10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-QSB

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended December 31, 2005

COMMISSION FILE NUMBER     333-69414

SOURCE DIRECT HOLDINGS, INC.

 (Exact name of registrant as specified in charter)

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

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

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

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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of February 16, 2006, the Company had outstanding 81,571,400 shares of its common stock, no par value.

TABLE OF CONTENTS

ITEM NUMBER AND CAPTION		PAGE
PART I
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND PLAN OF OPERATIONS	7
ITEM 3.	CONTROLS AND PROCEDURES	16
PART II
ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 2.	UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS	17
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS	17

2

PART I

ITEM 1. FINANCIAL STATEMENTS

SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Balance Sheets

December 31, 2005

	December 31, 2005 (Unaudited)		June 30, 2005 (Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	9,274	$	1,406
Accounts Receivable		60,102		123,741
Inventory		385,640		332,802
Prepaid Expenses		33,200		150,000
Total Current Assets		488,216		607,949
Property and Equipment
Property and equipment		886,084		884,084
Less: Accumulated Depreciation		(51,012)		(29,954)
Net Property and Equipment		835,072		854,130
Other Assets
Intangible assets		115,000		115,000
Accumulated Amortization		(15,973)		(12,139)
Net Other Assets		99,027		102,861
TOTAL ASSETS	$	1,422,315	$	1,564,940
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable	$	80,352	$	95,135
Accrued Expenses		62,544		38,757
Current Portion of Building Loan		-		4,284
Notes Payable		129,263		136,263
Shareholder Loan		305		-
Total Current Liabilities		272,464		274,439
Long-Term Liabilities
Building Loan, net of current portion		763,691		762,114
Total Long-Term Liabilities		763,691		762,114
Total Liabilities		1,036,155		1,036,553
Stockholders' Equity
Common Stock -- $.001 par value; 200,000,000 shares authorized; 83,507,975 issued and outstanding		83,508		79,002
Additional paid-in capital		2,961,274		2,584,548
Accumulated deficit		(2,658,622)		(2,135,163)
Total Stockholders' Equity		386,160		528,387
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,422,315	$	1,564,940

See accompanying notes to financial statements.

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SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Statement of Operations

(Unaudited)

	For the Three		For the Three		For the Six		For the Six
	Months Ended		Months Ended		Months Ended		Months Ended
	31-Dec-05		31-Dec-04		31-Dec-05		31-Dec-04
Revenues	$	70,601	$	35,908	$	129,977	$	69,406
Cost of Goods Sold		23,784		15,656		47,569		33,776
Gross Profit		46,817		20,252		82,408		35,630
General and admin. Expense		283,039		211,178		566,602		389,426
Operating Loss		(236,222)		(190,926)		(484,194)		(353,796)
Interest income		-		-		-		-
Interest expense		(23,017)		-		(39,266)		-
Gain/(loss) on asset sales		-		-		-		-
Income taxes		-		-		-		-
Net Loss	$	(259,239)	$	(190,926)	$	(523,460)	$	(353,796)
Net Loss per share		(0.01)		(0.01)		(0.01)		(0.01)
Weighted Average Number
of shares outstanding		82,583,734		69,275,259		81,531,683		69,275,259

See accompanying notes to financial statements.

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 SOURCE DIRECT HOLDINGS, INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

	For the six		For the six
	Months Ended		Months Ended
	31-Dec-05		31-Dec-04
Cash Flow Used for Operating Activities
Net Loss	$	(523,460)	$	(353,796)
Adjustments to Reconcile net loss to
net cash used for operating activities:
Depreciation		21,058		4,900
Amortization Expense		3,834		3,834
(Increase)/Decrease in Trade Receivables		63,639		3,802
(Increase)/Decrease in Inventory		(52,838)		(181,750)
Increase/(Decrease) in employee advance		-		(5,437)
Increase/(Decrease) in accounts payable		(14,783)		10,085
(Increase)/Decrease in Prepaid Expenses		154,504		(12,602)
Increase/(Decrease) in payroll Liabilities		23,786		822
(Decrease) in income taxes payable				(60)
Net Cash Flows Used for Operating Activities		(324,260)		(530,202)
Cash Flows used for Investing Activities
Purchase equipment		(2,000)		(27,465)
Acquisition of Intangible Assets		-		-
Net Cash Flows Used for Investing Activities		(2,000)		(27,465)
Cash Flows used for Financing Activities
Proceeds from Equipment Loans		-		-
Proceeds from Shareholder Loans		305		(36,563)
Payments on Shareholder Loans		-		-
Net borrowing (payments) on long-term debt		(2,706)
Increase (Decrease) in Note Payable		(7,000)		-
Proceeds from stock issuance		343,529		655,000
Net Cash Flows Used for Financing Activities		334,128		618,437
Net Increase / (Decrease in cash		7,868		60,770
Beginning Cash Balance		1,406		955
Ending Cash Balance	$	9,274	$	61,725
Supplemental Disclosures
Interest paid		39,266		-
Income taxes paid		-		-

