the 20 day cure period, BOK may pursue further action
including acceleration of all amounts due and/or foreclosure of BOK’s security
interest in substantially all of CDC’s assets.  The Company, as
guarantor, and CDC are currently in discussions with BOK to seek a waiver or
forbearance of the default or to amend the credit
agreement.


11





NOTE
4 – NOTES PAYABLE, REGISTRATION PAYMENT PENALTY





On April
3, 2008, the Company reached an agreement with investors holding certain
registration rights under an August 2006 Investor Rights Agreement, whereby the
Company was obligated to file a registration statement covering the investors'
shares and to have such registration statement declared effective by the
Securities and Exchange Commission within a specified period of time. Failure to
meet its obligations under the Investor Rights Agreement resulted in the Company
incurring monetary penalties to the investors. With the execution of the Penalty
Settlement Agreement on April 3, 2008, the parties to the Investor Rights
Agreement agreed to cease any further accrual of the late registration penalties
under such agreement, and the Company issued promissory notes to the investors
in the aggregate amount of $754,600, reflecting the total accrued late
registration penalties through February 29, 2008. The notes bear interest at 12%
per annum and mature March 10, 2010. If the Adjusted Share Price of the
Company's common stock is equal to or greater than $.25 for a period of five (5)
consecutive trading days the Company has the option of paying any or all of the
accrued interest on the notes payable in its common stock. The agreement
relieves the Company of any further obligation to register the investors' shares
that were the subject of a pending registration statement.  One
provision of the notes payable is that if the Company admits an inability to pay
its debts generally as they become due, the notes payable are deemed to be in
default.  Accordingly, the notes payable, registration rights
agreement are deemed to be in default as of October 31, 2008, and as a
consequence, the loans became due immediately, and loan interest increased to
18% per annum.





NOTE
5 – COMMON STOCK PURCHASE AGREEMENT





On April
2, 2008, the Company issued 20,046,000 shares of its common stock at a price of
$.05 per share for a total consideration of $1,002,300. 10,000,000 shares were
purchased by Vision Opportunity Master Fund, Ltd. ("Vision") and 10,046,000
shares were purchased by officers, directors, and employees of the Company or
its wholly owned subsidiary, Chatsworth Data Corporation, as well as existing
shareholders of the Company. The purchase price of the stock of $0.05 was below
the trading price of the stock by $0.065. Therefore, compensation expense of
$522,990 was recognized for the 8,046,000 shares of stock issued to officers,
directors and employees of the Company.





On June
20, 2008, the Company agreed to issue an additional 5,600,000 shares of its
common stock at a price of $.05 per share for a total consideration of $280,000.
The shares were purchased by MKM Opportunity Fund, Ltd (MKM). MKM is managed by
a former employee of Vision. Also on June 20, 2008, MKM loaned the Company
$220,000 (see Note 2).





NOTE
6 – STOCK OPTIONS AND WARRANTS





Stock
options




On
September 14, 2006, the Company adopted the 2006 Equity Incentive Plan (the
Plan) for its officers, directors and consultants. Subject to adjustments,
options to purchase no more than 10,000,000 shares of common stock may be issued
in the aggregate under the Plan. The options may not be granted for a term in
excess of ten years.


12


During
June 2008, the Company granted options to purchase a total of 300,000 shares of
common stock at $0.07 per share to various employees. The options vest one year
from the date of grant with respect to 50% of the shares of common stock and the
remaining options vest over the following three years and expire in 2013. The
options were valued at $7,727, the fair value of the stock options on the date
granted determined using a Black-Scholes pricing model. The Company recognized
$1,288 of compensation expense from the date the options were granted through
October 31, 2008 related to the fair value of the vested options.





During
June 2008, the Company granted options to purchase 250,000 shares of common
stock at a price of $0.07 per share to a non-employee director. Options to
purchase 130,000 shares of common stock vested immediately, expire in 2017, and
were valued at $3,298, the fair value of the stock options on the date granted
determined using a Black-Scholes pricing model, and were recorded as
compensation expense. Options to purchase 120,000 shares of common stock vest
over 24 months, expire in 2017, and were valued at $3,414. The Company
recognized a total of $4,220 of compensation expense from the date the options
were granted through October 31, 2008 related to fair value of the vested
options





The fair
value of grants issued in the three and nine months ended October 31, 2008 were
determined using a Black-Scholes option pricing model with the following
assumptions: 3.49% average risk-free interest rate; 50% expected volatility;
five year expected term, and 0% dividend yield.





