10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2008

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the transition period from ____ to ____

Commission File Number: 000-9500

Secured Digital Storage Corporation

(Exact Name of Registrant as Specified in its Charter)

New Mexico	85-0280415
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2001 Butterfield Road, Suite 1050, Downers Grove, IL 60615

(Address of Principal Executive Offices, Zip Code)

(630-271-8593)

(Registrant’s Telephone Number, Including Area Code) 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 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 definitions of “large accelerated filer”, “accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o Non-accelerated filer  o 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

As of November 12, 2008, 19,507,479 shares of Common Stock, $.001 par value were outstanding.

SECURED DIGITAL STORAGE CORPORATION

CONTENTS TO FORM 10-Q

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4-5
	Consolidated Statements of Cash Flows	6
	Consolidated Statements of Stockholders’ Equity	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4T.	Controls and Procedures	17
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	18
Item 6.	Exhibits	18
Signatures		19
Exhibit Index		20

2

PART 1 – FINANCIAL INFORMATION

SECURED DIGITAL STORAGE CORPORATION

Consolidated Balance Sheets

	(Unaudited) September 30, 2008			(Audited) December 31, 2007
ASSETS:
Current Assets:
Cash	$	163,057		$	384,095
Prepaid Expenses		-			316,316
Total Current Assets		163,057			700,411
Noncurrent Assets
Net Fixed Assets		39,044			325,529
Other Assets		332,000			161,523
Total Noncurrent Assets		371,044			487,052
TOTAL ASSETS	$	534,101		$	1,187,463
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Accounts Payable	$	596,191		$	504,930
Accrued Expenses		1,186,830			68,519
Current Portion of Debt		1,804,387			480,335
Total Current Liabilities		3,587,408			1,053,784
Noncurrent Liabilities:
Long-Term Debt		-			314,643
Total Liabilities		3,587,408			1,368,427
Stockholders' Equity:
Common Stock, $.001 par value; 50,000,000 shares authorized; 19,507,479 issued and outstanding at September 30, 2008 and 10,753,604 shares issued and outstanding at December 31, 2007		19,507			10,754
Additional Paid-in Capital		5,649,266			3,492,548
Retained Earnings (Deficit)		(8,722,080	)		(3,684,266	)
Total Stockholders' Equity (deficit)		(3,053,307	)		(180,964	)
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)	$	534,101		$	1,187,463

The accompanying notes are an integral part of these consolidated financial statements

3

SECURED DIGITAL STORAGE CORPORATION

Consolidated Statements of Operations

(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
Revenue:	$	27,750		$	-
Operating Expenses:
Compensation		1,317,079			2,718
Professional Services		955,456			108,658
Occupancy		156,238			-
Operating Leases		232,950			-
Depreciation		114,923			-
Other Administrative Expense		1,576,688			61,676
Total Operating Expenses		4,353,334			173,052
Total Operating Profit (Loss)		(4,325,584	)		(173,052	)
Interest Expense, net		712,230			203,119
Loss Before Taxes		(5,037,814	)		(376,171	)
Taxes		-			-
Net Loss	$	(5,037,814	)	$	(376,171	)
Per Share Information:
Weighted average number of common shares outstanding		18,231,228			1,385,576
Net Loss per Common Share	$	(0.28	)	$	(0.27	)

The accompanying notes are an integral part of these consolidated financial statements

4

SECURED DIGITAL STORAGE CORPORATION

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	September 30,
	2008			2007
Revenue:	$	27,750		$	-
Operating Expenses:
Compensation		364,719			2,718
Professional Services		41,460			29,579
Occupancy		78,260			-
Operating Leases		79,167			-
Depreciation		38,641			-
Other Administrative Expense		1,237,441			26,247
Total Operating Expenses		1,839,688			58,544
Total Operating Profit (Loss)		(1,811,938	)		(58,544	)
Interest Expense, net		264,053			88,319
Loss Before Taxes		(2,075,991	)		(146,863	)
Taxes		-			-
Net Loss	$	(2,075,991	)	$	(146,863	)
Per Share Information:
Weighted average number of common shares outstanding		19,507,479			1,554,833
Net Loss per Common Share	$	(0.11	)	$	(0.09	)

The accompanying notes are an integral part of these consolidated financial statements

5

SECURED DIGITAL STORAGE CORPORATION

Consolidated Statements of Cash Flows

(Indirect Method) (Unaudited)