See accompanying notes to financial statements.

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Source Direct Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

December 31, 2005

(Unaudited)

Note 1

ORGANIZATION AND INTERIM FINANCIAL STATEMENTS

Interim financial statements-The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles for complete financial statements generally accepted in the United States of America. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of December 31, 2005. There has not been any change in the significant accounting policies of Source Direct Holdings, Inc. for the periods presented. The results of operations for the three months ended December 31, 2005 are not necessarily indicative of the results for a full-year period.  It is suggeste d that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2005 filed with the Securities and Exchange Commission (the “SEC”).

Note 2

INVENTORY

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

	December 31, 2005
Raw Materials	$195,639
Finished Goods	$190,001
Total Inventory	$385,640

Note 3

ISSUANCE OF COMMON SHARES AND WARRANTS

During the period from July 1, 2005 to September 30, 2005 a shareholder exercised a total of 703,600 warrants at $0.125 per share from October 1, 2005 to December 31, 2005 a shareholder exercised 406,000 warrants at $0.125 per share. These shares have not yet been issued in certificate form, as per request of the shareholder.

During the period from October 1, 2005 through December 31, 2005, The company issued shares of common stock for $155,579 for cash.  500,000 shares of restricted common stock were issued for advertising services on November 18, 2005 at a value of $37,703. 

Note 4

RELATED PARTY / SHAREHOLDER LOANS

There is currently a Shareholder Loan to the Company in the amount of $305.  The loan is unsecured, due on demand, and non-interest bearing.

Note 5

NOTES PAYABLE

The Company has borrowed funds for operating purposes from an individual pursuant to a note.  As of December 31, 2005 the balance due on the note consisted of $50,000 principal and $7,100 of accrued interest.  This note is currently in default.  The Company is working with the individual to make payment arrangements.

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Note 6

GOING-CONCERN

The Company has accumulated losses since inception totaling $2,658,622 and was still developing operations as of December 31, 2005.  Financing for the Company’s limited activities to date has been provided primarily by the issuance of stock, by advances from Stockholders and by borrowing funds.  The Company’s ability to achieve a level of profitable operations and/or additional financing impacts the Company’s ability to continue as it is presently organized.  Management continues to develop its planned principal operations.  Should management be unsuccessful in its operating activities, the Company may experience material adverse effects.

Note 7

SUBSEQUENT EVENTS

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

On December 9, 2005, the Company filed a lawsuit in the Third Judicial District Court in Salt Lake County, Utah, against Integritas, Inc., International Marketing Group, Inc., Corporate Capital, Inc., Jonquil International, Inc., Asset Growth Strategies, Inc., Reyna Enterprises, Inc., OmniCap, Inc., Phillip Flynn and Scott Phillip Flynn.  The Company's complaint alleges that the Company was fraudulently induced by the defendants to enter into certain marketing, consulting, and distribution contracts.  Based on the fraudulent inducement and the Company's rescission of the contracts, the Company seeks to recover the approximately 8,000,000 shares of Source Direct stock that were issued to the defendants pursuant to the contracts.  The defendants have counterclaimed against the Company, alleging that the Company was not authorized to place a stop hold order on the shares issued to the defendants, and that that the Compa ny is liable for any decline in the market value of the stock that occurred after September 7, 2005.  The Company denies that it is liable to the defendants and intends to defend vigorously against the counterclaim and prosecute its own claims for affirmative relief against the defendants.

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

Forward Looking Statements

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

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

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

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

COMPANY HISTORY

Source Direct, Inc. (“SDI”) was incorporated under the laws of the State of Idaho on July 8, 2002.  Since its inception, SDI was in the business of promoting and marketing cleaning products and supplies, and developing new products.  