At
October 31, 2008, options outstanding are as follows:




Shares
                
                
                Average
                  Exercise PriceBalance
      at January 31, 2008
                
                
                7,437,500
                
                
                $
                0.33Granted
                
                
                550,000
                
                
                
                0.07Exercised
                
                
                -
                
                
                
                -Cancelled
                
                
                (200,000
                )
                
                
                0.40Balance
      at October 31, 2008
                
                
                7,787,500
                
                
                $
                0.36





Additional
information regarding options outstanding and exercisable as of October 31, 2008
is as follows:





Options Outstanding
                                            
                                            Options ExercisableWeightedNumber of
                                            
                                            AverageShares
                                            
                                            Remaining
                                            
                                            WeightedRange of
                                            
                                            Underlying
                                            
                                            Contractual
                                            
                                            Average
                                            
                                            Shares Under
                                            
                                            WeightedExercise Price
                                            
                                            Options
                                            
                                            life (years)
                                            
                                            Exercise Price
                                            
                                            Options
                                            
                                            Exercise Price$.07-$.65
                                            
                                            7,787,500
                                            
                                            6.38
                                            
                                            $              0.27
                                            
                                            6,012,361
                                            
                                            $              0.32





The
aggregate intrinsic value of the 7,787,500 options outstanding and 6,021,361
options exercisable as of October 31, 2008 was nil. The aggregate intrinsic
value for the options is calculated as the difference between the price of the
underlying awards and quoted price of the Company's common shares for the
options that were in-the-money as of October 31, 2008.


13


A summary
of the status of nonvested shares as of October 31, 2008 are as
follows:





SharesNonvested
      at January 31, 2008
                  
                  
                  2,411,805Granted
                  
                  
                  550,000Vested
                  
                  
                  (1,136,666
                  )Nonvested
      at October 31, 2007
                  
                  
                  1,825,139





For the
three and nine months ended October 31, 2008, the Company recognized $30,069 and
$112,108, respectively, of compensation expense related to the fair value of
vested options, which has been reflected as compensation cost in the
accompanying consolidated statement of operations.





The total
deferred compensation expense for the outstanding value of unvested stock
options was $192,950 as of October 31, 2008, which will be recognized over a
weighted average period of 22 months.





Warrants





At
October 31, 2008, warrants outstanding were as follows:





Number of
                  Shares under
                  Warrants
                
                
                Weighted
                  Average
                  Exercise PriceWarrants
      outstanding at February 1, 2008
                
                
                12,103,000
                
                
                $
                0.30Warrants
      granted
                
                
                -
                
                
                
                -Warrants
      expired
                
                
                -
                
                
                
                -Warrants
      outstanding at October 31, 2008
                
                
                12,103,000
                
                
                $
                0.30





Additional
information regarding warrants outstanding and exercisable as of October 31,
2008 is as follows:





Warrants Outstanding
                              
                              
                              Warrants ExercisableNumber of
                              
                              
                              
                              
                              
                              
                              
                              
                              Number ofShares
                              
                              
                              Remaining
                              
                              
                              Weighted
                              
                              
                              Shares
                              
                              
                              WeightedUnderlying
                              
                              
                              Contractual
                              
                              
                              Average
                              
                              
                              Underlying
                              
                              
                              AverageExercise Price
                              
                              
                              Warrants
                              
                              
                              life (years)
                              
                              
                              Exercise Price
                              
                              
                              Warrants
                              
                              
                              Exercise Price$0.30
                              
                              
                              
                              11,000,000
                              
                              
                              
                              3
                              
                              
                              $
                              0.30
                              
                              
                              
                              11,000,000
                              
                              
                              $
                              0.30$0.30
                              
                              
                              
                              1,000,000
                              
                              
                              
                              3
                              
                              
                              $
                              0.30
                              
                              
                              
                              1,000,000
                              
                              
                              $
                              0.30$0.01
                              
                              
                              
                              103,000
                              
                              
                              