	Nine Months Ended September 30,
	2008			2007
Cash Flows from Operating Activities:
Net Loss	$	(5,037,814	)	$	(376,171	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		115,973			-
Stock Based Compensation Expense		198,692			2,718
Stock Warrant Expense Issued with Debt		633,349			73,426
Write-off of Development Center Assets		1,080,105
Increase in Prepaid Expenses		204,429			-
Increase in Accounts Payable		136,371			60,743
Increase (decrease) in Accrued Expenses		198,464			53,588
Net Cash Flows Used by Operations		(2,470,431	)		(185,696	)
Cash Flows from Investing Activities:
Purchase of Equipment & Leases		(93,447	)		-
Cash Flows Used by Investing Activities		(93,447	)		-
Cash Flows from Financing Activities:
Repayments of Debt		(352,985	)		(353,000	)
Issuance of Debt		1,413,750			738,500
Issuance of Common Stock		1,210,100			-
Exercise of Stock Warrants to Common Stock		71,975			-
Net Cash Flows Provided by Financing Activities		2,342,840			385,500
Net Increase (Decrease) in Cash		(221,038	)		199,804
Cash at Beginning of Period		384,095			345
Cash at End of Period	$	163,057		$	200,149
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest	$	87,570		$	92,000
Cash Paid for Income Taxes	$	–		$	–
Supplemental Disclosure of Cash Flow Information
Conversion of Debt to Common Stock	$	200,000		$	–
Common Stock Committed for Subscription for Debt	$	-		$	933,500

The accompanying notes are an integral part of these consolidated financial statements

6

SECURED DIGITAL STORAGE CORPORATION

Consolidated Stockholders’ Equity (Deficit)

September 30, 2008

(Unaudited)

	Common Stock				Additional		Retained
	# of Shares		Amount		Paid-in Capital		Earnings (Deficit)			Totals
Balance - December 31, 2007		10,753,604	$	10,754	$	3,492,548	$	(3,684,266	)	$	(180,964	)
Net Loss		-		-		-		(5,037,814	)		(5,037,814	)
Stock Based Compensation Expense		-		-		198,692		-			198,692
Issuance of Stock Warrants for Debt		-		-		484,704		-			484,704
Issuance of Common Stock		2,681,375		2,681		1,407,419		-			1,410,100
Proceeds from Exercise of Stock Warrants to Common Stock		6,072,500		6,072		65,903		-			71,975
Balance – September 30, 2008		19,507,479	$	19,507	$	5,649,266	$	(8,722,080	)	$	(3,053,307	)

The accompanying notes are an integral part of these consolidated financial statements

7

SECURED DIGITAL STORAGE CORPORATION

Notes to Consolidated Financial Statements

September 30, 2008

(Unaudited)

Note 1 - Presentation of Interim Information and Significant Accounting Policies:

Basis of Accounting

The accompanying consolidated financial statements include the accounts of Secured Digital Storage Corporation (SDS) and Secured Digital Storage LLC (collectively the “Company”). In the opinion of management of SDS, the accompanying unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of September 30, 2008 and the results of operations for the three-months and nine-months ended September 30, 2008 and 2007, and the related cash flows for the nine-months ended September 30, 2008 and 2007. All intercompany transactions have been eliminated.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission for interim financial statements. These financial statements reflect all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary in order to make the financial statements not misleading. Interim results are not necessarily indicative of the results for a full year.

These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the Securities and Exchange Commission.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments, with an original maturity of three months or less to be cash equivalents.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Provision for depreciation is made generally at rates designed to allocate the cost of the property and equipment over their estimated useful lives of 3 - 15 years. Depreciation is calculated using the straight-line method. The cost of ordinary maintenance and repairs is charged to operations while renewals and replacements are capitalized.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

Accounting for Stock-Based Compensation

The Company has adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R), which revises SFAS 123, “Accounting for Stock-Based Compensation” (SFAS 123) and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company issued options during 2007 and 2008 which resulted in the recognition of stock-based compensation expense of $198,692 during the nine month period ended September 30, 2008 and $2,718 during the nine month period ended September 30, 2007. No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that the Company has recorded. All stock awards granted by the Company have an exercise price based on either the 10 day trailing price or the closing market value or the value of any existing new equity offerings on date of grant of the underlying common stock.

8

The fair value of each award is estimated on the date of the grant using the Black-Scholes option-pricing model (minimum value method), assuming no expected dividends or forfeiture rate and the following assumptions:

	2008			2007
Expected volatility factor		200	%		10	%
Risk free interest rate		2.85			4.50	%
Expected lives		5			5

The determination of the fair value of all awards is based on the above assumptions. See Note 3 for more information regarding the Company’s stock based compensation plans.

