UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(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, 2006

                                       OR

[ ]  Transition report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934 for the transition period from _____________ to ____________

                         Commission File Number 0-24372

                                  ARKONA, Inc.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


        Delaware                                                 33-0611746
-------------------------------                             -------------------
(State or other jurisdiction of                                (IRS Employer
 incorporation or organization)                              Identification No.)

                   10757 South River Front Parkway, Suite 400
                            South Jordan, Utah 84095
                    ----------------------------------------
                    (Address of principal executive offices)

                                 (801) 501-7100
                           ---------------------------
                           (Issuer's telephone number)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the  registrant  was required to file such reports) and (2) has been
subject  to such  filing  requirements  for the past 90  days.  Yes [X] No [ ] ]
Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). (check one): Yes [ ] No [X]

As of November 1, 2006, there were issued and outstanding  32,573,670  shares of
the Company's common stock, par value $.001 per share.

Transitional Small Business Disclosure Format (check one):  Yes [ ]     No [X]


                                     Page 1
<PAGE>




 PART I - Item 1. Financial Statements

                                  ARKONA, INC.

                            Condensed Balance Sheets

                                                  30-Sep-06      31-Mar-06
                                                (Un-audited)      (Audited)
                                                ------------    ------------
 ASSETS

      Current Assets:
        Cash and cash equivalents               $    973,616    $    570,766
        Accounts receivable, net of allowance        819,652         904,001
        Prepaid expenses                              93,462          73,693
        Notes receivable - current portion           114,315          77,324
        Other                                          9,346           1,899
                                                ------------    ------------
     Total Current Assets                          2,010,391       1,627,683
                                                ------------    ------------
     Property & Equipment, net of
        accumulated depreciation                     728,762         623,505
                                                ------------    ------------
     Other Assets:
        Deferred tax assets                        1,596,400       1,560,000
        Capitalized software costs, net of
             accumulated amortization              1,376,161       1,215,041
        Other intangible assets, net of
           accumulated amortization                  233,042         233,042
        Security deposits                             44,400          75,690
        Long-term notes receivable                    48,782          40,192
                                                ------------    ------------
     Total Other Assets                            3,298,785       3,123,965
                                                ------------    ------------
TOTAL ASSETS                                    $  6,037,938    $  5,375,153
                                                ============    ============

LIABILITIES & STOCKHOLDERS' EQUITY

     Current Liabilities:
        Accounts payable                        $    202,225    $    159,901
        Accrued liabilities                          421,539         411,230
        Deferred revenue - current portion           688,991         434,019
        Note payable - related party                  50,000          50,000
        Notes payable - current portion               98,237          62,563
                                                ------------    ------------
     Total Current Liabilities                     1,460,992       1,117,713
                                                ------------    ------------

     Long-term Notes Payable                         220,405         166,123
     Long-term Deferred Revenue                      266,034         287,743
                                                ------------    ------------
     Total Liabilities                             1,947,431       1,571,579
                                                ------------    ------------
     Stockholders' Equity:
        Preferred stock ($.001 par value)                575             575
        Common stock ($.001 par value)                32,549          32,490
        Additional paid in capital                23,650,220      23,479,767
        Unearned compensation                           --            (5,848)
        Accumulated deficit                      (19,592,837)    (19,703,410)
                                                ------------    ------------
     Total Stockholders' Equity                    4,090,507       3,803,574
                                                ------------    ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $  6,037,938    $  5,375,153
                                                ============    ============


See notes to condensed financial statements.



                                     Page 2
<PAGE>



<TABLE>
<CAPTION>

                                  ARKONA, INC.

                       Condensed Statements of Operations

                                          Three Months Ended               Six Months Ended
                                       30-Sep-06       30-Sep-05       30-Sep-06      30-Sep-05
                                      (Un-audited)   (Un-audited    (Un-audited)    (Un-audited
                                                     and Restated)                  and Restated)

                                     ------------    ------------    ------------   ------------
<S>                                  <C>             <C>             <C>            <C>
Revenues                             $  3,140,377    $  2,761,709    $  6,105,883   $  5,282,254

Cost of Sales                           1,649,184       1,398,202       3,159,189      2,763,808
                                     ------------    ------------    ------------   ------------
Gross Profit                            1,491,193       1,363,507       2,946,694      2,518,446
                                     ------------    ------------    ------------   ------------
Operating Expenses:
     Sales, marketing & general
         administrative                 1,247,628         821,210       2,416,401      1,561,399
     Research and development             255,099         269,187         472,382        498,513
                                     ------------    ------------    ------------   ------------
Total Operating Expenses                1,502,727       1,090,397       2,888,783      2,059,912
                                     ------------    ------------    ------------   ------------

Operating (Loss) Income                   (11,534)        273,110          57,911        458,534

Other Income (Expense)                     15,209          (1,984)         16,262         (3,685)
                                     ------------    ------------    ------------   ------------

Net Income Before Taxes                     3,675         271,126          74,173        454,849

Income Tax Benefit                           --           373,332          36,400        626,312
                                     ------------    ------------    ------------   ------------

Net Income                           $      3,675    $    644,458    $    110,573   $  1,081,161
                                     ============    ============    ============   ============


Basic Earnings per Common Share:
     Operating Income                $    (0.0004)   $      0.008    $      0.002   $      0.014
     Net Income                      $     0.0001    $      0.020    $      0.003   $      0.034
     Ave. Shares Outstanding           32,511,931      32,231,652      32,501,867     32,201,185

Diluted Earnings per Common Share:
     Operating Income                $    (0.0004)   $      0.007    $      0.001   $      0.012
     Net Income                      $     0.0001    $      0.016    $      0.003   $      0.028
     Ave. Shares Outstanding           39,272,132      39,212,465      39,348,721     39,017,673
</TABLE>



See notes to condensed financial statements.


                                     Page 3
<PAGE>


                                  ARKONA, INC.

                       Condensed Statements of Cash Flows

                                                Six Months       Ended
                                                30-Sep-06      30-Sep-05
                                               (Un-audited)   (Un-audited
                                                              and Restated)
                                               -----------    -----------
Cash Flows Provided By Operating Activities:
     Net income                                $   110,573    $ 1,081,161
     Adjustments to reconcile net income
         to net cash provided by
         operating activities:
         Depreciation and amortization             302,211        234,078
         Bad debt expense                           77,079          5,500
         Loss on asset disposition                    --              623
         Stock-based compensation                  157,460          3,340
         Deferred income tax                       (36,400)      (626,312)
         Changes in assets & liabilities:
              Accounts receivable                    7,270       (226,693)
              Prepaid expense                      (19,769)       (32,763)
              Security deposits                     31,290         13,205
              Notes receivable                     (45,581)       (79,796)
              Other assets                          (7,447)         3,300
              Accounts payable                      42,324        (71,327)
              Accrued liabilities                   10,309          9,421
              Deferred revenue                     233,263        (43,830)
                                               -----------    -----------
Net Cash Provided By Operating Activities          862,582        269,907
                                               -----------    -----------
Cash Flows Used In Investing Activities:
     Additions to equipment                       (233,773)      (249,643)
     Software development costs                   (334,815)      (139,664)
                                               -----------    -----------
Net Cash Used In Investing Activities             (568,588)      (389,307)
                                               -----------    -----------
Cash Flows Provided By Financing Activities:
     Proceeds from issuance of common stock         18,900         28,900
     Proceeds from notes payable                    89,956        155,914
                                               -----------    -----------
Net Cash Provided By Financing Activities          108,856        184,814
                                               -----------    -----------

Net Increase in Cash and Cash Equivalents          402,850         65,414

Beginning Cash Balance                             570,766        141,179
                                               -----------    -----------
Ending Cash Balance                            $   973,616    $   206,593
                                               ===========    ===========

See notes to condensed financial statements.



                                     Page 4
<PAGE>

                                  ARKONA, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS


Note 1 - Basis of Presentation
------------------------------

We have prepared the accompanying condensed financial statements, without audit,
according  to  the  applicable   regulations  of  the  Securities  and  Exchange
Commission.  Certain information and disclosures  normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted.  We believe that the following  disclosures  are
adequate and not misleading.  These un-audited  condensed  financial  statements
reflect all adjustments  (consisting only of normal recurring adjustments) that,
in management's  opinion, are necessary to present fairly the financial position
and results of  operations  of Arkona,  Inc.  for the periods  presented.  It is
suggested that these un-audited condensed financial statements should be read in
conjunction with the financial  statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006.