                              3
                              
                              
                              $
                              0.01
                              
                              
                              
                              103,000
                              
                              
                              $
                              0.01$0.01-$0.30
                              
                              
                              
                              12,103,000
                              
                              
                              
                              
                              
                              
                              $
                              0.30
                              
                              
                              
                              12,103,000
                              
                              
                              $
                              0.30


14





NOTE
7 – RELATED PARTY TRANSACTIONS





On August
1, 2006, the Company entered into consulting agreements with two individuals to
serve as the chairman of the board of directors and the Company's chief
financial officer. During the three and nine months ended October 31, 2008 and
2007, the Company paid or incurred an obligation to pay each individual $24,000
and $72,000, respectively. In addition, the Company paid a firm in which one of
the consultants is a partner $$1,005 and $8,673for services for the three
and nine months ended October 31, 2007 and $1,000 and $2,365 for the three and
nine months ended October 31, 2008. As of October 31, 2008 the Company was
obligated to the Company’s Chief Financial Officer in the amount of $24,000 for
compensation earned but unpaid at October 31, 2008.





A member
of the Company's board of directors was a shareholder and executive manager of
CDC before he sold his stock in CDC to the Company. On August 7, 2006, the
Company issued a note payable totaling $615,384 to the individual in conjunction
with the acquisition of CDC. At April 30, 2007, the balance of the note was
$461,538. During the three and nine months ended October 31, 2008 the Company
accrued $11,219 and $33,656, respectively, of interest on this note to the
current board member.  During the three and nine months ended October
31, 2007, the Company accrued $10,034 and $19,958, respectively, of interest on
this note to the current board member.


15





ITEM
2.  Management’s Discussion and Analysis or Plan of
Operation




This
section of this 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 states are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or out predictions.





Company
Overview




Chatsworth
Data Solutions, Inc. was incorporated in the State of Nevada as Adera Mines
Limited on December 30, 2003, and until August 2006 was an exploration stage
corporation. An exploration stage corporation is one engaged in the search for
mineral deposits (reserves) which are not in either the development or
production stage. In August 2006, the Company purchased all of the outstanding
shares of Chatsworth Data Corporation (CDC), a manufacturer of optical readers
and read heads, scanners, impact recorders and indicators.  The
acquisition was accounted for as a purchase in accordance with Statement of
Financial Accounting Standards No. 141 Business
Combinations.  In November, 2006, the Company changed its name
from Adera Mines Limited to Chatsworth Data Solutions, Inc. to reflect the
acquisition and operation of CDC.


.


Prior to
August 2006, CDC was privately owned. It was acquired from Republic Corporation
in 1971 by five Republic managers, four of whom managed CDC until the sale.
CDC's corporate headquarters are in Chatsworth, California, thirty miles
northwest of downtown Los Angeles. Its primary business has been the development
and manufacture of optical mark readers. Over 100,000 readers and 110,000 optic
head assemblies have been sold worldwide by CDC. The optical mark readers have
been traditionally sold into four vertical market sectors: education, gaming and
lottery, health care, and vote tabulation. CDC also manufactures impact
recording devices and cable testers. CDC prides itself on customer service; its
engineering and design staff is able to understand client's technical problems
and offer ready solutions to those problems. A customer hotline was installed
over fifteen years ago to enable field problems to be handled quickly,
efficiently and effectively. New products are designed and brought to market
quickly in response to customer demand.





Results
of operations – For the three months ended October 31, 2008, compared to the
three months ended October 31, 2007.





Sales
revenue totaled $1,440,469 for the three months ended October 31, 2008 and
$2,175,163 for the three months ended October 31, 2007.  Following is
a table indicating the sales for the respective periods.