On October 14, 2003, SDI, the predecessor of the Company, merged with a wholly owned subsidiary of Global Tech Capital Corp. (“GTCC”), a publicly traded Nevada corporation which was incorporated on July 21, 1998.  As a result of the merger, SDI was the surviving entity, and became a wholly owned subsidiary of GTCC.  GTCC’s name was then changed to Source Direct Holdings, Inc.

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

SUMMARY OF OUR BUSINESS

We acquired the formulas for two cleaning products. These products are Simply Wow® and Stain Pen®. The formulas for these products were developed by Deren Z. Smith, the President of Source Direct and one of its directors.  Kevin Arave, the Secretary/Treasurer of Source Direct and a director, also assisted in the funding for the development of the formulas.  Any and all rights and interests of these parties in and to the formulas or the trademarks were transferred to the Company for 11,500,000 shares each of the Subsidiary. These shares converted into 17,250,000 of the parent company as a result of the Merger.

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Additionally, the company developed a new product called Odor Annihilator in May 2005 and Tuff Buff ® wash-n-wax in November 2005.

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

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

HOUSEHOLD PRODUCTS

Simply Wow®

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

1.

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

2.

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

3.

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

4.

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

5.

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

Stain Pen®

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

Simply Wow Odor Annihilator™

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

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Odors are caused by organisms that send off molecules that your nose detects. Air fresheners try to overpower the odor by covering it up. Fabric refreshers try to remove the odor, but Simply WoW® Odor Annihilator™ goes further by removing the source of the odor so that it doesn't return.  Odor control consists of perfumes or other masking agents that are applied to hid the odor.  This however does not decrease the odor itself, but ads to it to try and make it les objectionable.  Unfortunately, the odor becomes overpowering, or only less objectionable than before.  Odor Annihilator™ annihilates the source of the odor first by applying a fast-acting neutralizer that binds the odor-causing molecules.  This reduces their volatility and prevents them from reaching your nose.  Then a special select bacteria degrades the odor-causing molecules, destroying them by converting them into microb ial cell components, carbon dioxide and water.  Thereby eliminating the odor at it’s source.

AUTOMOTIVE PRODUCTS

Simply Wow® Tuff Buff®

Source Direct has launched its newest all-organic, waterless wash-n-wax product. Tuff Buff® provides solutions for the discerning driver, professional and hobbyist alike, who demand the highest quality for all their automotive needs -- and it does so at a price point that means exceptional volume sales for Source Direct through its rapidly expanding distribution network. Tuff Buff® contains no acids, V.O.C.s, petroleum distillates, Hexane, or Silicone, eliminating annoying "fish eyes" in the paint and making it safe for even the most prestigious automotive retailers. Tuff Buff® restores factory shine, safely removes bugs and bird droppings, cleans and protects all finishes including plexiglass and black chrome, is safe for aftermarket window tint, and will not leave white residue in seams. Spray and wipe for a perfect 15 minute wash and wax. Tuff Buff® polishes & protects virtually any hard nonporous surface including windshields.

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

Simply Wow Odor Annihilator

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

INDUSTRIAL PRODUCTS

Simply Wow Industrial Cleaner   

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

·

Safe and effective

·

Biodegradable

·

Non-abrasive

·

Non-flammable

·

Industrial strength

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PRODUCT PRODUCTION

We currently produce our products in-house Stain Pen®, Simply Wow All Purpose Cleaner is produced in our facility. We also have agreed with other production facilities to help in manufacturing of our products, in the event we could not produce anticipated future needs.  We also believe other production facilities are available if needed to meet any demand for production. We also believe sufficient quantities of raw materials for our products are reasonably available such that production would not be unreasonably delayed, although we do not have any contracts for production of these raw materials. We have not secured any form of financing for significant production of our products. We will attempt to secure funding either from private sources or through a bank loan or factoring arrangement. There is no assurance that we will be able to obtain any of these sources of financing, or that if we could obtain it that the fin ancing terms would be favorable to the company.

Since inception, we have spent approximately $71,884 on research and development of the business, our products, and our marketing strategy.

PRODUCT DISTRIBUTION

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

·

Morgan & Sampson SCA,

·

Daymon Associates, Inc.

