CYBD Cyber Digital Inc (CE)

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending March 31, 2009. For further information, refer to the financial statements and footnotes thereto included in the Company's Form 10-KSB, for the year ended March 31, 2008.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") which requires the Company to account for business combinations using the purchase method. The statements of operations for the period ended June 30, 2008, includes indirect and general expenses related to business acquisitions that have been expensed as required by SFAS 141.

In December 2007, the FASB issued SFAS 141R, which replaces SFAS 141. SFAS 141R retains the fundamental requirements of SFAS 41 but broadens its scope and better defines the acquirer in business combinations. This statement retains the guidance in SFAS 141 for identifying and recognizing intangible assets. The Company believes this statement will impact any future acquisitions the Company is contemplating.

In June 2006, the FASB issued interpretation No. 48 ("FIN 48") "Accounting for Uncertainty in Income Taxes" which clarifies the accounting for uncertainties in income taxes. FIN48 establishes recognition thresholds for tax positions that may or may not be sustained by the relevant tax authorities and their recognition in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the effect of adopting FIN 48 and does not expect it to have a material effect on the Company's financial statements.

In June 2006, the Emerging Issues Task Force issued EITF issue 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement." A company may present taxes either gross or net basis, however, the amount of taxes collected on the gross basis must be disclosed. The Company presents revenue net of taxes collected. EITF 06-3 will not impact the Company's financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (as amended). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. SFAS No. 157 is effective for periods beginning after November 15, 2007. The Company is currently evaluating the effects, if any, on the Company's financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" (SFAS 159). SFAS 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective for the Company's 2009 fiscal year, although early adoption is permitted. The Company is currently assessing the potential effect of SFAS 159 on its financial statements.

At June 30, 2008, marketable securities consist of 808,000 shares of Pervasip Corp. received as part of the acquisition of NRT and TSI. The shares have been classified as available for sale in accordance.

Intangible assets consists of the following:

The Company has classified the marketable securities it received as part of its acquisition of NRT and TSI (see Note 6) as available for sale. In accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" unrealized holding gains and losses are excluded from earnings. Under SFAS No. 130, Reporting Comprehensive Income, unrealized holding gains and losses on the Company's available for sale equity securities are to be reported as components of comprehensive income.

The components of comprehensive (loss), net of related tax, are as follows:

The Company did not have any components of comprehensive income in prior periods. At June 30, 2008, accumulated other comprehensive loss consisted solely of unrealized holding losses on marketable securities.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (SFAS No. 123R) which requires that stock options and warrants issued for compensation or services be recorded at their estimated fair value using option pricing models. The Company uses the Black-Scholes model to value its stock option and warrants. The Company used an interest rate of 4.31% and expected volatility of 4.6% in valuing its stock options.

A summary of option and warrant activity as of June 30, 2008 is as follows:

Statements contained in this Report on Form 10-QSB that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including without limitation, statements regarding industry trends, strategic business development, pursuit of new markets, competition, results from operations, and are subject to the safe harbor provisions created by that statute. A forward-looking statement may contain words such as "intends", "plans", "anticipates", "believes", "expect to", or words of similar import. Management cautions that forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, marketing success, product development, production, technological difficulties, manufacturing costs, changes in economic conditions, competition, the ability to obtain financing on acceptable terms, future profitability, future profitability of acquired businesses or product lines, and those included in our company's Annual Report of Form 10KSB for the fiscal year ended March 31, 2008. Our company undertakes no obligation to release revisions to forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

We are a designer, software developer and manufacturer of a range of unique distributed digital-voice-switching and Internet Protocol (IP) broadband infrastructure equipment as well as a communications service provider through our subsidiaries. Our technology division produces Class 5 local digital central office switches, Class 4 regional tandem digital central office switches, IP soft-switches, routers, gateways, firewalls, voice-over IP (VoIP) and virtual private network (VPN) systems for public-switched-telephone-network (PSTN) operators and Internet Service Providers (ISP) worldwide. Our communication service provider subsidiaries provide services to small businesses and residential subscribers in the states of New York, New Jersey and Pennsylvania.

