10Q 10-12-2010

On July 15, 2010, we received payment from PDS of $1,003,095 consisting of principal and interest through July 15, 2010 on our $950,000 secured note with TPL for which PDS was jointly and severally liable. This amount has been recorded as a note receivable from TPL on PDS’ balance sheet on July 15, 2010. Due to TPL’s inability to pay the note, it has been fully reserved for at July 15, 2010 and the allowance has been recorded as “Reserve for loan loss and uncollectable receivable” on PDS’ statement of operations for the three months ended August 31, 2010.

During June 2010, PDS advanced Alliacense $410,000 to fund payroll and rent obligations. Due to non-payment by Alliacense, this amount has been fully reserved for at August 31, 2010 and the allowance has been recorded as “Reserve for loan loss and uncollectable receivable” on PDS’ statement of operations for the three months ended August 31, 2010.

Am I getting this straight: We loan TPL (secured loan) $950,000 and PDS (Phoenix Digital Solutions) which we co-own with TPL, is also liable for this note. TPL doesn't pay it back to us but our co- company pays it back to us with interest. Now it is an uncollectable receivable for PDS.

Additionally, PDS in June of this year loans money to Alliacense (owned by TPL) for payroll and rent. Alliacense has defaulted on this loan.

Why after getting shafted by TPL would our BoD agree to allow PDS to loan money to an entity owned by TPL, especially and after we filed a suit for non payment (and breach of contract) against TPL?