Note 2 - Concentration
----------------------

Our business is limited in that our products are currently specifically designed
for customers in the automobile  dealership  industry.  For this reason,  if the
industry  environment were to experience  significant  negative  conditions,  we
would also be affected.  However,  our products can meet  customer  needs in the
powersports  equipment  and RV  markets as well.  We now have a small  number of
customers  in the  motorcycle,  marine and RV markets.  Our plan is to move into
other vertical markets as soon as development allows.  Sales of our products and
services are not limited to any geographic area.

We maintain cash  balances in a local  financial  institution.  Accounts at this
institution  are  insured by the Federal  Deposit  Insurance  Corporation  up to
$100,000 each.

Note 3 - Significant Accounting Policies
----------------------------------------

(a)      Revenue Recognition

During  the  course  of  business,  we  recognize  revenue  from  the  following
activities:  Installation Services;  Post-installation Services; Hardware Sales;
and Consulting Services.

Installation  Services  include  fees for G/L setup,  data  conversion,  Virtual
Private Network ("VPN")  connection,  forms programming,  and training.  Each of
these  activities  are  separately  stated on a  customer's  Sales  and  Service
Agreement  ("Service  Agreement")  and  individually  priced.  The  Installation
Service  is  generally  performed  over a four (4) week  period  and  provides a
customer with the tools and knowledge  necessary in order for them to access and
use the Arkona  Dealer  Management  System  ("ADMS") on a go-forward  basis.  We
recognize installation services revenue in accordance with American Institute of
Certified  Public  Accountants  Statement of Position  97-2,  "Software  Revenue
Recognition" or SOP 97-2. We recognize  revenue when  persuasive  evidence of an
arrangement  exists,  delivery has occurred or services have been rendered,  the
sales price is fixed or  determinable,  and  collection  is probable.  Under SOP
97-2, we determine  whether a Service  Agreement  includes  multiple elements as
defined in Emerging  Issues Task Force No.  00-21,  "Revenue  Arrangements  with
Multiple Deliverables," and, if so, whether vendor-specific  objective evidence,
or VSOE,  of fair value  exists  for each of those  elements.  G/L  setup,  data
conversion,  forms programming and training are each separate  deliverables with
each having  stand-alone  value and revenue is  recognized  as the  services are
performed and completed, based upon the VSOE of fair value for each element. The
VPN connection does not have stand-alone  value and,  therefore,  VPN connection
fee revenue is deferred and recognized  over the expected  period of performance
under the customer Service Agreement.

Service  Agreements  generally  require the payment of  non-refundable  security
deposits. These deposits are generally in an amount equal to 25% of the combined
installation  fees and represent  security  against the labor and travel related
costs we will incur even if the contract is terminated  prior to the  completion
of the  installation  process.  These deposits are recorded as deferred  revenue
until the  installation  services are completed and invoiced.  At that time, the
deposits are recorded as payments against the related  receivable and recognized
as explained above.

                                     Page 5
<PAGE>

Post-installation  Services provide the customer the right to continuous  access
to the latest  version  of the ADMS  hosted on our  servers,  to have their data
hosted  and stored on our  servers,  to 24x7  maintenance  and  security  of the
servers,  to  post-contract  phone technical  support  services,  and to receive
manufacturers' parts price updates. The post-installation services are available
and billed on a month-to-month  basis and also separately  identified and priced
on  a  customer's  Service  Agreement.   Post-installation   services  fees  are
recognized ratably over the period in which the services are performed.

Hardware Sales include the sales of standard  computer  systems and  peripherals
and revenues are  recognized  when title passes upon  shipment to the  customer.
Installation of the hardware and/or  peripherals is not a required  component of
the Service Agreement.

Consulting  Services  generally  include  fees  charged  for   post-installation
training and forms programming.  We recognize consulting services fees under the
percentage-of-completion  method  over the  period  in which  the  services  are
provided.

(b)  Income Taxes

We apply the provisions of Statement of Financial  Accounting Standards ("SFAS")
No.  109,  "Accounting  for Income  Taxes."  SFAS No. 109  requires an asset and
liability approach for financial  accounting and reporting for income taxes, and
the  recognition  of  deferred  tax assets  and  liabilities  for the  temporary
differences  between the financial  reporting  basis and tax basis of our assets
and liabilities, at enacted tax rates expected to be in effect when such amounts
are realized or settled.

(c)  Net Income per Common Share

In accordance with SFAS No. 128,  "Earnings Per Share," basic  operating  income
and income per common  share is computed  using the weighted  average  number of
common shares outstanding.  Diluted operating income and income per common share
is computed using the weighted average number of common shares  outstanding plus
dilutive common share equivalents  outstanding during the period, computed using
the treasury stock method.

(d)  Cash & Cash Equivalents

For purposes of the  statements  of cash flows,  we consider  cash on deposit in
banks and other  unrestricted  investments  with  original  maturities  of three
months or less at the time of purchase to be cash equivalents.

(e) Use of Estimates in the Preparation of Financial Statements

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,  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.

(f)  Capitalization of Software Expense

Costs incurred to establish the  technological  feasibility of software products
to be sold,  leased or  otherwise  marketed by us are  expensed as research  and
development.   Once   technological   feasibility  is  established,   costs  are
capitalized  in  accordance  with  SFAS No.  86,  "Accounting  for the  Costs of
Computer Software to Be Sold,  Leased, or Otherwise  Marketed" until the product
is  available  for  general  release  to  customers.  Judgment  is  required  in
determining  when  technological   feasibility  of  a  product  is  established.
Capitalized  costs,  which  consist  primarily  of payroll and  benefits of both
employees and outside  contractors,  have been amortized on a product-by-product
basis using the  straight-line  method over the  estimated  economic life of the
products. In addition, capitalized software costs are tested for impairment each
year in accordance with SFAS No. 142.

(g)  Stock-Based Compensation

In December 2001, we established a stock  incentive plan (the "Plan") to provide
incentives  to our  directors,  officers,  employees and advisors to do business
with the Company and to enable us to obtain and retain the  services of the type
of  directors,   officers,  advisors  and  employees  considered  essential  for
long-term success.  The granting of options and other incentive awards is at the
discretion of the Board. The Plan currently has authorized  9,000,000 shares for


                                     Page 6
<PAGE>

awards.  Stock  options are granted at a price equal to fair market value of the
common stock on the date of grant and are  exercisable  after a period of one to
four years and expire ten years after the date of grant.

Prior to April 1, 2006, we accounted for share-based payments to employees using
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and, as a result, we measured  stock-based  compensation using the
intrinsic value method. On December 19, 2004, the Financial Accounting Standards
Board  issued  SFAS No.  123(R),  "Share-Based  Payments",  which  requires  all
share-based  payments to employees,  including grants of employee stock options,
to be recognized in the income statement based on their fair values.  For public
companies that file as small business issuers, the reporting  requirements under
SFAS No.  123(R) became  effective  January 1, 2006 or at the beginning of their
new fiscal year.  We adopted the  provisions  of SFAS No.  123(R) as of April 1,
2006.

Following  the  provisions  of SFAS No.  123(R),  we have  adopted the  modified
prospective  method of accounting and reporting for share-based  payments and we
recognize the related cost of an option over the period during which an employee
is  required to provide  the  requisite  service.  Prior  periods  have not been
restated for stock compensation based on estimates of fair value of options.  We
have  estimated  the fair  value  of  options  using  the  Black-Scholes  option
valuation model. We use historical data to estimate the expected  volatility and
expected life. Assumptions used for the valuation model are set forth below:

     Expected volatility factor     126.0%    Average expected life (years)   3

     Risk-free interest rate          3.0%    Dividend yield                  0

The following table summarizes stock option activity of the plan:
<TABLE>
<CAPTION>

                                                             Weighted          Weighted
                                                              Average           Average
                                                             Exercise          Remaining
                                              Shares          Price          Life in Years
                                            ---------        --------        -------------
<S>                                         <C>               <C>            <C>
Outstanding at March 31, 2006               6,793,667         $0.40
         Granted                               80,000         $0.65
         Exercised                            (59,000)        $0.32
         Cancelled/Expired                   (188,000)        $0.59
                                            ---------
Outstanding at September 30, 2006           6,626,667         $0.38              6.9

Exercisable at September 30, 2006           5,009,517         $0.30              6.7
</TABLE>

For the three  and six  months  ended  September  30,  2006,  total  stock-based
employee compensation expense recognized was $69,670 and $137,005, respectively.
As of  September  30, 2006,  there was  approximately  $662,000 of  unrecognized
compensation  cost related to non-vested stock options,  which is expected to be
recognized over a weighted-average period of 1.3 years.