16





Sales-three months ended
                
                October 31, 2008
                
                
                October 31, 2007(Unaudited)
                
                
                (Unaudited)Gaming
                
                $
                479,468
                
                
                $
                322,929Education
                
                
                65,249
                
                
                
                989,670Voting
                
                
                104,534
                
                
                
                637Medical
                
                
                35,615
                
                
                
                52,791Others
                
                
                73,137
                
                
                
                72,193Total
      Optical Mark Readers
                
                
                758,003
                
                
                
                1,438,220Impact
      recorders/indicators
                
                
                682,466
                
                
                
                736,943Cablemaster
                
                
                -
                
                
                
                -Total
                
                $
                1,440,469
                
                
                $
                2,175,163





Sales of
Optical Mark Readers declined due to reduced sales in the Education
market.  The quarter ended October 31, 2007 included sales to a
customer that did not repeat in the current quarter.  There was an
increase in sales in the Voting market which were negligible in the quarter
ended October 31, 2007.  The Company believes that the reduced sales
in the gaming market are a result of a decline in purchases of new equipment
which is evident in the overall gaming market.  The Company has
developed a new scanner product and sales of scanners were $35,227 in the
current quarter.  The Company anticipates the sales of scanners will
increase in the future and may enable it to increase its sales in several of the
vertical markets in the coming year.  The Company no longer actively
markets the Cablemaster product and any future sales will be
negligible.





Cost of
sales totaled $951,047 for the three months ended October 31, 2008 and
$1,458,903 for the three months ended October 31, 2007.  Gross margin
percentage was 34.0% for the three months ended October 31, 2008 and 32.9% for
the three months ended October 31, 2007.  The increased gross margin
percentage is the result of Impact recorders/indicators making up a larger
percentage of sales.  Impact recorders/indicators have a larger gross
margin percentage than due Optical Mark Readers.  The increase in
gross margin due the change in the mix of sales is partially offset by the need
to spread manufacturing overhead over a small volume of sales.





General
and administrative (G&A) expenses totaled $711,229 for the three months
ended October 31, 2008 and $917,286 for the three months ended October 31,
2007.  Included in G&A for this quarter were accounting and legal
fees totaling $17,131 compared to $75,974 in the quarter ended October 31,
2007.  The legal and accounting fees in the quarter ended October 31,
2007 included costs incurred in connection with the attempt to register certain
shares issued by the Company.  The current quarter included no such
fees.  The current quarter includes the cost of outside consulting
services of $36,116 compared to $183,170 in the quarter ended October 31,
2007.  The cost of group medical insurance increased from $26,351 in
the quarter ended October 31, 2007 to $34,385 in the current
quarter.  Salary cost was approximately the same in the current
quarter and the quarter ended October 31, 2007.  In accordance with
SFAS 123(R), the Company recorded an expense for the fair value of vested stock
options of $30,069 for the three month period ended October 31, 2008 compared to
$55,523 for the three month period ended October 31, 2007.


17


The
Company recognized an impairment charge of $4,820,003 for goodwill and
amortizable intangible assets.  These assets were recorded a result of
the acquisition of CDC in August 2006.  The Company performed an
analysis of the carrying value of the goodwill and the unamortized balance of
certain intangible assets and determined that an impairment charge was
necessary.  The analysis included the determination of the fair value
of the reporting unit, using a discounted cash flow approach.  The
carrying value exceeded the fair value of the unit.  A comparison of
the market value of the Company’s common stock the Company’s equity supported
the determination that an impairment charge was warranted.  The
Company then measured the amount of the impairment loss and recorded the loss in
the current quarter ended October 31, 2008.  No such impairment charge
was recorded in the quarter ended October 31, 2007.





The
Company did not record an income tax expense or benefit for the three months
ended October 31, 2008.  However the Company recorded an income tax
benefit of $39,017 for the quarter ended October 31, 2007.





The net
loss for the three months ended October 31, 2008 was $(5,415,762) compared to
net loss of $(736,410) for the three months ended October 31, 2007.





Results
of operations – For the nine months ended October 31, 2008, compared to the nine
months ended October 31, 2007.





Sales
revenue totaled $4,066,779 for the nine months ended October 31, 2008 and
$6,536,237 for the nine months ended October 31, 2007.  Following is a
table indicating the sales for the respective periods.