·

Bridgeworks  Marketing & Sales, Inc. (Canada)

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

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

·

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

·

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

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

Under the Agreement, Daymon agreed to devote its efforts to the sale of the Company's products during the term of the agreement, which is one year, with automatic one-year renewals unless terminated by either party on 90 days' written notice. Daymon agreed to provide weekly sales data, by location, as well as analytical reviews of such data. Daymon agreed to devote adequate facilities and personnel to perform the services required in the Agreement.

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

In addition to the above agreements, we also utilize internal marketing efforts to advertise and distribute our products. In October 2005, we appointed a new National Director of Business Development. Sharon Kirkwood brings 27 years of high-level experience in the consumer packaged goods industry.  Ms. Kirkwood also has many key industry contacts.

Source Direct became a title sponsor on a NASCAR sponsorship agreement with Erik Darnell and Darnell Motor Sports for the 2004 and 2005 NASCAR racing seasons. Erik Darnell is a featured competitor in "Roush Racing: Driver X," a 13-week series debuting on the Discovery Channel.  After 13 weeks of intense competition, competing on two of the toughest racetracks in NASCAR, selected out of 1,700 applicants and winning the approval of ROUSH RACING's toughest judges, Erik Darnell was recognized as the best talent for 2006.   The Company is one of Erik Darnell’s primary sponsors.

In January 2005, our internal marketing staff contracted with Bi-Mart Membership Discount Stores. The Company has begun shipments of our proprietary 3-ounce Stain Pen™ to all Bi-Mart Membership Discount Stores throughout the northwest region.

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

During the quarter ended September 30, 2005, our internal marketing staff expanded our distribution into the Home Shopping Network catalogue, Improvements. Home Shopping Network is a global, multi-channel retailer reaching more than 85 million U.S. households. Management believes this will offer greater distribution opportunities with this mega-retailer, as HSN expands its catalogue portfolio through numerous acquisitions currently under way.

Nationwide brand preference for Stain Pen® is also being supported with advertising in the September 2005 issues of two of America's women's magazines: Redbook and Woman's Day.

In November 2005, we attended the SEMA Show in Las Vegas where we introduced our automotive specialty products. This gave our products exposure to automotive enthusiasts and key domestic and international distributors. The SEMA Show attracts more than 100,000 industry leaders from over 100 countries.

In December 2005, Simply Wow® was featured on Epinions.com, a popular online consumer reviews hot spot provided as a service of Shopping.com, Inc., an eBay company. Epinions provides a trusted, global, grassroots resource of unbiased consumer insights, in-depth product reviews, and personal recommendations by the general public. Validation on Epinions.com translates into enormous consumer awareness, instant credibility and huge potential for mass-market penetration of featured products.

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Significant Customers

                Through December 31, 2005, we received revenues through sales of our products by three divisions of Albertsons®: the Salt Lake division, the Denver division, and the Vacaville, California division. We believe that we have a good relationship with these divisions. Additionally, we have received purchase orders from additional divisions of Albertsons®. Also, we have received orders from ATA Retail Services.  In June 2005, we began shipments of the Stain Pen™ product to the Flying J Travel Plaza chain. We continue to develop many different outlets for our unique line of products.  Simply Wow® debuted January 21, 2006 at 12:00 AM (ET). Exclusive to QVC, this multiple-unit Simply Wow package included two 32oz bottles of Simply Wow cleaner and was sold in a QVC January sales blitz. Odor Annihilator™, an all-organic, biodegradab le odor remover, has been accepted for distribution to over 5,000 major retail outlets nationwide via the highly successful ATA Retail Services network.  In February 2006 we received an order for Stain Pen®, for the popular LTD Commodities Catalog, which is known for shopping the world in order to sell the best merchandise from house wares, gifts, toys and apparel. With the addition of these new customers and increased sales Source Direct views this as positive steps in making the company profitable.

Principal Suppliers

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

COMPETITION

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

DESCRIPTION OF PROPERTY

Source Direct purchased a manufacturing facility in February 2005 located at 4323 Commerce Circle, Idaho Falls, Idaho. The property consists of approximately 3,780 square feet of office space, and approximately 10,000 square feet of warehouse and manufacturing space.  The Company anticipates that the new facilities will be suitable, appropriate, and adequate for its needs for the foreseeable future. Our monthly obligation for interest only payments for this facility total $6,681.45.