The Company accounts for equity instruments issued for services and goods to non-employees under SFAS 123; EITF 96-18, “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”; and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees”. Generally, the equity instruments issued for services and goods are for shares of the Company’s common stock or warrants to purchase shares of the Company’s common stock. These shares or warrants generally are fully-vested, nonforfeitable and exercisable at the date of grant and require no future performance commitment by the recipient.

The Company expenses the fair market value of these securities over the period in which the related services are received.

Other Comprehensive Income

The Company has no material components of other comprehensive income (loss), and accordingly, net loss is equal to comprehensive loss in all periods.

Loss Per Share

Basic and diluted net loss per share information is presented under the requirements of SFAS No. 128, “Earnings per Share.” Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects potential dilution of securities by adding other potential common shares, including stock options and warrants in the weighted-average number of common shares outstanding for a period, if dilutive. All potentially dilutive securities, including stock options and warrants, have been excluded from this computation, as their effect is anti-dilutive. As of September 30, 2008, there were 5,330,000 (Note 3) stock options and 7,377,000 stock warrants outstanding that could be converted into potential common stock. As of December 31, 2007, there were 4,100,000 stock options and 12,224,500 stock warrants outstanding that could be converted into common stock.

Fair Value of Financial Instruments

The carrying amount of cash, prepaid expenses, other assets, accounts payable, accrued expenses and debt are considered representative of their respective fair values due to the short-term nature of these financial instruments. Long term debt approximates fair value due to the interest rate on the notes approximating current rates.

9

Unaudited Pro Forma Financial Information

The following unaudited pro forma condensed consolidated results of operations have been prepared as if the acquisition of Secured Digital Storage LLC had occurred as of January 1, 2007:

	Nine months ended
	September 30,
	2008			2007
Net revenues	$	0		$	0
Net loss	$	(5,037,814	)	$	(717,112	)
Net loss per share:
Basic and diluted	$	(0.28	)	$	(0.08	)
Weighted average shares outstanding:
Basic and diluted		18,231,228			8,885,580

The unaudited pro forma condensed consolidated results of operations are not necessarily indicative of results that would have occurred had the acquisitions occurred as of January 1, 2007, nor are they necessarily indicative of the results that may occur in the future.

Going Concern

The Company’s financial statements have been presented on the basis that it is a going concern.

The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and achieve profitable operations. There is insufficient cash on hand to support current or anticipated operations. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. Although management has raised additional debt and equity capital, the Company must continue to seek new capital to vitalize the Company.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current period presentation.

10

Note 2 – Debt

Following is the summary of debt at September 30, 2008 and December 31, 2007

	September 30, 2008			December 31, 2007
Note payable, TAPO Ventures, LLC, related party, non-interest bearing loan, open ended	$	64,000		$	100,000
Short term loan, David Hoffman, 18% interest per annum, due October 1, 2008		1,200,000			–
Short term loan, sr. management, related parties, non-interest bearing, due upon demand		23,000
Short term loan, unrelated party, stated interest of $5,000, due upon demand		85,000
Short term loan, Doug Stukel, related party, non-interest bearing, due upon demand		–			75,000
Note payable, two individuals, 7% interest per annum, 750,000 warrants issued, due February 28, 2008		–			300,000
Debt obligation under capital lease		432,387			468,623
Total debt		1,804,387			943,623
Less: Contra debt for stock warrants		–			(148,645	)
Net debt		1,804,387			794,978
Less: Current Portion		(1,804,387	)		(480,335	)
Long Term Debt	$	-		$	314,643

The weighted average interest rate on the debt listed above was 15.5% as of September 30, 2008.

The aggregate principal re-payments of debt for the remaining three months of 2008 and annual thereafter are as follows (excluding contra debt for stock warrants):

2008	$	1,417,636
2009		185,371
2010		190,033
2011		11,348
Total	$	1,804,387

Note 3 – Stock Options

During 2007 and 2008, the Company granted executives options to acquire 5,330,000 shares of common stock of the Company. In accordance with the terms of each of these option agreements (i) 40% of such options vested upon execution of the Agreement, and (ii) 20% shall thereafter vest on the yearly anniversary of the Agreement over the next three (3) years. Accordingly, 2,952,000 of stock options are vested under these agreements. There have been no other stock option issuances.