Sales-nine months ended
                
                October 31, 2008
                
                
                October 31, 2007(Unaudited)
                
                
                (Unaudited)Gaming
                
                $
                1,127,457
                
                
                $
                1,869,192Education
                
                
                261,813
                
                
                
                1,256,074Voting
                
                
                196,203
                
                
                
                483,840Medical
                
                
                126,221
                
                
                
                198,747Others
                
                
                215,832
                
                
                
                196,444Total
      Optical Mark Readers
                
                
                1,927,526
                
                
                
                4,004,297Impact
      recorders/indicators
                
                
                2,139,253
                
                
                
                2,342,614Cablemaster
                
                
                -
                
                
                
                189,326Total
                
                $
                4,066,779
                
                
                $
                6,536,237





Sales of
Optical Mark Readers declined in all vertical markets served by the
Company.  The Company believes that the reduced sales in the voting
market is a result of customers delaying updating current voting systems and
delaying the purchase of new voting systems until after the fall 2008
elections.  The Company believes that the reduced sales in the gaming
market are a result of a decline in purchases of new equipment which is evident
in the overall gaming market. The reduced sales in the Education market is
primarily the result of one customer not repeating its orders during the current
nine months ended October 31, 2008.  The Company has developed a new
scanner product which it anticipates will enable it to increase its sales in
several of the vertical markets during the coming year.  Sales of
scanners were $35,277 in the nine months ended October 31, 2008.  The
Company no longer actively markets the Cablemaster product and any future sales
will be negligible.


18





Cost of
sales totaled $2,776,221 for the nine months ended October 31, 2008 and
$4,173,837 for the nine months ended October 31, 2007.  Gross margin
percentage was 31.73% for the nine months ended October 31, 2008 and 36.14% for
the nine months ended October 31, 2007.  The reduced gross margin
percentage is due to the need to spread fixed manufacturing costs over a smaller
volume of sales.





General
and administrative (G&A) expenses totaled $3,153,907 for the nine months
ended October 31, 2008 and $3,106,920 for the nine months ended October 31,
2007.  Included in G&A for the current nine month period is
accounting and legal fees totaling $117,023 compared to $429,764 in the nine
month ended October 31, 2007.  The legal and accounting fees in the
nine month period ended October 31, 2007 included costs incurred in connection
with the attempt to register certain shares issued by the
Company.  The current nine month period included no such
fees.  The current nine month period includes the cost of outside
consulting services of $161,385 compared to $609,316 in the nine months ended
October 31, 2007.  The cost of group medical insurance increased from
$77,784 in the nine month period ended October 31, 2007 to $106,630 in the
current nine month period.  Salary cost increased from $1,148,801 in
the nine month period ended October 31, 2007 to $1,291,801 in the current
period.  In accordance with SFAS 123(R), the Company recorded an
expense for the fair value of vested stock options of $112,108 for the nine
month period ended October 31, 2008 compared to $182,715 for the nine month
period ended October 31, 2007.  Also in accordance with SFAS 123(R),
in the nine month period ended October 31, 2008 the Company recorded
compensation expense in connection with the issuance of common stock in the
amount of $522,990.  No such expense was recorded in the nine month
period ended October 31, 2007.





The
Company recognized an impairment charge of $4,820,003 for goodwill and
amortizable intangible assets.  These assets were recorded a result of
the acquisition of CDC in August 2006.  The Company performed an
analysis of the carrying value of the goodwill and the unamortized balance of
certain intangible assets and determined that an impairment charge was
necessary.  The analysis included the determination of the fair value
of the reporting unit, using a discounted cash flow approach.  The
carrying value exceeded the fair value of the unit.  A comparison of
the market value of the Company’s common stock the Company’s equity supported
the determination that an impairment charge was warranted.  The
Company then measured the amount of the impairment loss and recorded the loss in
the current quarter ended October 31, 2008 and is reflected in the results of
the nine months ended October 31, 2008.  No such impairment charge was
recorded in the quarter ended October 31, 2007 or nine months ended October 31,
2007.





The
Company recorded a net tax benefit of $551,554 in the nine month period ended
October 31, 2007.  However no income tax expense or income tax benefit
was recorded in the nine month period ended October 31, 2008.


19





The net
loss for the nine months ended October 31, 2008 was $(7,803,806) compared to net
loss of $(1,511,659) for the nine months ended October 31, 2007.