Cash received from options exercised for the six months ended September 30, 2006
was $18,900. No tax benefit was realized from the options exercised.

The following summarizes the stock-based  employee  compensation expense for the
six months ended  September 30, 2005,  had we adopted the provisions of SFAS No.
123(R):

         Net income, as restated                              $ 644,458

         Add:  Stock-based employee compensation
               included in reported net income                    3,340

         Deduct:  Stock-based employee compensation
                  determined under fair value based
                  method for all awards                         (39,376)
                                                              ---------
         Pro forma net income, as restated                    $ 608,422

         Pro forma earnings per common share:
                  Basic                                       $   0.019
                  Diluted                                     $   0.016

(h)  Advertising Costs

Advertising costs are charged to expense as incurred.

                                     Page 7
<PAGE>

(i)  Equipment

We  utilize  significant  amounts  of  equipment  in  providing  service  to our
customers.  Equipment is  depreciated  using the  straight-line  method over the
estimated useful life of the equipment.  Changes in technology or changes in the
intended use of equipment may cause the estimated  period of use or the value of
these assets to change.  Management  performs an annual  analysis to confirm the
appropriateness  of  estimated  economic  useful  lives  for  each  category  of
equipment.

(j)  Reclassifications

Certain  reclassifications  have been made to prior period  balances in order to
conform to current period classifications.

Note 4 - Prior Period Adjustments
---------------------------------

During the quarter ended June 30, 2006, we determined  that the  accounting  for
VPN connection fees was improperly  reported in prior periods. We had recognized
these fees over the  installation  and training  period.  In accordance with SAB
Topic 13,  these fees  should have been  recorded  over the  expected  period of
performance under the customers' Service Agreement.

During the last quarter of fiscal year end March 31, 2006,  we  determined  that
the  accounting  for the deferred tax valuation  allowance was improper in prior
periods and,  therefore,  we have restated downward the amount of the income tax
benefit recorded during the fiscal year ended March 31, 2006 and prior.

The effect on certain line items of these prior period  adjustments is set forth
below:

                                    Fiscal Year   Three Months    Six Months
                                       Ended         Ended          Ended
                                     03/31/06       09/30/05      09/30/05
                                    -----------   -----------    -----------
Revenues
   As Previously Reported           $11,129,798   $ 2,732,305    $ 5,261,504
   Adjustment                            82,373        29,404         20,750
                                    -----------   -----------    -----------
   Restated Amount                  $11,212,171   $ 2,761,709    $ 5,282,254

Net Income Before Tax
   As Previously Reported           $   821,062   $   241,722    $   435,126
   Adjustment                            82,373        29,404         19,723
                                    -----------   -----------    -----------
   Restated Amount                  $   903,435   $   271,126    $   454,849

Tax Benefit
   As Previously Reported           $ 1,244,000   $      --      $ 1,739,618
   Adjustment                              --         373,332     (1,113,306)
                                    -----------   -----------    -----------
   Restated Amount                  $ 1,244,000   $   373,332    $   626,312

Net Income
   As Previously Reported           $ 2,065,062   $   241,722    $   435,126
   Adjustment                            82,373       402,736        646,035
                                    -----------   -----------    -----------
   Restated Amount                  $ 2,147,435   $   644,458    $ 1,081,161

Basic EPS
   As Previously Reported           $     0.064   $     0.007    $     0.014
   Adjustment                             0.003         0.013          0.020
                                    -----------   -----------    -----------
   Restated Amount                  $     0.067   $     0.020    $     0.034

Diluted EPS
   As Previously Reported           $     0.053   $     0.006    $     0.011
   Adjustment                             0.002         0.010          0.017
                                    -----------   -----------    -----------
   Restated Amount                  $     0.055   $     0.016    $     0.028

                                                       (continued)


                                     Page 8
<PAGE>


                                    Fiscal Year   Three Months    Six Months
                                       Ended         Ended          Ended
                                     03/31/06       09/30/05      09/30/05
                                    -----------   -----------    -----------


Deferred Tax Asset
   As Previously Reported           $ 1,560,000   $ 5,039,237    $ 5,039,237
   Adjustment                              --      (4,100,925)    (4,100,925)
                                    -----------   -----------    -----------
   Restated Amount                  $ 1,560,000   $   938,312    $   938,312

Deferred Contract Revenue
   As Previously Reported           $   207,417   $   177,245    $   177,245
   Adjustment                           514,345       575,969        575,969
                                    -----------   -----------    -----------
   Restated Amount                  $   721,762   $   753,214    $   753,214


Note 5 - Issue of Warrants
--------------------------

On May 10, 2006, we entered into a letter agreement with CCG Investor  Relations
with respect to their  provision of investor  relationship  services for us. The
agreement requires that, in addition to other consideration,  we issue to Coffin
Partners  LLC (i) warrants to purchase  50,000  shares of our common stock at an
exercise  price of $.68 per share on or before  March 31,  2009  (vesting  6,000
shares on issuance and 4,000 shares per month thereafter),  and (ii) warrants to
purchase 50,000 shares of common stock at an exercise price of $.68 per share on
or before March 31, 2009 (vesting 25% on the last day of each calendar  quarter,
beginning with September 30, 2006,  provided that the market price of our common
stock has been above $1.00 for at least 20 days during that  calendar  quarter).
All  of  the  warrants  contain  a  net  exercise  provision  and  benefit  from
"piggyback" registration rights. Such warrants were issued on August 14, 2006.


Item 2.  Management's Discussion and Analysis
---------------------------------------------

Overview

We primarily develop and market fully-integrated,  on-demand business management
solutions to new and independent automobile dealerships.

Our principle product is our Arkona Dealer Management Suite or "ADMS".  The ADMS
is  an  on-demand,  software-based  dealership  management  system  that  allows
dealerships to manage  substantially  all aspects of their business  operations,
including sales, customer relationship management,  accounting,  parts, service,
and  financing.  It is a modular  system,  which makes it scalable for different
types and sizes of dealerships. A key advantage of the ADMS is that it is run on
an Application  Service Provider or "ASP" model. The ASP model bundles software,
hardware,   systems   development,   integration   and   management   into   one
cost-effective  offering.  Under our ASP model, we provide the software and host
customer  data on servers at central  locations,  and customers use the software
over the Internet.  The ASP model may  significantly  reduce upfront and ongoing
hardware costs for the dealership because the significant  processing is done on
computers  maintained at offsite locations by us. The dealership generally needs
only standard personal  computers with reliable  Internet access.  The ASP model
reduces the need for  technical  computer  personnel  because the  software  and
related hardware are managed by us at an offsite  location.  The ADMS integrates
with many of the major automobile  manufacturers and we continue to work towards
integration with the remaining manufacturers.

We provide installation services, including G/L setup, data conversion,  Virtual
Private Network ("VPN") connection,  forms programming and consultative training
to employees of the dealerships who purchase the right to use of the ADMS. For a
continuing  monthly  fee,  we  provide  post-installation  services,   including
continuous access to the latest version of the ADMS hosted on our servers,  data
hosting,  technical support and 24x7 maintenance and security of the servers. We
earn  a  significant   amount  of  our  revenue  from  the   recurring   monthly
post-installation  services, which comprise over 59% of our total revenues. With
the addition of consulting services to our existing customer base, approximately
67% of our revenues are recurring in nature.

For all types of dealerships,  we market our products primarily through regional
sales  representatives,  in-house sales and marketing  personnel and independent
sales  agents.  We also market our  products via trade  shows,  seminars,  press
releases,  trade  publications,  customer referral programs,  relationships with
suppliers, automobile manufacturers and industry partners.

Our main target market is composed of new and independent  (used-car) automobile
dealerships.  Because of operating similarities with automobile dealerships,  we
are expanding our target market to include dealers of RV, marine and powersports
equipment.  We estimate there are between 22,000 and 23,000 new car  dealerships
in the United States and over 60,000  independent car  dealerships.  We estimate
there  are  approximately  6,000  dealers  of  powersports   (motorcycle,   ATV,
watercraft/sport boats and snowmobiles) equipment.