11

The following table summarizes the activity under the stock options:

	Number of Shares		Price per Share		Weighted Average Share Price
January 1, 2007		-		—		—
2007 grants		4,100,000	$	0.51	$	0.51
December 31, 2007		4,100,000		0.51		0.51
2008 grants		1,230,000		0.80		0.80
September 30, 2008		5,330,000	$	0.51- 0.80	$	0.58
Vested Shares, September 30, 2008		2,952,000	$	0.51- 0.80	$	0.56

	Options		Weighted Average Grant Date Fair Value
Non Vested Shares, September 30, 2008		2,378,000	$	0.60

The aggregate intrinsic value for options vested and outstanding as of September 30, 2008 totaled $3,075,000 and the weighted average contractual life of those options was 9.0 years. As of September 30, 2008, $1,198,555 of compensation expense remained to be recognized on the stock options. The expense will be recognized ratably over 3 years. Total compensation expense recognized under stock option grants were $198,692 and $0 for the nine months ended September 30, 2008 and 2007, respectively. The Company has not recognized any deferred income tax benefit related to stock-based compensation due to our deferred tax asset being fully reserved.

Note 4 – Fixed Assets

The following table summarizes the Company’s fixed assets as of September 30, 2008 and December 31, 2007:

	September 30, 2008			December 31, 2007
Computer Software & Equipment	$	38,692		$	290,674
Leasehold Improvements		30,000			30,000
Furniture and Fixtures		2,228			8,141
Gross Fixed Assets		70,920			328,815
Less: Accumulated Depreciation		(31,876	)		(3,286	)
	$	39,044		$	325,529

Note 5 – Capital Stock Transactions

The authorized capital stock of the Company was established at 50,000,000 with $.001 par value. In April 2005 the Company authorized a 1 for 50 reverse split. All shares of stock have been adjusted to reflect this reverse split. During 2007, the Company converted $933,500 of debt plus accrued interest into 1,953,582 shares of common stock. Additionally, in conjunction with the acquisition of Secured Digital Storage LLC, the Company issued 7,500,004 shares of common stock. The Company is also in the process of raising additional capital. Through December 31, 2007, the Company had received $735,000 of funds in advance of the subscription for 918,750 shares of common stock of the Company. Additionally, during 2008, the Company received an additional $1,210,100 of funds in advance for subscription for 1,512,625 shares of common stock of the Company. The Company has also converted $200,000 of debt in advance for subscription of 250,000 shares of common stock of the Company. During the second quarter of 2008, the Company issued 2,681,375 shares of common stock from the advance for subscription listed above.

12

In November 2005, the Company issued warrants to purchase 10,000,000 shares of common stock in the Company to LD Acquisition, LLC at an exercise price of $0.01 per share. These warrants were subsequently assigned to various individuals and entities. During 2007, the Company issued warrants to purchase 2,224,500 shares of common stock in the Company to various lenders. Of these stock warrants, 724,500 have an option price of $0.51 per share and 1,500,000 have an option price of $0.80 per share. As of December 31, 2007, none of these warrants has been exercised. Through September 30, 2008 the Company had issued 1,225,000 additional warrants in 2008, with 1,200,000 having an exercise price of $0.80 per share and a two year life and 25,000 having an exercise price of $3.00 per share with a 5 year life. During the nine months ended September 30, 2008, 6,072,500 stock warrants were converted resulting in net proceeds of $71,975. The following table summarizes the stock warrants issued and outstanding:

	Issue Date		Expiration Date		Exercise Price		Granted		Exercised		Outstanding
LD Acquisition Warrants		11/15/2005		11/15/2015	$	0.01		10,000,000		6,050,000		3,950,000
Conversion of Debt		9/19/2007		12/31/2012	$	0.51		724,500		22,500		702,000
Notes Payable Issuance		11/12/2007		11/12/2012	$	0.80		750,000		-		750,000
Personal Guarantee – Equipment		11/15/2007		11/15/2012	$	0.80		750,000		-		750,000
Short-term debt		4/1/2008		4/1/2010	$	0.80		1,200,000		-		1,200,000
Guarantee-Equipment		4/1/2008		10/18/2012	$	3.00		25,000		-		25,000
								13,449,500		6,072,500		7,377,000

The weighted average exercise price of the stock warrants outstanding as of September 30, 2008 was $0.36 per warrant and the weighted average contractual life of the warrants was 5.1 years.