Liquidity
and Capital Resources





On
December 11, 2008, the CDC received a notice of default from the Bank of
Oklahoma, N.A. (“BOK”) regarding its revolving credit agreement.  BOK
advised CDC that it was not in compliance with certain provisions of the credit
agreement and had a 20 day period to cure the default.  In the event
that CDC fails to cure the default within the 20 day cure period, BOK may pursue
further action including acceleration of all amounts due and/or foreclosure of
BOK’s security interest in substantially all of CDC’s assets.  The
Company, as guarantor, and CDC are currently in discussions with BOK to seek a
waiver or forbearance of the default or to amend the credit
agreement.  The Company is actively seeking alternative financing from
other sources; however it may not be able to secure such financing. If the
Company is unsuccessful in obtaining other financing or negotiating a
modification of the terms of the current borrowing agreement, the Company may
not be able to continue as a going concern.  As of October 31, 2008,
CDC had borrowed $1,049,892 under its revolving line of credit, the maximum
amount allowed under the borrowing agreement.  The line of credit
matured February 28, 2008 and on April 3, 2008, the Company negotiated an
extension of the line of credit to February 28, 2009 and obtained a waiver of
default for non-compliance with all existing financial covenants as of January
31, 2008.  Effective February 29, 2008, the interest rate under the
line of credit increased to prime plus 2% (6% as of October 31,
2008).  As of October 31, 2008, the Company had exceeded it borrowing
base under this agreementby $156,000.





As of
October 31, 2008, the Company had cash on hand of $181,804 compared to $72,329
as of January 31, 2008.  The Company used $612,011 of cash in
operating activities for the nine months ended October 31, 2008 compared to
$1,306,805 for the nine months ended October 31, 2007.  On June 20,
2008 the Company closed on $280,000 of an authorized $1,500,000 private
placement of securities.  The Company also borrowed $220,000 from the
purchaser of the securities, MKM Opportunity Master Fund, Ltd.  The
Company advanced $475,000 of the $500,000 to its subsidiary, CDC, for use in its
day to day operations. During the nine month period ended October 31, 2008, the
Company converted a registration payment obligation into a note payable that
matures on March 10, 2010 and bears interest at 12% per annum payable at
maturity.  The agreement relieves the Company of any obligation to
register the investors’ shares that were the subject of a pending registration
statement.





As of
October 31, 2008, notes payable totaled $1,720,000. Notes payable to the selling
shareholders in the amount of $1,500,000 were amended on March 31,
2008.  The maturity schedule was amended so principal of $500,000 was
due October 31, 2008; principal of $500,000 is due on January 31, 2009; and
principal of $500,000 is due April 30, 2009. The Company did not make the
required payment due on October 31, 2008 and is negotiating for an extension of
the payment and a modification of the payment due under the notes.  In
addition, starting April 1, 2008, the interest rate of the outstanding
promissory notes will increase to 9.54% from 6.54% at January 31, 2008. No other
terms of the notes were modified. The increase in rate will result in
approximately $45,000 of additional annual interest expense based on the current
amount of the notes payable.  The principal of the note in the amount of
$220,000 to MKM Opportunity Master Fund, Ltd. and all accrued interest was due
on July 20, 2008.  The note and accrued interest remains unpaid as of
August 31, 2008.  The note bears interest at 12% until maturity and
after that date bears interest at 18% per annum.  In addition, the
Company is obligated to MKM Opportunity Master Fund, Ltd. in the amount of
$20,000 which represents a commitment fee payable as the note was not paid by
August 20, 2008.


20





Going
concern





Existing
cash balance at October 31, 2008 will not be sufficient to meet its obligation
under its revolving credit agreement, the note to MKM Opportunity Master Fund,
Ltd., the notes to the selling shareholders, working capital requirements,
capital expenditure and investment requirements for the next 12 months. The
Company did not make the interest payment due on the shareholders notes of
approximately $25,000 due September 31, 2008, did not make principal payments of
$500,000 due on the shareholders notes due October 31, 2008, and does not
anticipate having sufficient funds to make the interest payment due on December
31, 2008 of approximately $25,000.  If the Company is not able to
obtain some liquidity, either from loans or other means, the Company may be
forced to cease activity and seek bankruptcy protection.  The Company
is exploring alternatives to improve liquidity, including raising capital,
refinancing outstanding debt, or the potential sale of
assets.   There is no assurance additional financing will be
available at all or that, if available, such financing will be obtainable on
terms favorable to the Company or that any additional financing will not be
dilutive.  As of October 31, 2008, these items among others, raise
substantial doubt about the Company’s ability to continue as a going concern.
The Company’s condensed consolidated financial statements as of October 31, 2008
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.