                                     Page 9
<PAGE>

The market for automobile  dealer  management  systems is dominated by two major
players:  Automatic  Data  Processing,  Inc.  ("ADP")  and  Reynolds  & Reynolds
("Reynolds"). According to a 2005 Woods & Seaton automotive retailing study, ADP
and Reynolds  together  control  about 80% of the market for  automobile  dealer
management  systems.  ADP and Reynolds are large,  well-financed  organizations.
They have good brand name  recognition and their systems  integrate with all the
major  automobile  manufacturers.  Their market  dominance  creates  significant
hurdles for us because many  dealerships  are hesitant to abandon their existing
systems  and switch to a new system  provided by a smaller  vendor with  limited
resources.  Their  ability  to  integrate  their  systems  with  all  the  major
automobile  manufacturers is highly  appealing to large  automobile  dealerships
selling  automobiles  from  most  of  the  major  automobile  manufacturers  and
especially automobile  manufacturers with systems with which our ADMS cannot yet
integrate. However, the price of ADP's and Reynolds' dealer systems is generally
much higher than our price for the ADMS,  and we believe that ADP and  Reynolds'
products generally do not reflect recent technological  developments,  including
the ability to run on a true ASP model.  Our success in  competing  with ADP and
Reynolds in the market for  independent  automobile  dealerships  supports  this
belief.

On  August  8,  2006,  Reynolds  announced  it would  merge  with a  competitor,
Universal Computer Systems,  Inc. ("UCS"), with Reynolds becoming a wholly-owned
subsidiary  of UCS but that the  combined  companies  would  retain  the name of
Reynolds.  The merger closed on October 23, 2006.  Industry  analysts state that
the  merger  leads to  questions  regarding  product  strategy,  leadership  and
business culture. It is expected the merger will cause considerable  uncertainty
in the DMS arena in the near future. In the long run, we believe the merger will
create  significant  market share  opportunities  for us as Reynolds'  customers
consider  alternative DMS providers.  In the interim, we believe that the merger
has slowed the rate at which potential  customers close on installation bids for
our products  since it has slowed down the bid process at UCS and Reynolds,  and
customers  typically wait to receive a bid from their existing provider prior to
making a decision to change to our ADMS product.

Explanation of Restatement

Historically,  we have  recognized  VPN  connection  fee revenues at the time we
completed our  installation of our ADMS at the customer's  dealership.  Fees for
this VPN connection,  also referred to as a license fee, generally range from 0%
to 20% of the total  installation  charge.  Following  discussions  and analysis
stemming from  comments  received  from the SEC staff,  we  determined  that VPN
connection fees are not a separate  deliverable  (i.e., do not have  stand-alone
value)  and,  therefore,  should  be  recognized  over the  expected  period  of
performance  under  the  customer  Service  Agreement,   rather  than  upon  the
completion of installation.

We have  recognized  VPN  connection  fee  revenue at the time  installation  is
complete  since  commencing  our ADMS business in late 2000. As a result of this
change in accounting policy, revenue that was recognized in early periods is now
being deferred and recognized ratably over the expected period of performance of
the customer Service Agreement which, as of September 30, 2006,  approximates 60
months - see "Note 4 - Prior Period Adjustments."

Results of Operations

Total revenues  increased for the three and six months ended  September 30, 2006
compared with 2005.  Total revenues were $3,140,377 and $6,105,883 for the three
and six months  ended  September  30,  2006,  which  represents  13.7% and 15.6%
increases, respectively, compared to $2,761,709 and $5,282,254 for the three and
six months ended  September  30, 2005.  This  increase in revenues  continues to
reflect the Company's success in penetrating the dealer management system market
controlled  by ADP and  Reynolds.  The  combination  of our  products'  superior
features and capabilities,  the ASP model's cost savings and  efficiencies,  our
practice of not locking our customers into long-term  contracts,  as well as our
reputation  for  providing  outstanding  service and support,  contribute to the
Company's  continuing  revenue  growth.  Revenues  include  one-time  fees  from
installation  services,  including G/L setup,  data conversion,  VPN connection,
forms programming and training;  post-installation services,  including on-going
monthly  support and  maintenance  fees,  sales of hardware,  and  miscellaneous
consulting fees.

Installation  Services - Installation  services revenues  decreased  $124,164 or
12.9%,  from $960,669 for the three months ended  September 30, 2005 to $836,505
for the three  months  ended  September  30,  2006.  For the six  month  period,
installation  services  revenues  decreased 19.6%, from $1,914,838 to $1,535,533
for the six months ended  September  30, 2006.  Although  installation  services
revenues have decreased when compared with the prior period, we continue to gain
market share,  indicated by our  continued  growth in new  installations.  As of


                                    Page 10
<PAGE>

September 30, 2006, we have 671 total rooftop customers, compared to 495 rooftop
customers as of September 30, 2005. For the three and six months ended September
30,  2006,  total new rooftop  installations  were 41 and 77,  respectively.  We
continue to see the impact of higher fuel  prices and the  resulting  decline in
domestic auto sales on dealerships and their capital investment decisions.  Poor
economic  performances by OEMs such as Ford and GM have also caused  uncertainty
for the  dealerships.  These  economic  factors,  as well as the  merger  of DMS
providers  Reynolds and UCS and changes in the proposal  process used throughout
the rest of the dealer  software  industry  are, we believe,  causing  potential
customers to defer their  purchase  decisions for longer than was previously the
case.  We base  this  belief on the level of our  sales  orders  in  process  or
"funnel," which remains strong when compared to prior quarters.

Support and  Maintenance  - We earn a  significant  portion of our revenues from
recurring support and maintenance  revenues and they continue to grow rapidly as
our  installed  customer  base grows.  For the three months ended  September 30,
2006,  monthly support and maintenance  revenues increased $459,071 or 33.1%, to
$1,846,793 compared to $1,387,722 for the three months ended September 30, 2005.
For the six month period,  support and maintenance revenue increased $992,268 or
37.7%,  to $3,625,790  compared to $2,633,522 for the six months ended September
30, 2005.  This increase  reflects  growth of our customer base, both in new and
independent  automobile  dealerships of all sizes.  As noted above,  for the six
months ended  September 30, 2006 our customer base grew by 77 rooftop  customers
to a total of 671 rooftop  customers,  compared to 594 rooftop  customers  as of
March 31, 2006.  We now earn 59.4% of our revenues  from  recurring  support and
maintenance and over 66% when considering additional monthly consulting revenues
provided to existing customers.

Hardware - Hardware  revenues  increased 46.5%, to $345,226 for the three months
ended  September 30, 2006  compared with $235,584 for the prior period.  For the
six month period,  hardware  revenues  increased 27.6%, to $588,184  compared to
$461,085  for the six  months  ended  September  30,  2005.  We expect  hardware
revenues to continue to increase as we expand our customer base.

Consulting - Consulting  fees increased  42.3%, to $226,547 for the three months
ended  September 30, 2006  compared with $159,213 for the prior period.  For the
six month period,  consulting  fees  increased  83.9%,  to $472,739  compared to
$257,028 for the six months ended September 30, 2005. We view consulting fees to
be  recurring in nature  based upon  customer-designed  programs and expect that
such revenues will continue to grow as our customer base grows.

Total cost of sales increased  $250,982 or 18.0%,  from $1,398,202 for the three
months  ended  September  30,  2005 to  $1,649,184  for the three  months  ended
September  30, 2006.  For the six month  period,  total cost of sales  increased
$395,381 or 14.3%,  from  $2,763,808 for the six months ended September 30, 2005
to $3,159,189 for the six months ended  September 30, 2006. The increase in cost
of sales is due primarily to fixed costs associated with having staffed for more
installations than actually occurred in the first half of the year. In addition,
our hosting  facility and server capacity costs have increased.  Notwithstanding
these increases,  gross margins remain strong, at 47.5% and 48.3%, respectively,
for the three and six months ended September 30, 2006. As installation  revenues
pick up during the second half of the year,  we expect gross margins to continue
to strengthen.