NOTE 6 – Commitments and Contingencies

As permitted under New Mexico law and the Company's charter documents, the Company will indemnify its executive officers and directors for certain events and occurrences while the officer or director is, or was, serving at the Company's request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable. The Company has secured an insurance policy, which will enable the company to recover a portion of any future amounts that may be paid. No liabilities have been recorded for these indemnification agreements as of September 30, 2008 or December 31, 2007.

Operating and Capital Leases: The Company has entered into certain non-cancelable operating and capital lease agreements related to office space, equipment and software. Total rent expense under operating leases was $486,465 and $0 for the nine months ended September 30, 2008 and 2007, respectively. Total payments including interest made under capital leases were $133,503 and $0 for the nine months ended September 30, 2008 and 2007, respectively.

13

The following table summarizes the fixed assets that are under capital leases:

	September 30, 2008		December 31, 2007
Computer Equipment	$	-	$	158,980
Purchased Software		-		106,657
Less Accumulated Depreciation		-		-
Net	$	-	$	265,637

Minimum remaining rental commitments under operating leases and capital leases arrangements are as follows as of September 30, 2008:

For the years ended December, 31,	Operating Leases		Capital Leases
Remaining three months of 2008	$	207,581	$	48,336
2008		377,948		193,343
2009		375,582		193,343
2010		72,703		11,543
2011		50,358		-
	$	1,084,172	$	446,565

The Capital leases payments include $14,177 of imputed interest on the lease.

14

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary and Forward Looking Statements

In addition to statements of historical fact, this Form 10-Q contains forward-looking statements. The presentation of future aspects of Secured Digital Storage Corporation, (the “Company” or “Issuer”) found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” or “could” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause the Company’s actual results to be materially different from any future results expressed or implied by the Company in those statements. Important facts that could prevent the Company from achieving any stated goals include, but are not limited to, the following:

(a)	volatility or decline of the Company’s stock price;
(b)	potential fluctuation in quarterly results;
(c)	failure of the Company to earn revenues or profits;
(d)	inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;
(e)	failure to make sales;
(f)	rapid and significant changes in markets;
(g)	litigation with or legal claims and allegations by outside parties; or
(h)	insufficient revenues to cover operating costs.

There is no assurance that the Company will be profitable, and the Company may not be able to successfully develop the business. The Company may not be able to attract or retain qualified executives and personnel, and competition and government regulation may hinder the Company’s business attempts. Further, additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in business.

The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and Annual Report on Form 10-KSB filed by the Company in 2008 and any Current Reports on Form 8-K filed by the Company.

Changes in Financial Condition

The Company’s cash position at September 30, 2008 has been reduced by $221,038 since December 31, 2007 despite the issuance of a net addition of debt of $1,072,965 and the proceeds of $1,210,100 in proceeds for the advance of funds for subscriptions of common stock as well as $71,975 proceeds from the conversion of existing stock warrants to common stock. The continuing funding of the operating expenses of the business with no revenues is causing the reduction in cash. During the 3^rd quarter the company terminated all non senior management personnel and eliminated salaries for those remaining senior executives. The cash on hand is currently not sufficient to cover current obligations of $3,590,017, including $223,033 of accrued payroll. Additionally, the Company does not currently have the funds to continue paying the capital and operating leases with HP Fincial Services. However, the Company is still seeking ways to fund this liability along with other remaining liabilities.

15

As of October 1, 2008, $1,200,000 of debt financing became due. We are continuing discussions with the lender in order to develop a plan to repay this obligation. However, no conclusions have been derived from these discussions.

Results of Operations for the Three-Months and Nine-Months Ended September 30, 2008 compared to Same Period in 2007

The Company had no revenue during 2007 and recorded only $27,750 of revenues in 2008, all of which were consulting revenues recognized and paid during the third quarter of 2008. These revenues were unrelated to the primary business of providing managed storage for enterprises. Since acquiring Secured Digital Storage, LLC in the fourth quarter of 2007, the Company has incurred significant expenses to fund the operations, including compensation, professional fees and costs of capital and operating leases. The Company has also incurred substantially higher interest expense on its debt due to higher levels of debt, higher interest on the debt as well as the cost of warrants incurred on the issuance of the debt instruments. The interest for the nine month period ended September 30, 2008 included $633,349 of imputed interest for the value of stock warrants issued on existing debt compared to $73,426 in the comparable period last year.