                We currently own the following trademarks and web domains:

                Trademarks:

                Simply Wow®

                Stain Pen®

                Prompt™

                Works On The Spot®

                Tuff Buff™

                Web Domains:

·

http://www.simplywow.com

·

http://www.worksonthespot.com

·

http://www.multipurposecleaner.com

·

http://www.stainpen.com

·

http://www.stainstick.com

·

http://www.laundrystain.com

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·

http://www.organicsimplywow.com

·

http://www.tuffbuff.com

·

http://www.allpurposecleaner.com

Risk Factors

There are various risks involved in any investment in the Company, including those described below.  Any shareholder or potential investor in the Company should consider carefully these risk factors.

·

The financial statements of the Company include a "going concern" limitation.

·

The Company has a limited operating history and may require additional funding.

·

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

·

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

·

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

·

There is no active public market for the common stock of the Company.

·

The Company’s shares are designated as penny stock.

·

The market for the Company’s shares is volatile.

·

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

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

Financial Condition and Changes in Financial Condition

Three Months ended December 31, 2005 and 2004

Revenues for the quarter ended December 31, 2005, totaled $70,601. These revenues were primarily generated from purchase orders from various retail stores including Albertsons®, Wal-Mart®, ATA Retail Services and the Flying J Travel Plaza chain. We anticipate receiving additional orders from these sources as well as from the other distribution agreements that are in place, but we can give no assurance that such sales will occur.  Our cost of goods sold for these sales totaled $23,784, which resulted in a gross profit margin of $46,817 or 66.3% of sales. Revenues for the prior year quarter totaled $33,908 with a gross margin of $20,252.

Operating expenses for the quarter ended December 31, 2005 totaled $283,039. Compensation related expenses were $71,503 a decrease of $21,847 from the prior quarter. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $104,812. We incurred $56,208 in legal and accounting related expenses as a result of the various marketing agreements we entered into and expenses related to fulfilling our filing requirements with the SEC. We did not incur any research and development expenses during the quarter. The remaining expenses were incurred for general business purposes.

Operating expenses for the quarter ended December 31, 2004, totaled $211,178. Compensation related expenses were $53,959. Travel expenses incurred for product promotion and general business activities totaled $14,247. We incurred $18,780 in legal and accounting related expenses. Research and development expenses totaled $5,490 for the quarter. The remaining expenses were incurred for general business purposes.

Six Months ended December 31, 2005 and 2004

We generated revenues from sales of our cleaning products of $129,977 during the six months ended December 31, 2005. Our cost of goods sold for these sales totaled $47,569, which resulted in a gross profit margin of $82,408 or 63.4% of sales. Revenue for the six-month period ended December 31, 2004 was $69,406 with a gross margin of $35,630.

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 Operating expenses for the six months ended December 31, 2005 totaled $566,602. Compensation related expenses were $164,854. Travel, advertising and marketing expenses incurred for product promotion and general business activities totaled $224,360. We incurred $75,808 in legal and accounting related expenses as a result of the various marketing agreements we entered into and expenses related to fulfilling our filing requirements with the SEC. The remaining expenses were incurred for general business purposes.

Operating expenses for the six-month period ended December 31, 2004, totaled $389,426. Compensation related expenses were $145,308. Travel expenses incurred totaled $24,393. We incurred $55,915 in legal and accounting fees. Research and development expenses totaled $11,491. The remaining expenses were incurred for general business purposes.

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

Liquidity and Capital Resources:

Since inception to December 31, 2005, we have funded our operations from the sale of securities and loans.

During the period from inception through September 30, 2005, we sold a total of 7,454,600 shares of our common stock for total proceeds of $749,829.

During the quarter ended December 31, 2005, we sold 2,096,575 shares of our common stock for total proceeds of $104,829.

We have utilized the proceeds from these stock sales to fund our various marketing and promotion efforts and general business activities.  

We have also funded our operations with loans from individuals. As of December 31, 2005, we were indebted to three individuals for a total amount of $129,263 including accrued interest.

On January 13, 2005, the Company entered into agreements to purchase a new headquarters building. The purchase price for the property was $800,000. Pursuant to the terms of a promissory note, the Company was required to pay $5,882.19 on or before March 3, 2005, and the same amount on or before the third of each month thereafter. The Company had made the required payments through the date of this Report.  The Note bears interest at a rate of 11.25% and matured on January 13, 2006.