Operating expenses, consisting of research and development, sales, marketing and
general  administrative  expenses,  increased $412,330 or 37.8%, from $1,090,397
for the three months ended September 30, 2005 to $1,502,727 for the three months
ended September 30, 2006. For the six month period, operating expenses increased
$828,871 or 40.2%,  from  $2,059,912 for the six months ended September 30, 2005
to  $2,888,783  for the six months  ended  September  30,  2006.  We continue to
increase our sales and marketing  focus and our sales funnel  continues to grow.
We expect sales to benefit from these efforts in the future.  We have instituted
an investor  relations  program in an attempt to  communicate  our  business and
prospects more widely and effectively to the investment  community.  We continue
to focus  resources  on  developing  new and  enhanced  products.  Research  and
development costs (including  capitalized  software costs) as a percent of sales
have  increased to 12.7% and 12.8%,  respectively,  for the three and six months
ended  September 30, 2006 compared with 11.7% and 12.1%,  respectively,  for the
three and six months ended  September 30, 2005.  Administration  costs have been
impacted by the cost of accounting  compliance with  Sarbanes-Oxley and the cost
of stock option compensation due to the implementation of SFAS 123(R).

Operating  income  decreased  $284,644,  to a loss of  $(11,534) or $(.0003) per
diluted common share for the three months ended September 30, 2006 compared with
operating  income of $273,110 or $.007 per  diluted  common  share for the three
months ended  September 30, 2005.  The current  quarter  results were  adversely


                                    Page 11
<PAGE>

affected by stock-based employee  compensation expense of $69,670.  There was no
stock-based  compensation  expense  included during the prior year quarter ended
September 30, 2005.  For the six month period,  operating  income was $57,911 or
$0.001 per diluted  common  share for the six months  ended  September  30, 2006
compared with  operating  income of $458,534 or $0.028 per diluted  common share
for the six months  ended  September  30,  2005.  The results for the six months
ended  September  30,  2006 were  adversely  affected  by  stock-based  employee
compensation expense of $157,460, with there being no similar expense in the six
months ended  September  30, 2005.  Included in net income for the three and six
months ended  September 30, 2006 is the recognition of income tax benefits of $0
and $36,400,  respectively,  recorded to account for the future tax benefit from
previous years' net operating losses. For the first six months, operating income
continues  to be impacted by expected  higher  operating  costs not being offset
because  of  the  deferral  of  installations  and  related  revenues.  We  have
strengthened our infrastructure and geared up for a higher level of new business
and  installed  base  than is in place at the  moment.  While  this cost base is
causing a reduction in current profitability, we believe it will help to enhance
future profitability.

Liquidity and Capital Resources

Our liquidity  position is steadily  improving.  As of September 30, 2006 we had
working  capital of  $549,399  compared to  $509,970  as of March 31,  2006.  We
generated  $862,582 of operating cash flow during the six months ended September
30, 2006  compared  with  $269,907 for the  corresponding  period in fiscal year
2005.  Cash and cash  equivalents  totaled  $973,616 as of  September  30, 2006,
growing $402,850 since March 31, 2006. Accounts receivable, net of allowance for
bad accounts,  totaled $819,652 as of September 30, 2006 compared to $904,001 as
of March 31, 2006.  Current  liabilities  totaled $1,460,992 as of September 30,
2006  compared to $1,117,713 as of March 31, 2006.  Debt  (principally  from the
utilization of long-term  lease financing of equipment)  totaled  $368,642 as of
September  30, 2006 and $278,686 as of March 31, 2006.  During fiscal year ended
March 31,  2006 we  entered  into a  $250,000  line of credit  agreement  with a
financial  institution.  As of September  30, 2006 we had not utilized any funds
available under the line of credit.

In order to meet operating costs during the six months ended September 30, 2006,
we relied upon cash provided from  operations.  There were no significant  funds
received  from the sale of equity  securities.  We expect our  revenues and cash
flows from  operations  to continue  to  increase  in the future.  We expect net
income to  increase  as well;  however,  due to costs  associated  with  planned
expansion  programs,  our  profitability  (net of income  tax  benefits)  is not
expected to grow at the same rate as revenue. With respect to our planned future
capital  needs,  we  expect  our  recurring   revenues  and  revenues  from  new
installations to produce adequate cash flow to meet our costs.

We do not have a significant  cash reserve.  If we experience a material adverse
event, expand our operations in any significant way or otherwise need additional
cash, we would need to raise  additional  capital.  We believe that,  absent the
occurrence of a material adverse event, we could raise needed additional capital
through the offer and sale of convertible notes,  warrants and equity securities
or through  commercial  financing  arrangements.  We do not,  however,  have any
commitments from any party to provide such capital,  and there is a risk that we
would not be able to raise capital, or may be compelled to pay a very high price
for additional capital, under certain circumstances.  If adequate capital is not
available,  our  ability  to  expand  our  operations,  or  to  continue  normal
operations, may be limited.

The  following  table  discloses  aggregate  information  about our  contractual
obligations  including office and equipment lease payments and the note payable,
and the periods in which payments are due as of September 30, 2006:

<TABLE>
<CAPTION>

                                         Less Than
                             Total         1 Year      1-3 years      4-5 Years     After 5
                         ------------- ------------- -------------- ------------- -------------
<S>                        <C>           <C>           <C>          <C>           <C>
Office Lease               $1,912,012    $ 481,308     $1,430,704
------------------------ ------------- ------------- -------------- ------------- -------------
Equipment Leases              318,642       98,237        203,792        16,613
------------------------ ------------- ------------- -------------- ------------- -------------
Note Payable                   50,000       50,000
------------------------ ------------- ------------- -------------- ------------- -------------
Total                      $2,280,654    $ 629,545     $1,634,496     $  16,613       None
</TABLE>


Capital  expenditures,  principally  for computer  related  equipment and office
cubicles, for the three and six months ended September 30, 2006 totaled $130,731
and $227,783,  respectively.  There are no planned capital  expenditures for the
upcoming quarter outside of normal operating equipment needs.

                                    Page 12
<PAGE>

Critical Accounting Policies and Estimates

Management is basing this discussion and analysis of our financial condition and
results of operations  on our financial  statements.  The  preparation  of these
financial statements requires us to make estimates and judgments that affect the
reported  amounts of assets,  liabilities,  revenues and  expenses,  and related
disclosure  of  contingent  assets and  liabilities.  On an on-going  basis,  we
evaluate our critical accounting policies and estimates, including those related
to revenue  recognition,  equipment  capitalization of software costs and income
taxes.  We base our  estimates on  historical  experience  and on various  other
assumptions  that we  believe  to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

We  believe  the  following  critical   accounting   policies  affect  the  more
significant  judgments and estimates used in the preparation of our consolidated
financial statements.  These judgments and estimates affect the reported amounts
of assets and  liabilities  and the  reported  amounts of revenues  and expenses
during the reporting  periods.  Changes to these  judgments and estimates  could
adversely affect our future results of operations and cash flows.

*     Revenue Recognition - During the course of business,  we recognize revenue
      from the following activities:  Installation  Services;  Post-installation
      Services; Hardware Sales; and Consulting Services.

      Installation  Services include fees for G/L setup,  data  conversion,  VPN
      connection,  forms programming, and training. Each of these activities are
      separately  stated on a  customer's  Service  Agreement  and  individually
      priced.  The Installation  Service is generally  performed over a four (4)
      week period and provides a customer with the tools and knowledge necessary
      in order for them to access  and use the ADMS on a  go-forward  basis.  We
      recognize  installation  services  revenue  in  accordance  with  American
      Institute  of Certified  Public  Accountants  Statement of Position  97-2,
      "Software  Revenue  Recognition"  or SOP 97-2.  We recognize  revenue when
      persuasive  evidence of an  arrangement  exists,  delivery has occurred or
      services have been rendered, the sales price is fixed or determinable, and
      collection  is probable.  Under SOP 97-2,  we determine  whether a Service
      Agreement  includes  multiple  elements as defined in Emerging Issues Task
      Force No. 00-21, "Revenue  Arrangements with Multiple  Deliverables," and,
      if so, whether vendor-specific  objective evidence, or VSOE, of fair value
      exists for each of those  elements.  G/L  setup,  data  conversion,  forms
      programming and training are each separate  deliverables  with each having
      stand-alone  value and revenue is recognized as the services are performed
      and completed, based upon the VSOE of fair value for each element. The VPN
      connection does not have stand-alone value and, therefore,  VPN connection
      fee  revenue  is  deferred  and  recognized  over the  expected  period of
      performance under the customer Service Agreement.

      Service  Agreements   generally  require  the  payment  of  non-refundable
      security deposits.  These deposits are generally in an amount equal to 25%
      of the combined installation fees and represent security against the labor
      and travel  related costs we will incur even if the contract is terminated
      prior to the completion of the  installation  process.  These deposits are
      recorded as deferred revenue until the installation services are completed
      and invoiced.  At that time, the deposits are recorded as payments against
      the related receivable and recognized as explained above.