Liquidity and Capital Resources

As of September 30, 2008 the Company had $163,057 of cash. Included in the cash balance is $150,000 of restricted cash related to guaranteeing a letter of credit issued with respect to a lease of computer software and equipment. Excluding the restricted cash, there was only $13,057 of cash, which is insufficient for any significant operations. As of September 30, 2008, the Company had $3,587,408 of current obligations, including the accrual of the lease payments for computer software and equipment, where the value of the remaining lease obligations, net of the estimated net realizable value, was recognized in the results of operations during the 3^rd quarter of 2008. Additionally, the Company has other recurring obligations that it currently is not able to meet.

The Company does not have capital sufficient to meet the Company’s cash needs, to operate and pay existing debt service, including the costs of compliance with the continuing reporting requirements of the Securities Exchange Act of 1934. The Company is currently seeking alternatives to its funding sources, either through loans or equity placements to cover such cash needs. Lack of capital and customers has been a sufficient impediment from accomplishing the goal of expanding its operations. There is no assurance the Company will be able to carry out its business without additional funding. The Company will need to raise additional funds to continue and expand its business activities in the next twelve months.

Irrespective of whether the Company’s cash assets prove to be inadequate to meet the Company’s operational needs, the Company may seek to compensate providers of services by issuances of stock in lieu of cash.

GOING CONCERN

The Company’s auditor has issued a “going concern” qualification as part of its opinion in the Audit Report for the year ended December 31, 2007. There is substantial doubt about the ability of the Company to continue as a “going concern.” The Company currently has no viable business, limited capital, minimal cash and no other liquid assets. Management is currently seeking options to its business model. Without new operating funds, the Company cannot meet its current obligations.

On August 12, 2008, the Board of Directors of the Company approved the immediate suspension of all salaries to all officers. Three such executives, Messrs. Malone, Gainer and Hauschild, are parties to certain employment letters and have agreed to modify or waive the provisions in such letters related to payment of salary. On August 14, 2008, the Company terminated all non-officer employees. There were five non-officer employees in total. The Company has outstanding compensation due to such employees and may be subject to claims for such wages, including claims under the Illinois Wage Payment and Collection Act. The Company continues to attempt to raise additional capital. No assurance can be made that these efforts will be successful.

16

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over Financial Reporting.

17

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.

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

(a) None.

(b) Not applicable.

(c) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As previously disclosed, on April 1, 2008, David Hoffman (the “Lender”) made a loan to the Company in the amount of one million two hundred thousand dollars ($1,200,000.00) (the “Loan”). In connection with the Loan, the Company issued a promissory note to the Lender in the amount of $1,200,000 (the “Note”). The outstanding principal and accrued interest under the Note was due and payable on September 30, 2008 (“the Maturity Date”). Prior to the Maturity Date, or the Loan’s otherwise becoming due, interest shall accrue on the outstanding principal balance of the Loan at an annual interest rate (the “Interest Rate”) equal to eighteen percent (18%). The Company has failed to make the interest payment due on September 1, 2008 and has failed to make the payment of all outstanding principal and accrued interest upon the Maturity Date. The total amount of each default is $18,000 for the September interest payment, and $1,236,000 (including the previously unpaid interest) for the total Maturity Date Payment. The total arrearage as on the date hereof is $1,254,000. The Company is in discussion with this Lender in order to develop a plan to repay this obligation. However, no conclusions have been derived from these discussions.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description of Document
31.1	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

18

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SECURED DIGITAL STORAGE CORPORATION

(Registrant)

Date: November 19, 2008	By:	/s/ William M. Lynes
		William M. Lynes Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
Date: November 19, 2008	By:	/s/ Patrick J. Gainer
		Chief Financial Officer (Principal Financial and Accounting Officer)

19

EXHIBIT INDEX

Exhibit Number	Description of Document
31.1	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

20

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William M. Lynes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Secured Digital Storage Corporation;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. 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

d. 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: November 19, 2008	By:	/s/ William M. Lynes
		William M. Lynes Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Patrick J. Gainer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Secured Digital Storage Corporation;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. 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

d. 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: November 19, 2008	By:	/s/ Patrick J. Gainer
		Patrick J. Gainer Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

EX-32.1

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 on Form 10-Q of Secured Digital Storage Corporation (the “Company”) for the period ended September 30, 2008 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date 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 to his knowledge:

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.

Date:  November 19, 2008	By:	/s/ William M. Lynes
		William M. Lynes Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

EX-32.2

EXHIBIT 32.2

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 on Form 10-Q of Secured Digital Storage Corporation (the “Company”) for the period ended September 30, 2008 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date 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 to his knowledge:

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

Date: November 19, 2008	By:	/s/ Patrick J. Gainer
		Patrick J. Gainer Chief Financial Officer (Principal Financial and Accounting Officer)