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

At December 31, 2005, we had cash of $9,274, and net working capital of $215,752.  Our cash requirements for the next twelve months will depend significantly on the number of purchase orders we receive for our products and our ability to secure financing for these orders.  We anticipate that we will be able to secure either a business loan or a factoring arrangement for any purchase order that exceeds our current ability to fund internally.  However, we have no current agreements or arrangements, which would provide such funding.  We have also not negotiated the terms of such funding and cannot provide any assurance that the terms will be favorable for the company.  We are also unable to predict the number of orders for our products, or if we receive additional orders, the amount of operating profit such orders would generate.  Therefore, we are unable to predict our future cash requirements until we secu re additional purchase orders.

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

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

Plan of Operation

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

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

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

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

New Accounting Pronouncements

Source Direct does not expect the adoption of recently issued accounting pronouncements to have a significant impact on Source Direct’s results of operations, financial position, or cash flow.

ITEM 3.  CONROLS AND PROCEDURES

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

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As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Certifying Officers carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2005. Their evaluation was carried out with the participation of other members of the Company’s management.  Based upon their evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Certifying Officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts a nd expenditures are being made only in accordance with the authorization of the Company’s Board of Directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements. There has been no change in the Company’s internal control over financial reporting that occurred in the quarter ended December 31, 2005, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On December 9, 2005, Source Direct Holdings, Inc. filed a lawsuit in the Third Judicial District Court in Salt Lake County, Utah, Civil No. 050921794, against Integritas, Inc., International Marketing Group, Inc., Corporate Capital, Inc., Jonquil International, Inc., Asset Growth Strategies, Inc., Reyna Enterprises, Inc., OmniCap, Inc., Phillip Flynn and Scott Phillip Flynn.  Source Direct’s complaint alleges that it was fraudulently induced by the defendants to enter into certain marketing, consulting, and distribution contracts.  Based on the fraudulent inducement and Source Direct’s rescission of the contracts, Source Direct seeks to recover the approximately 8,000,000 shares of Source Direct stock that were issued to the defendants pursuant to the contracts.  The defendants have counterclaimed against Source Direct, alleging that Source Direct was not authorized to place a stop hold order on the shares iss ued to the defendants, and that that Source Direct is liable for any decline in the market value of the stock that occurred after September 7, 2005.  Source Direct denies that it is liable to the defendants and intends to defend vigorously against the counterclaim and prosecute its own claims for affirmative relief against the defendants.

ITEM 2.  UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

             During the quarter ended December 31, 2005, a shareholder purchased a total of 2,096,575 shares at $0.05 per share.  Also in the same quarter 406,000 warrants were exercised at $.0125 per share.   These shares have not yet been issued in certificate form, as per request of the shareholder. In addition 500,000 shares of restricted common stock were issued for advertising services in November 2005 at a value of $37,703. 

ITEM 5. OTHER INFORMATION

As of December 31, 2005 a shareholder has loaned the Company $305.  The loan is unsecured, due on demand, and non-interest bearing.

ITEM 6. EXHIBITS

a.  Exhibits

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31.1

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)

31.2

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)

32.1

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. (1)

_____________________

(1)  Filed herewith

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Signatures

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

	(Registrant)      Source Direct Holdings, Inc.
Date:  February 21, 2006	By: /s/ Deren Z. Smith
	Deren Z. Smith, President (Principal executive officer)
Date:  February 21, 2006	By: /s/ Kevin Arave
	Kevin Arave, Treasurer (Principal financial officer and chief accounting officer)

19

EX-31

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Deren Z. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Source Direct Holdings, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2006
	/s/ Deren Z. Smith
	Deren Z. Smith
	President and Chief Executive Officer

EX-31

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Kevin Arave, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Source Direct Holdings, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2006	/s/ Kevin Arave
	Kevin Arave
	Treasurer and Chief Financial Officer

EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Source Direct Holdings, Inc. (the “Company”) on Form 10-QSB for the period ended December 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated:  February 21, 2006

/s/ Deren Z. Smith

Name: Deren Z. Smith

Title:  Chief Executive Officer

Dated:  February 21, 2006

/s/ Kevin Arave

Name: Kevin Arave

Title:  Chief Financial Officer