      Post-installation  Services  provide the customer the right to  continuous
      access to the latest  version of the ADMS hosted on our  servers,  to have
      their data  hosted  and stored on our  servers,  to 24x7  maintenance  and
      security  of  the  servers,   to  post-contract  phone  technical  support
      services,   and  to  receive   manufacturers'  parts  price  updates.  The
      post-installation  services are available  and billed on a  month-to-month
      basis and also  separately  identified and priced on a customer's  Service
      Agreement. Post-installation services fees are recognized ratably over the
      period in which the services are performed.

      Hardware  Sales  include  the  sales  of  standard  computer  systems  and
      peripherals and revenues are recognized when title passes upon shipment to
      the customer.  Installation  of the hardware  and/or  peripherals is not a
      required component of the Service Agreement.

                                    Page 13
<PAGE>

      Consulting  Services generally include fees charged for  post-installation
      training and forms  programming.  We recognize  consulting  services  fees
      under the  percentage-of-completion  method  over the  period in which the
      services are provided.

*     Equipment  - We utilize  significant  amounts of  equipment  in  providing
      service  to our  customers.  We  utilize  straight-line  depreciation  for
      equipment  over our estimate of their useful lives.  Changes in technology
      or changes in the intended use of equipment may cause the estimated period
      of use or the  value of these  assets  to  change.  We  perform  an annual
      analysis to confirm the appropriateness of estimated economic useful lives
      for each category of equipment.  Estimates and assumptions used in setting
      depreciable lives require both judgment and estimates.

*     Capitalization  of  Software  Costs  - Costs  incurred  to  establish  the
      technological  feasibility  of  software  products  to be sold,  leased or
      otherwise  marketed  are  expensed  as  research  and  development.   Once
      technological  feasibility  is  established,   costs  are  capitalized  in
      accordance  with SFAS No. 86 until the  product is  available  for general
      release to  customers.  Capitalized  costs,  which  consist  primarily  of
      payroll and benefits of both employees and outside contractors,  have been
      amortized on a  product-by-product  basis using the  straight-line  method
      over the estimated  economic life of the products  (determined  to be five
      years).  In  addition,  with the  issuance  of SFAS No.  142,  capitalized
      software costs are tested for impairment each period and, if impairment is
      determined, the amount of impairment is written off in that period.

*     Income Taxes - We apply the  provisions of SFAS No. 109,  "Accounting  for
      Income  Taxes." SFAS No. 109 requires an asset and liability  approach for
      financial  accounting and reporting for income taxes,  and the recognition
      of  deferred  tax assets and  liabilities  for the  temporary  differences
      between  the  financial  reporting  basis and tax basis of our  assets and
      liabilities,  at  enacted  tax rates  expected  to be in effect  when such
      amounts are realized or settled.  As a result of net operating  loss carry
      forwards, we expect to recognize income tax benefits in future periods.

*     Stock-Based  Compensation  -  Effective  April 1,  2006,  we  adopted  the
      provisions of SFAS No. 123(R),  "Share-Based Payments", which requires all
      share-based  payments to  employees,  including  grants of employee  stock
      options,  to be  recognized  in the income  statement  based on their fair
      values.

Cautionary Statement Regarding Forward-Looking Statements

We consider all forward-looking statements contained in this Quarterly Report to
be covered by and to qualify for the safe harbor protection  provided by Section
21E of the Securities  Exchange Act of 1934, as amended,  and Section 27A of the
Securities Act of 1933, as amended.  Stockholders  and prospective  stockholders
should  understand that several factors govern whether the results  described by
any such forward-looking  statement will be or can be achieved. Any one of those
factors could cause actual results to differ  materially from those projected in
this report.

The  forward-looking  statements  contained  in this  report  include  plans and
objectives of management for future  operations,  plans relating to the products
and predictions  regarding our economic performance.  Assumptions  applicable to
the foregoing  involve  judgments  with respect to, among other  things,  future
economic, competitive, and market conditions, future business decisions, and the
time and money required to successfully  complete development  projects,  all of
which are difficult or impossible  to predict  accurately  and many of which are
beyond our control.  Although we believe  that the  assumptions  underlying  the
forward-looking  statements are reasonable, any of those assumptions could prove
inaccurate.  Therefore, we cannot assure that the results contemplated in any of
the forward-looking  statements contained herein will be realized. The impact of
actual experience and business developments may cause us to alter our marketing,
capital  expenditure  plans,  or other  budgets,  which may in turn  affect  our
results of operations. In light of the inherent uncertainties in forward-looking
statements,  the inclusion of any such  statement  does not  guarantee  that our
objectives  or plans will be achieved.  Among other risk factors to consider are
the factors  identified  in the  subsection  entitled  "Factors  That May Affect
Future Results" below.

Factors That May Affect Future Results

Our short and long-term  success is subject to certain risks,  many of which are
substantial   in  nature.   The  following  risk  factors  should  be  carefully
considered,  in  addition  to  other  risks  identified  in  this  report,  when


                                    Page 14
<PAGE>

evaluating an  investment  in our common  stock.  Any one of these factors could
cause actual results of operations to differ materially from projected results.

         We may not continue to experience net income in the future.
         -----------------------------------------------------------------------

Any projection of continued  profitability  assumes that we will continue to add
new customers at a constant or increased  rate and that our  operating  expenses
will increase  slower than our  revenues.  We may not be able to continue to add
new  customers  at a constant or  increased  rate,  and we may even begin losing
customers.  Even if we add more  customers,  our labor  costs,  server and other
capital  equipment costs and other expenses may begin to increase  dramatically,
or  we  may  experience  unexpected  costs  related  to  litigation,  insurance,
acquisitions, product development, or other items that may cause our expenses to
increase  at a faster  rate than  expected.  We may not be able to  maintain  or
increase profitability or to increase profitability in the future.

         We may  require  additional  capital  to  continue  development  of our
         products, pursue our expansion plan and fund our operations.
         -----------------------------------------------------------------------

We do not have a significant  cash reserve.  If we experience an unexpected need
for cash,  expand  our  operations  in any  significant  way or  otherwise  need
additional  cash, we expect to continue to rely  primarily on the offer and sale
of  convertible  notes,  warrants and equity  securities to obtain such cash. If
financing  is  needed,  additional  financing  may  not be  available  on  terms
favorable  to us, or at all. If  adequate  funds are not  available,  or are not
available  on  acceptable  terms,  our ability to expand our  operations,  or to
continue normal operations, may be limited.

         We may be unable to continue to increase the number of customers  using
         our ADMS product or other future offerings.
         -----------------------------------------------------------------------

Our  ADMS  is  relatively  new  and we  are  operating  in a  market  where  two
competitors (ADP and Reynolds)  control 80% of the market and have a significant
advantage  relative  to  market  acceptance.  Any  projections  or  expectations
regarding  the number of  customers  that will accept  installation  of our ADMS
product is subject to the risk that  end-users may determine not to purchase our
ADMS product at the rate projected because of our insignificant  position in the
market, concerns over our ability to continue as a going concern, concerns about
our product and related  services or various other reasons.  If we are unable to
increase  our monthly  installations  of our ADMS  product in the future,  it is
unlikely that we will be able to maintain profitability.

         Our financial  results are adversely  affected by any factors  limiting
         the number of installation we do in a quarter or fiscal year.
         -----------------------------------------------------------------------

In any given  reporting  period,  approximately  25% of our  revenue  is derived
directly  from  additional   installations  of  our  ADMS  product.   Additional
installations also increase our recurring revenue for subsequent  quarters.  Any
event,  trend or factor that has the effect of reducing the number of additional
installations  in any quarter or fiscal year,  or in reducing the growth rate in
additional  installations,  will harm our financial  results for that period and
subsequent periods. Factors that may reduce additional installations include:

     o   demand for, and the competitiveness of our ADMS product;

     o   trends  in new and  independent  car  sales,  with many  dealers  being
         reluctant  to  incur  any  new  expenses  or  to  experiment  with  new
         technologies during slow sales periods;

     o   any factor,  such as the recent Reynolds and UCS merger,  which creates
         uncertainty as to future product  offerings by our competitors or slows
         their  bidding  process,  since most dealers  consider a bid from their
         existing provider prior to switching to our ADMS product;

     o   the aggressiveness and ability of our sales team; and

     o   our capacity for new installations,  which is affected by growth in the
         number of, and turnover among, installation technicians.