Critical
Accounting Policies





Revenue
recognition





The
Company recognizes revenue when there is persuasive evidence that an arrangement
exists, delivery of the product has occurred and title has passed, the selling
price is both fixed and determinable, and collectibility is reasonably assured,
all of which generally occurs upon shipment of the Company’s product or delivery
of the product to the destination specified by the customer.





Intangible
assets





Intangible
assets and goodwill are related to the Company's acquisition of CDC in August
2006.   Intangible assets with finite lives are amortized over
their estimated useful lives, which are three years for customer relations and
five years for propriety technology.  In addition to amortization,
intangible assets are tested at least annually for impairment.


21





Goodwill
represents the excess of the cost of the acquired entity over the net of amounts
assigned to assets acquired and liabilities assumed, and is not
amortized.  The Company tests goodwill for impairment at least
annually, or whenever events or circumstances  indicate an impairment
may exist, by using a two-step process. In the first step, the fair value of the
reporting unit, estimated using a discounted cash flows approach, is compared
with the carrying amount of the reporting unit, including
goodwill.  If the carrying amount of the reporting unit exceeds its
fair value, goodwill is considered impaired and a second step is performed to
measure the amount of impairment loss, if any.





Stock-based
compensation





The
Company estimates the fair value of stock options using a Black-Scholes option
pricing model, consistent with the provisions of SFAS No. 123 (revised
2004), Share-Based
Payment (SFAS 123(R).  SFAS 123(R) requires all share-based
payments to employees, including stock option grants, to be recognized in the
income statement based on their fair values. The standard applies to newly
granted awards and previously granted awards that are not fully vested on the
date of adoption. The Company adopted SFAS 123(R) using the modified prospective
method, which requires that compensation expense for the portion of awards for
which the requisite service has not yet been rendered and that are outstanding
as of the adoption date be recorded over the remaining service
period.  Prior to the adoption of SFAS No. 123(R) on February 1,
2006, the Company had no share-based payments.  Accordingly, no prior
periods have been restated, the impact of SFAS 123(R) is not presented, and no
pro forma amounts are presented for 2005 had the Company recognized stock-based
compensation in accordance with SFAS No. 123.





The
Company accounts for options and warrants granted to non-employees under SFAS
No. 123(R) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments
that are issued to other than Employees for Acquiring or in Conjunction with
Selling Goods or Services. The Company measures the fair value of such
options using the Black-Scholes option pricing model at each financial reporting
date.





Recent
accounting pronouncements





In
December 2007, the FASB issued FASB Statement No. 141 (R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a Company obtains control
over another business. Statement 141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income; and changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently. SFAS No. 160 also requires that any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value
when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
requirements to identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure
requirements are applied retrospectively for all periods
presented.


22





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 ("SFAS No. 161"), to improve financial reporting
of derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity's financial position, financial performance and cash flows.
SFAS No. 161 applies to fiscal years and interim periods beginning
after November 15, 2008.




The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





The
Company is a smaller reporting company and is not required to provide the
information required by this.





ITEM
4. CONTROLS AND PROCEDURES




(a)
Evaluation of disclosure controls and procedures. As of the end of the period
covered by this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, 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. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.




(b)
Changes in internal controls over financial reporting. There was no change in
our internal control over financial reporting during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


23


PART
II - OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




Not
applicable.




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





On April
2, 2008, the Company closed on $1,002,300 of subscriptions raised under a Common
Stock Purchase Agreement (“SPA”) by and among the Company and a group of
investors (collectively the “Investors”). Terms of the SPA provided for a
minimum of 20,000,000 shares and a maximum of 30,000,000 shares to be sold under
the SPA, at a price of $.05 per share. On April 2, 2008, the Company held its
initial closing of the common stock offering, and issued 20,046,000 shares of
its common stock at a price of $.05 per share for a total consideration of
$1,002,300. Ten million shares were purchased by Vision Opportunity Master Fund,
Ltd. (“Vision”) and 10,046,000 shares were purchased by other accredited
investors, including officers, directors, management and employees of the
Company or its wholly owned subsidiary, Chatsworth Data Corporation, as well as
existing shareholders of the Company.