On June 1, 2007, we acquired two CLECs, New Rochelle Telephone Corp., ("NRT") and Telecarrier Services, Inc. ("TSI"), based in White Plains, New York. These acquisitions have allowed us to expand our market presence in New York, New Jersey and Pennsylvania, and have also allowed us to become a facilities based provider of voice and data services as we build our network by deploying our proprietary network equipment. Upon migrating these customers to our network, we will significantly improve profitability through operating synergies.

Net sales

Net sales for the quarter ended June 30, 2008 was $889,757 as compared to $445,049 for the quarter ended June 30, 2007. Net sales consist of local and long distance telephone service provided by our subsidiaries, NRT and TSI. Revenues are generated on a recurring monthly basis from services provided to both small businesses and residential customers. The average revenue per user (ARPU) is approximately $43 per month. We are in early stages of developing the alternative local voice and data switching services market in the U.S. due to the recent creation of the market opportunity. We were waiting for the FCC's deregulation policies on local voice and data switching in order to enter this lucrative market with our systems. Our overall strategy is to grow through acquisitions of profitable non-facilities based CLECs in the post FCC deregulation.

Cost of Sales

Cost of sales for the quarter ended June 30, 2008 was $603,724 as compared to $281,411 for the quarter ended June 30, 2007. Cost of sales predominantly consists of purchasing communication services from Verizon and Qwest on a resale basis. We also include in our cost of sales the materials and labor used, subcontractor costs and overhead incurred in the manufacture of our systems as well as any change in the valuation of our inventory, which was $0 for both quarters ended June 30, 2008 and 2007.

Gross Profit

Gross profit for the quarter ended June 30, 2008 was $286,033 as compared to $163,638 for the same quarter ended June 30, 2007. Gross profit as a percentage of sales was 32% for the quarter ended June 30, 2008 as compared to 37% for the same quarter ended June 30, 2007.

Selling, general and administrative

Selling, general and administrative expenses increased from $200,924 in quarter ended June 30, 2007 to $466,858 in quarter ended June 30, 2008, representing an increase of $265,934 or approximately 132%, principally due to selling, general and administrative expenses of NRT and TSI. The stock based compensation expense in quarter ended June 30, 2008 was $6,150 as compared to $0 for the same quarter ended June 30, 2007.

Research and development

Research and development expenses increased from $5,769 in quarter ended June 30, 2007 to $10,769 in quarter ended June 30, 2008, representing an increase of $5,000 or approximately 87%. All development costs are expensed in the period incurred.

Net Income (loss) from operations

Loss from operations in quarter ended June 30, 2008 was $(437,853) or $(.013) per share as compared with a loss of $(145,708) or $(.004) per share in the quarter ended June 30, 2007.

Net income (loss) available to Common Stockholders

Preferred stock dividend was $3,125 and $3,125 in the quarters ended June 30, 2008 and 2007, respectively. As a result of the foregoing, the net loss available to common stockholders in the quarter ended June 30, 2008 was $(440,978) or $(.013) per share as compared to a net loss of $(148,833) or $(.004) per share in the quarter ended June 30, 2007.

Our ability to generate cash adequate to meet our needs results primarily from sale of preferred and common stock, cash flow from operations, issuance of debt, and cash advances in the form of loan from our Chief Executive Officer and a shareholder. We believe that our current sources of liquidity pursuant to the acquisitions of New Rochelle Telephone Corp. and Telecarrier Services, Inc., as of June 1, 2007, are sufficient to meet our near-term growth needs. However, we need additional capital to pursue more acquisitions to support our future growth needs. We have no off-balance sheet arrangements.

Cash and cash equivalents were $513,820 and $63,867 for the quarters ended June 30, 2008 and 2007, respectively.

Marketable securities were $161,600 and $275,000 for the quarters ended June 30, 2008 and 2007, respectively.