         Our  competitors  have greater  resources  than we do, which may permit
         them  to  rapidly  develop  or  purchase  new  technologies,  undertake
         significant marketing campaigns or price more aggressively than we do.
         ----------------------------------------------------------------------

                                    Page 15
<PAGE>

The  market  for  automobile   dealership  data  management  systems  is  highly
competitive,  and we must compete with companies that possess greater financial,
technical and marketing  resources than we do. These  advantages may enable them
to respond more quickly to new or emerging  technologies and changes in customer
preferences.  These  advantages  may also allow them to engage in more extensive
research and development,  undertake extensive far-reaching marketing campaigns,
adopt  more  aggressive  pricing  policies  and make more  attractive  offers to
potential  employees and strategic  partners.  As a result,  we may be unable to
obtain a significant  market share in the automobile dealer  management  systems
business. In addition, competition may result in price reductions, reduced gross
margin and loss of market share. We may not be able to compete successfully, and
competitive  pressures may adversely affect our business,  results of operations
and financial condition.

         We are  subject to various  regulatory  regimes,  and may be  adversely
         affected by  allegations  or  determinations  that we have not complied
         with governing rules and laws.
         -----------------------------------------------------------------------

We are  subject to a variety of laws and  regulatory  regimes as a result of our
status as a public  company,  in addition to those  applicable to all businesses
generally. Laws and rules governing public companies change frequently,  and are
often complex.  In connection with such laws, we are subject to periodic audits,
inquiries and investigations.  Any such audits, inquiries and investigations may
divert  considerable  financial and human  resources  and  adversely  affect our
execution of our business plan. In addition,  through such audits, inquiries and
investigations,  we or a regulator have from time to time determined, and may in
the future  determine,  that we are out of compliance with one or more governing
rules or laws.  In fact,  we have  recently  filed  Current  Reports on Form 8-K
indicating a need to restate certain financial  statements from the fiscal years
ended  March  31,  2005  and  2006  and  intervening  quarters.  Remedying  such
non-compliance has, during the last twelve months diverted,  and may continue to
divert additional financial and human resources.  In addition, we may be subject
to a formal charge or determination that we have materially violated a governing
law, rule or regulation. Any charge, and particularly any determination, that we
had  materially  violated a governing  law would likely have a material  adverse
effect on the market  price of our stock,  our ability to execute  our  business
plan and our ability to retain and attract qualified management.

         Our services are subject to system failure and security risks.
         -----------------------------------------------------------------------

Our operations,  particularly our ASP service, are dependent upon our ability to
protect our network infrastructure  against damage from natural disasters,  such
as fire,  earthquakes  and  floods,  as well as power  loss,  telecommunications
failures  and  similar  events.  All  of our  network  and  computer  equipment,
including components critical to our operations, are currently concentrated in a
single  co-location  facility  provided  by MCI.  Notwithstanding  precautionary
measures  that we and our  co-location  host have  taken,  the  occurrence  of a
natural  disaster or other  unanticipated  system or power  failure  could cause
interruptions  in  the  services  we  provide.  In  addition,   failure  of  our
telecommunications  providers  to provide  the data  communications  capacity we
require as a result of natural disasters, bankruptcy, operational disruptions or
for any other reason could cause  interruptions in the services we provide.  Any
damage or failure  that  causes  interruptions  in our  operations  could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

Our ASP network is subject to additional factors that could cause  interruptions
in service,  reduced  capacity for our customers and claims against us. The core
of our network  infrastructure  is vulnerable to unauthorized  access,  computer
viruses,  equipment  failure  and  other  disruptive  problems,   including  the
following:

     o   We and our  customers  may  experience  interruptions  in  service as a
         result of the  accidental  or  malicious  actions  of  Internet  users,
         current and former employees or others.

     o   Unauthorized   access  may  jeopardize  the  security  of  confidential
         information stored in our computer systems and our customers'  computer
         systems,  which may result in liability to our  customers  and also may
         deter potential customers.

     o   We may face  liability for  transmitting  viruses to third parties that
         damage or impair their access to computer networks,  programs,  data or
         information.

     o   There may be a systemic failure of Internet communications,  leading to
         claims associated with the general unavailability of our ASP product.

                                    Page 16
<PAGE>

     o   Eliminating   computer  viruses  and  alleviating   other  security  or
         technical  problems may require  interruptions,  delays or cessation of
         service to our customers.

The occurrence of any unauthorized access,  computer virus, equipment failure or
other  disruptive  problem could have a material adverse affect on our business,
financial condition and results of operations.

         We are dependent upon highly qualified personnel,  and the loss of such
         personnel is a risk to our success.
         -----------------------------------------------------------------------

We are highly  dependent upon the efforts of management and technically  skilled
personnel,   including  programmers,   installers,  and  engineers.  Our  future
performance  will depend,  in part, upon our ability to increase  sales,  manage
growth  effectively,  and retain the services of our  management,  our technical
staff and sales staff. Competition for management, technical and sales personnel
is intense, and we do not have long-term  employment  agreements with any of our
employees.  As a result, we may be unable to retain our key employees or attract
other highly qualified  employees in the future. The loss of the services of any
of our management,  technical or sales team or the failure to attract and retain
additional key employees  could have a material  adverse effect on our business,
financial condition and results of operations.

         We rely on our intellectual  property  rights,  and if we are unable to
         protect these rights, our business may be harmed.
         -----------------------------------------------------------------------

We regard our intellectual  property,  particularly our ADMS, as critical to our
success,  and we rely on common law and trade secret  protection  to protect our
proprietary rights in intellectual  property.  Any of our intellectual  property
rights may be  challenged,  invalidated or  circumvented,  or the rights granted
there under may not provide any competitive advantage.  In addition,  others may
independently  develop  substantially  equivalent  proprietary  information  and
techniques or otherwise gain access to our trade secrets and know-how.  We could
also  incur  substantial  costs  in  asserting  our  intellectual   property  or
proprietary rights against others, including any such rights obtained from third
parties. Although each of our employees and consultants is asked to enter into a
confidentiality and invention agreement,  such agreements may not be honored. We
may be unable to protect  effectively  our rights to trade  secrets and know-how
which would harm our competitive position and operations.

         Third-party  claims that we infringe upon their  intellectual  property
         rights could be costly to defend or settle.
         -----------------------------------------------------------------------

Litigation regarding  intellectual property rights is common in the software and
software-based  service industry.  We expect that software products and services
may be increasingly subject to third-party  infringement claims as the number of
competitors in our industry  segment grows and the  functionality of products in
different  industry  segments  overlaps.  We may,  from time to time,  encounter
disputes over rights and obligations  concerning  intellectual  property.  Third
parties  may bring  claims of  infringement  against us,  which may be with,  or
without,  merit. We could be required,  as a result of an intellectual  property
dispute, to do one or more of the following:

     o   Cease  selling,  incorporating  or using products or services that rely
         upon the disputed intellectual property;

     o   Obtain from the holder of the intellectual  property right a license to
         sell or use the disputed intellectual  property,  which license may not
         be available on reasonable terms;

     o   Redesign  products or services that incorporate  disputed  intellectual
         property; and

     o   Pay  significant  monetary  damages to the  holder of the  intellectual
         property right.

The  occurrence  of any of these events could  result in  substantial  costs and
diversion of resources or could severely limit the services we can offer,  which
could seriously harm our business, operating results and financial condition.

In addition,  we have agreed,  and may agree in the future, to indemnify certain
of  our  customers   against  claims  that  our  software   infringes  upon  the


                                    Page 17
<PAGE>

intellectual  property  rights of others.  We could incur  substantial  costs in
defending ourselves and our customers against  infringement claims. In the event
of a claim of  infringement,  we and our customers may be required to obtain one
or more  licenses from third  parties.  We, or our  customers,  may be unable to
obtain  necessary  licenses from third parties at a reasonable  cost, or at all.
Defense of any  lawsuit or failure to obtain any such  required  licenses  could
harm our business, operating results and financial condition.

         Software-based products tend to evolve rapidly, and our competitors may
         develop products that are technically superior to our products.
         -----------------------------------------------------------------------

Our primary  product,  the ADMS,  is a  software-based  product.  The market for
software  and  software-based  products is  recognized  for rapid  technological
developments,   frequent  new  product   introductions   and  evolving  industry
standards. The rapid evolution of software products requires that we continually
improve the performance,  features and reliability of our software, particularly
in response to  competitive  offerings  by other  companies.  We may not respond
quickly, cost effectively and sufficiently to these developments.

