10-Q

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

o TRANSITION 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 x No 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  o
NNon-accelerated filer  o  (Do not check if a smaller reporting company)	Smaller reporting company x

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

Yes o No 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 INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed consolidated balance sheets as of October 31, 2008
	(Unaudited) and January 31, 2008	3
	Condensed consolidated statements of operations for the three and
	nine months ended October 31, 2008 and 2007 – Unaudited	4
	Condensed consolidated statement of changes in stockholders'
	equity (deficiency) for the nine months ended October 31, 2008 – Unaudited	5
	Condensed consolidated statements of cash flows for the nine months
	ended October 31, 2008 and 2007 – Unaudited	6
	Notes to condensed consolidated financial statements – Unaudited	7
Item 2.	Management's Discussion and Analysis or Plan of Operations	16
Item 3.	Controls and Procedures	23
PART II	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	26
Item 6.	Exhibits	26
	SIGNATURES	27

2

CHATSWORTH DATA SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

October 31 2008 (Unaudited) and January 31, 2008

	October 31, 2008 (Unaudited)			January 31, 2008
ASSETS
Current Assets
Cash	$	181,804		$	72,329
Accounts receivable, less allowance for doubtful accounts of $16,193 and $16,367		601,818			1,377,486
Inventories		1,431,261			1,550,974
Prepaid expenses		28,329			40,457
Total current assets		2,243,212			3,041,246
Property and equipment, net		328,773			377,061
Goodwill		-			3,926,643
Intangible assets, net		-			1,639,640
Other assets		58,182			24,734
Total assets	$	2,630,167		$	9,009,324
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable	$	1,181,906		$	1,181,750
Accrued liabilities		320,751			285,955
Line of credit		1,049,892			1,797,593
Current portion of notes payable		1,720,000			1,000,000
Registration payment penalty promissory note		754,600			-
Total current liabilities		5,027,149			4,265,298
Notes payable, long term		-			500,000
Registration payment penalty promissory notes		-			754,600
Total liabilities		5,027,149			5,519,898
Commitments and contingencies
Stockholders' 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			312
Additional paid-in capital		8,410,326			6,493,184
Accumulated deficit		(10,807,876	)		(3,004,070	)
Total stockholders' equity (deficiency)		(2,396,982	)		3,489,426
Total 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		$	6,536,237
Cost of sales		951,047			1,458,903			2,776,221			4,173,837
Gross profit		489,422			716,260			1,290,558			2,362,400
Operating expenses
General and administrative		711,229			917,286			3,153,907			3,106,920
Depreciation		34,491			36,730			115,892			94,398
Amortization of intangible assets		248,760			248,760			746,280			746,280
Loss 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				Additional
	Number of Shares		Amount		Paid-in Capital		Accumulated Deficit			Total
Balance, January 31, 2008		31,250,000	$	312	$	6,493,184	$	(3,004,070	)	$	3,489,426
Sale of common stock		25,646,000		256		1,282,044		-			1,282,300
Fair value of vested stock options		-		-		112,108		-			112,108
Fair value of stock-based employee compensation		-		-		522,990		-			522,990
Net 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 Activities
Net 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			803,947
Fair value of stock based employee compensation		522,990			-
Fair value of vested stock options		112,108			182,175
Impairment of goodwill and intangible assets		4,820,003			-
Income tax benefit		-			(551,554	)
Changes in operating assets and liabilities
Accounts receivable		775,668			(146,876	)
Inventories		119,713			(878,135	)
Other assets		(33,448	)		16,937
Prepaid expenses		12,128			6,445
Accounts payable		156			837,338
Accrued liabilities		34,796			(402,423	)
Accrued registration penalty payment		-			337,000
Net cash used in operating activities		(612,011	)		(1,306,805	)
Cash Flows from Investing Activities
Purchase of property and equipment		(33,113	)		(183,798	)
Net cash used in investing activities		(33,113	)		(183,798	)
Cash Flows from Financing Activities
Proceeds from issuance of common stock		1,282,300			1,577,593
Proceeds 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			1,327,593
Increase (decrease) in cash and cash equivalents		109,475			(163,010	)
Cash and cash equivalents, beginning of period		72,329			341,676
Cash and cash equivalents , end of period	$	181,804		$	178,666
Supplemental cash flow information
Cash 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	7,787,500
Warrants 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	$	1,500,000
Notes payable – MKM Opportunity Master Fund Ltd.		220,000		-
		1,720,000		1,500,000
Less current maturities		1,720,000		1,000,000
Long 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.  

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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.

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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 Price
Balance at January 31, 2008		7,437,500		$	0.33
Granted		550,000			0.07
Exercised		-			-
Cancelled		(200,000	)		0.40
Balance 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 Exercisable
		Weighted
	Number of	Average
	Shares	Remaining	Weighted
Range of	Underlying	Contractual	Average	Shares Under	Weighted
Exercise 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.

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

	Shares
Nonvested at January 31, 2008		2,411,805
Granted		550,000
Vested		(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 Price
Warrants outstanding at February 1, 2008		12,103,000	$	0.30
Warrants 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 Exercisable
	Number of						Number of
	Shares		Remaining		Weighted		Shares		Weighted
	Underlying		Contractual		Average		Underlying		Average
Exercise 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

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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.

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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.

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

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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	$	1,869,192
Education		261,813		1,256,074
Voting		196,203		483,840
Medical		126,221		198,747
Others		215,832		196,444
Total Optical Mark Readers		1,927,526		4,004,297
Impact recorders/indicators		2,139,253		2,342,614
Cablemaster		-		189,326
Total	$	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.

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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.

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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 agreement by $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.

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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.

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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.

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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.

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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.

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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.

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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. Anderson
	Sidney L. Anderson Chief Executive Officer, President

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INDEX TO EXHIBITS.

Exhibit Number	Description
31.1	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.

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Sidney L. Anderson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Chatsworth Data Solutions, Inc.

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant's other certifying officer(s) 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 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 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(s) 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 the 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 control 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:  December 17, 2008	/s/ Sidney L. Anderson
	Sidney L. Anderson
	Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Clayton Woodrum, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Chatsworth Data Solutions, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant's other certifying officer(s) 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 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 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(s) 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 the 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 control 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:  December 17, 2008	/s/ Clayton Woodrum
	Clayton Woodrum
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS OF 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

I, Sidney L. Anderson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of  Chatsworth Data Solutions, Inc. on Form 10-Q for the fiscal quarter ended July 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Chatsworth Data Solutions, Inc.

Date:  December 17, 2008	/s/ Sidney L. Anderson
	Sidney L. Anderson
	Chief Executive Officer and President

I, Clayton Woodrum, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Chatsworth Data Solutions, Inc. on Form 10-Q for the fiscal quarter ended July 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Chatsworth Data Solutions, Inc.

Date: December 17, 2008	/s/ Clayton Woodrum
	Clayton Woodrum
	Chief Financial Officer