Net cash provided by (used in) operating activities were $324,799 and $(218,506) for the quarters ended June 30, 2008 and 2007, respectively.

Net cash provided by (used in) investing activities were $(2,393) and $175,547 during the quarters ended June 30, 2008 and 2007, respectively.

Net cash provided by (used in) financing activities were $(120,578) and $73,320 for the quarters ended June 30, 2008 and 2007, respectively.

As of the quarters ended June 30, 2008 and 2007, our company has received cash advances of $1,256,300 and $1,256,300, respectively, from our Chief Executive Officer. These cash advances in the form of a note are secured by all assets of the Company. As of the quarters ended June 30, 2008 and 2007, our company has received cash advances of $350,000 and $350,000 from a shareholder, respectively.

Effective June 1, 2007, we acquired two telephone companies, NRT and TSI, from eLEC. These companies were acquired on cashless basis through the issuance of secured convertible note in the principal amount of approximately $1.3 million with an accredited institutional investor. The note is due July 1, 2010 and bears interest at prime plus 2% but no less than 9%. All or portion of the outstanding principal and interest due under the note may be converted into shares of our common stock upon satisfaction of specified conditions. The note is convertible into shares of our common stock at a fixed price of $0.50 per share, provided however, (i) the average closing price of our common stock for the 5 trading days prior to conversion is greater than or equal to $0.58, and (ii) specified trading volume conditions are met. Otherwise, we must make the monthly principal and interest payments in cash. The note is secured by a lien on substantially all our assets, other than intellectual property assets. In connection with the note, we entered into a Registration Rights Agreement with the institutional investor to register the shares of our common stock issuable upon conversion of the note. The Registration Rights Agreement was declared effective by Securities Exchange Commission on October 18, 2007 for the issuance of up to 3,200,000 shares of our common stock pursuant to terms of the convertible note. In addition to our purchase agreement, we also received 808,000 restricted shares of common stock of eLEC Communications Corp., which is included as marketable securities for the fiscal year 2008.

In December 2007, it came to our attention that NRT evidently had not been receiving telephone usage data from Verizon for the immediately preceding seven months, depriving NRT of the ability to bill its customers accordingly. Under our Wholesale Advantage Services Agreement with Verizon, we believe Verizon is obligated to provide this billing data. We also believe, among other things, that we had overpaid Verizon with respect to some of the months prior to that seven-month period, that Verizon failed to correctly apply current payments to current charges and instead continued to apply payments to past disputed amounts prior to 2007, that Verizon wrongly billed us for late charges, that Verizon billed NRT for usage with respect to which NRT was never provided the corresponding data , and that Verizon improperly charged us for ISP-bound traffic pursuant to FCC rules set forth in 16 FCC Red 9151 (2001). We have been discussing the foregoing matters with Verizon and believe we can reach an amicable resolution with Verizon of each of these disputes. However, there can be no assurance that these disputes will be resolved amicably or, if and when resolved, that they will be resolved in our favor, although if these disputes are not resolved in our favor, we believe eLEC may, in certain circumstances, be obligated to indemnify us for our resulting damages pursuant to the terms of the stock purchase agreement between us and eLEC pursuant to which we agreed to acquire NRT. However, there can be no assurance that eLEC will provide any such indemnification to us, and any adverse resolution of one or more of these disputes with Verizon could have a material and adverse effect on our company.

Although the acquisitions of NRT and TSI have provided reasonable revenues and positive cash flow, additional financing will be needed to support our plans to grow by acquiring additional CLECs. We are in negotiations with a number of other profitable non-facilities based CLECs for potential acquisitions, although there can be no assurance that we will consummate these or any other acquisitions or, if consummated, that those acquisitions will be successful.

Inflation has historically not had a material effect on our operations.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures were designed 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 applicable SEC rules and forms. In addition, based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-QSB.

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion, of management, the amount of any liability is not likely to have a material effect on the financial statements.

A) Exhibits

B) Reports on Form 8-K

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.