The
purchase price of the stock under the SPA of $0.05 was below the trading price
of the stock by $0.065.  Therefore, compensation expense of $522,990
was recognized for the 8,046,000 shares of stock issued to officers, directors
and employees of the Company.





The
securities were offered and sold by the Company pursuant to exemptions from
registration set forth in section 4(2) of the Securities Act of 1933, as
amended.





The
common stock purchased by Investors other than Vision is subject to a Lock-up
Agreement, which provides that the Investor may not sell the common stock
purchased by him for a period of twelve (12) months following the closing.
Thereafter, the Investor may sell no more than 1/12 of the shares in any one
month for a period of 24 months.





The funds
received by the Company were immediately transferred to Chatsworth Data
Corporation for use in its operations.





On June
20, 2008, the Company closed on an additional $500,000 of funding, evidenced by
a private placement of securities in the amount of $280,000 and the issuance of
the Company's promissory note for $220,000.  The note bears interest
at 12% per annum and matured on July 20, 2008.  The note remains
unpaid as of August 31, 2008 and is now in default.  The note now
bears interest at the default rate of 18%.  In addition the Company is
obligated to pay a commitment fee of $20,000 as a result of not paying the
principal of the note by August 20, 2008.


24


The
purchase price of the stock under the SPA of $0.05 and 5,600,000 shares of were
sold to the purchaser.





The
securities were offered and sold by the Company pursuant to exemptions from
registration set forth in section 4(2) of the Securities Act of 1933, as
amended.





Funds
received by the Company in the amount of $475,000 were immediately transferred
to Chatsworth Data Corporation for use in its operations.








ITEM
3. DEFAULTS UPON SENIOR SECURITIES





On June
20, 2008, the Company issued a $220,000, non-secured loan to MKM Opportunity
Master Fund, Ltd. (MKM) for working capital purposes.  The loan
originally bore interest of 12% per annum, with principal and accrued interest
due July 20, 2008.    As of October 31, 2008, the Company
had not repaid the loan and, as such, the loan was in default.  As a
consequence of the default, the loan interest increased to 18% per annum,
payable on maturity.





The
Company is currently in default on the notes to the selling
shareholders.  Interest of approximately $25,000 was due on September
30, 2008 has not been paid.  The principal payment of $500,000 due on
October 31, 2008 has not been paid.   The Company does not
anticipate on having funds to pay the interest of approximately $25,000 due on
the selling shareholder notes which will become due on December 31,
2008.





On
December 1, 2006, CDC entered into a revolving credit agreement with a financial
institution. At October 31, 2008, outstanding borrowings under this agreement
were $1,049,892, which was in excess of its borrowing base by approximately
$156,000.  Beginning July 31, 2008, the line of credit requires the Company
to meet certain financial covenants, which the Company did not
meet.  The Company was notified on December 11, 2008 by its lending
bank that it is default under the borrowing agreement.  The agreement
provides for a 20 day cure period.  The Company is seeking financing
to replace the existing line of credit.  There is no assurance that
the Company will be able to obtain such financing.





On April
3, 2008, the Company reached an agreement with investors holding certain
registration rights under an August 2006 Investor Rights Agreement and the Company issued promissory notes to the
investors in the aggregate amount of $754,600.  One provision
of the notes payable is that if the Company admits an inability to pay its debts
generally as they become due, the notes payable are deemed to be in
default.  Accordingly, the notes payable, registration rights
agreement are deemed to be in default as of October 31, 2008, and as a
consequence, the loans became due immediately, and loan interest increased to
18% per annum.





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





Not
applicable.


25


ITEM
5. OTHER INFORMATION




Not
applicable.





ITEM
6. EXHIBITS




(a)
Exhibits




The
exhibits listed in the Exhibit Index are filed as a part of this
report.


26





SIGNATURES




In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




CHATSWORTH
      DATA SOLUTIONS, INC.Date:  December
      17, 2008
                  /s/ Sidney L. AndersonSidney
      L. Anderson
                    Chief
      Executive Officer,
President


27


INDEX
TO EXHIBITS.





Exhibit
                    Number
                  
                  Description31.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certification by the Chief Executive
      Officer.31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certification by the Chief Financial
      Officer.32.1
                  
                  Certifications
      by the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.


28