In addition,  the widespread  adoption of new  technologies  or standards  could
require  substantial  expenditures  to modify or adapt our products and services
and which  could  have a  material  adverse  effect on our  business,  financial
condition and results of operations.  Furthermore, our new software enhancements
may contain design flaws or other defects that limit their marketability.

Research  and  development  by others may render some or all of our  products or
potential product offerings  uncompetitive or obsolete. We compete with a number
of entities that are currently  developing and producing  software products that
compete with our current and proposed  products.  Many of these competitors have
substantially greater capital resources,  research and development capabilities,
and production and marketing resources, capabilities and experience than we have
available to us. These  competitors may succeed in developing  products that are
more  effective  or less costly than any products  that we may develop,  or that
gain market acceptance prior to any of our products,  making market  penetration
or retention more difficult for us.

         Trading  in our  common  stock  is  thin,  and  there is a limit to the
         liquidity of our common stock.
         -----------------------------------------------------------------------

Our common stock is quoted on the OTC Bulletin  Board.  The volume of trading in
our common stock is limited and likely dominated by a few  individuals.  Because
of the low volume of trading in our common stock,  the price of our common stock
may increase or decrease significantly as a result of a single trade by a single
stockholder. In addition, the limited volume of trading limits significantly the
number of shares that one can purchase or sell in a short period of time without
adversely affecting the market price. Consequently, an investor may find it more
difficult  to dispose  of shares of our common  stock or obtain a fair price for
our common stock in the market.

         Our management  owns a significant  number of our  outstanding  shares,
         which will allow them to influence the outcome of matters  submitted to
         stockholders for approval.
         -----------------------------------------------------------------------

Our officers and directors own  approximately  30% of our issued and outstanding
common stock. Eight additional stockholders have the power to vote approximately
12% of our issued and outstanding common stock. As a result,  these stockholders
have substantial  control over matters  requiring  approval by our stockholders,
such  as the  election  of  directors  and  approval  of  significant  corporate
transactions.  In addition,  this  concentration  of ownership may also have the
effect of delaying or preventing a change in control.

         Our  stockholder  rights plan and certain  provisions  in the  Delaware
         corporate  law may  permit our Board of  Directors  to block a takeover
         attempt and adversely affect the value of our common stock.
         -----------------------------------------------------------------------

Our Board of  Directors  adopted a  stockholder  rights  plan,  and  declared  a
dividend  of an  associated  right,  which are  expected  to have the  effect of
deterring any takeover of the company that is not preceded by Board  approval of
the proposed  transaction.  The  existence of such  stockholder  rights plan may
deter potential tender offers for our common stock or other  acquisition  offers
and may have the effect of delaying or preventing a change of control.

In addition,  the Delaware General  Corporations Law prohibits  certain mergers,
consolidations,  sales of assets or similar  transactions  between a corporation


                                    Page 18
<PAGE>

and another company which is, or is an affiliate of, a beneficial  holder of 15%
or  more  of such  corporation's  voting  power  (referred  to as an  interested
stockholder)  for three years after the acquisition of the voting power,  unless
the acquisition of the voting power was approved beforehand by the corporation's
board  of  directors  or the  transaction  is  approved  by a  majority  of such
corporation's   stockholders  (excluding  the  interested  stockholder).   These
provisions prohibiting  interested stockholder  transactions could also preserve
management's control of the company.

         Obtaining  additional  capital  through the sale of common  stock would
         result in dilution of stockholder interests.
         -----------------------------------------------------------------------

We may raise  additional  funds in the  future by issuing  additional  shares of
common stock or securities,  such as  convertible  notes,  options,  warrants or
preferred stock that are convertible  into or exercisable for common stock.  Any
such sale of common stock or other  securities will lead to further  dilution of
the equity ownership of existing holders of our common stock.

         The  market  price for our  common  stock is  volatile  and may  change
         dramatically at any time.
         -----------------------------------------------------------------------

The market price of our common stock, like that of the securities of other early
stage companies, may be highly volatile. Our stock price may change dramatically
as the  result of  announcements  of our  quarterly  results,  new  products  or
innovations  by  us  or  our  competitors,   significant  customers'  contracts,
significant  litigation  or other  factors or events  that would be  expected to
directly affect our business or financial  condition,  results of operations and
other factors specific to our business and future  prospects.  In addition,  the
market  price for our  common  stock may be  affected  by  various  factors  not
directly related to our business, including the following:

     o   intentional  manipulation  of our  stock  price by  existing  or future
         stockholders;

     o   short selling of our common stock or related derivative securities;

     o   a single acquisition or disposition, or several related acquisitions or
         dispositions, of a large number of our shares;

     o   the interest of the market in our business  sector,  without  regard to
         our financial condition or results of operations;

     o   the adoption of governmental  regulations  and similar  developments in
         the United  States or abroad  that may affect our  ability to offer our
         products and services or affect our cost structure;

     o   disputes relating to patents or other significant intellectual property
         rights held by others that we, our suppliers or our customers use;

     o   developments in the automobile or automobile dealership industry; and

     o   economic and other external market  factors,  such as a general decline
         in market prices due to poor economic indicators or investor distrust.

          Our  ability  to  issue  preferred  stock  may  significantly   dilute
          ownership  and  voting  power and  negatively  affect the price of our
          common stock.
          ----------------------------------------------------------------------

Under our Certificate of Incorporation,  as amended,  we are authorized to issue
up to 10,000,000  shares of preferred stock.  There are presently 575,000 shares
of Series B preferred stock issued and  outstanding,  convertible into 2,875,000
shares of common  stock.  Our Board of  Directors  has the  authority  to create
various  series of  preferred  stock  with such  voting,  dividend,  conversion,
liquidation  and other rights superior to those of our common stock and to issue
such stock without stockholder  approval.  This issuance of such preferred stock
would dilute the  ownership  and voting power of the holders of our common stock
and may have a negative effect on the price of our common stock.

         We have not declared any dividends with respect to our common stock.
         -----------------------------------------------------------------------

We have never paid a cash  dividend  on our  common  stock.  We intend to retain
earnings,  if any, to finance the  operation  and expansion of our business and,
therefore,  we do not expect to pay cash dividends on our shares of common stock
in the foreseeable future.

                                    Page 19
<PAGE>

Item 3.  Controls and Procedures
--------------------------------

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the  participation  of our management,  including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure  controls and  procedures,  as such term is defined
under Rule 13a-15(e)  promulgated under the Securities  Exchange Act of 1934, as
amended  (the  "Exchange  Act"),  as  of  September  30,  2006.  Based  on  this
evaluation,  our principal  executive  officer and principal  financial  officer
concluded that our disclosure  controls and procedures are effective in ensuring
that information  required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded,  processed,  summarized and
reported, within the time periods specified in the Commission's rules and forms.


Changes in Internal Controls over Financial Reporting

With  the  participation  of  our  principal  executive  officer  and  principal
financial  officer,  our management has, as required by Rule 13a-15(d) under the
Exchange Act,  determined  that there were no changes  during the fiscal quarter
ended September 30, 2006 in our internal  control over financial  reporting that
would materially affect, or would be reasonably likely to materially affect, our
internal control over financial reporting


PART II. OTHER INFORMATION
--------------------------

Item 6.  Exhibits
-----------------

See the Exhibit Index following the signature page hereof.



                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this report to be signed on its behalf on November
13, 2006 by the undersigned thereunto duly authorized.

                                   ARKONA, Inc.

November 13, 2006                    /s/ Alan Rudd
                                   -------------------------------------------
                                   Alan Rudd, Chief Executive Officer


November 13, 2006                    /s/ Leland H. Boardman
                                   -------------------------------------------
                                   Leland H. Boardman, Chief Financial Officer




                                    Page 20
<PAGE>




                                    EXHIBIT INDEX


   Exhibit
    Number                  Title of Document                      Location
------------  ----------------------------------------------    ----------------
31.1          Section 302 Certification of Chief Executive      Filed herewith
              Officer

31.2          Section 302 Certification of Chief Financial      Filed herewith
              Officer

32.1          Section 906 Certification of Chief Executive      Filed herewith
              Officer

32.2          Section 906 Certification of Chief Financial      Filed herewith
              Officer






                                    Page 21