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]

As of February 6, 2007, there were issued and outstanding  33,008,420  shares of
the Company's common stock, par value $.001 per share.

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


<PAGE>

 PART I - Item 1. Financial Statements

                                  ARKONA, INC.

                            Condensed Balance Sheets

                                                  31-Dec-06      31-Mar-06
                                                (Un-audited)     (Audited)
                                                ------------    ------------
 ASSETS

      Current Assets:
        Cash and cash equivalents               $  1,100,739    $    570,766
        Accounts receivable, net of allowance        994,078         904,001
        Prepaid expenses                              95,391          73,693
        Notes receivable - current portion           104,359          77,324
        Other                                         15,142           1,899
                                                ------------    ------------
     Total Current Assets                          2,309,709       1,627,683
                                                ------------    ------------
     Property & Equipment, net of
        accumulated depreciation                     739,065         623,505
                                                ------------    ------------
     Other Assets:
        Deferred tax assets                        1,785,000       1,560,000
        Capitalized software costs, net of
             accumulated amortization              1,495,319       1,215,041
        Other intangible assets, net of
           accumulated amortization                  233,042         233,042
        Security deposits                             44,400          75,690
        Long-term notes receivable                    34,955          40,192
                                                ------------    ------------
     Total Other Assets                            3,592,716       3,123,965
                                                ------------    ------------
TOTAL ASSETS                                    $  6,641,490    $  5,375,153
                                                ============    ============

LIABILITIES & STOCKHOLDERS' EQUITY

     Current Liabilities:
        Accounts payable                        $    119,369    $    159,901
        Accrued liabilities                          460,928         411,230
        Deferred revenue - current portion           735,704         434,019
        Note payable - related party                  50,000          50,000
        Notes payable - current portion              108,859          62,563
                                                ------------    ------------
     Total Current Liabilities                     1,474,860       1,117,713
                                                ------------    ------------

     Long-term Notes Payable                         203,423         166,123
     Long-term Deferred Revenue                      273,562         287,743
                                                ------------    ------------
     Total Liabilities                             1,951,845       1,571,579
                                                ------------    ------------
     Stockholders' Equity:
        Preferred stock ($.001 par value)                575             575
        Common stock ($.001 par value)                32,658          32,490
        Additional paid in capital                23,773,926      23,479,767
        Unearned compensation                           --            (5,848)
        Accumulated deficit                      (19,117,514)    (19,703,410)
                                                ------------    ------------
     Total Stockholders' Equity                    4,689,645       3,803,574
                                                ------------    ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $  6,641,490    $  5,375,153
                                                ============    ============


See notes to condensed financial statements.



                                     Page 2
<PAGE>

<TABLE>
<CAPTION>
                                  ARKONA, INC.

                       Condensed Statements of Operations


                                          Three Months Ended              Nine Months Ended
                                       31-Dec-06       31-Dec-05      31-Dec-06      31-Dec-05
                                      (Un-audited)   (Un-audited    (Un-audited)    (Un-audited
                                                     and Restated)                  and Restated)

                                     ------------    ------------    ------------   ------------
<S>                                  <C>             <C>             <C>            <C>
Revenues                             $  3,472,421    $  2,663,613    $  9,578,304    $  7,945,867

Cost of Sales                           1,793,507       1,398,111       4,952,696       4,161,919
                                     ------------    ------------    ------------    ------------
Gross Profit                            1,678,914       1,265,502       4,625,608       3,783,948
                                     ------------    ------------    ------------    ------------
Operating Expenses:
     Sales, marketing & general
         administrative                 1,160,518         862,443       3,576,919       2,423,842
     Research and development             170,808         230,212         643,190         728,725
                                     ------------    ------------    ------------    ------------
Total Operating Expenses                1,331,326       1,092,655       4,220,109       3,152,567
                                     ------------    ------------    ------------    ------------

Operating Income                          347,588         172,847         405,499         631,381

Other Income (Expense)                      2,956          (1,470)         19,218          (5,155)
                                     ------------    ------------    ------------    ------------

Net Income Before Taxes                   350,544         171,377         424,717         626,226

Income Tax (Provision) Benefit            124,779         235,980         161,179         862,292
                                     ------------    ------------    ------------    ------------

Net Income                           $    475,323    $    407,357    $    585,896    $  1,488,518
                                     ============    ============    ============    ============


Basic Earnings per Common Share:
     Operating Income                $      0.011    $      0.005    $      0.012    $      0.020
     Net Income                      $      0.015    $      0.013    $      0.018    $      0.046
     Ave. Shares Outstanding           32,577,659      32,321,572      32,527,223      32,241,460

Diluted Earnings per Common Share:
     Operating Income                $      0.011    $      0.004    $      0.010    $      0.016
     Net Income                      $      0.012    $      0.010    $      0.015    $      0.038
     Ave. Shares Outstanding           39,248,162      39,540,512      39,411,379      39,213,350

</TABLE>


See notes to condensed financial statements.


                                     Page 3
<PAGE>

                                  ARKONA, INC.

                       Condensed Statements of Cash Flows

                                                    Nine Months Ended
                                               ---------------------------
                                                31-Dec-06      31-Dec-05
                                               (Un-audited)   (Un-audited
                                                              and Restated)
                                               ------------   ------------
Cash Flows Provided By Operating Activities:
     Net income                                $   585,896    $ 1,488,518
     Adjustments to reconcile net income
         to net cash provided by
         operating activities:
         Depreciation and amortization             467,726        359,797
         Bad debt expense                           87,079         20,500
         Loss on asset disposition                   2,051            623
         Stock-based compensation                  226,275          3,340
         Deferred income tax                      (225,000)      (862,292)
         Changes in assets & liabilities:
              Accounts receivable                 (177,156)      (243,271)
              Prepaid expense                      (21,698)       (57,109)
              Security deposits                     31,290         13,205
              Notes receivable                     (21,798)       (64,951)
              Other assets                         (13,243)         3,499
              Accounts payable                     (40,532)         3,809
              Accrued liabilities                   49,698         48,396
              Deferred revenue                     287,504        (67,986)
                                               -----------    -----------
Net Cash Provided By Operating Activities        1,238,092        646,078
                                               -----------    -----------
Cash Flows Used In Investing Activities:
     Additions to equipment                       (318,205)      (320,555)
     Software development costs                   (547,410)      (244,457)
                                               -----------    -----------
Net Cash Used In Investing Activities             (865,615)      (565,012)
                                               -----------    -----------
Cash Flows Provided By Financing Activities:
     Proceeds from issuance of common stock         73,900         48,856
     Proceeds from notes payable                    83,596        153,641
                                               -----------    -----------
Net Cash Provided By Financing Activities          157,496        202,497
                                               -----------    -----------

Net Increase in Cash and Cash Equivalents          529,973        283,563

Beginning Cash Balance                             570,766        141,179
                                               -----------    -----------
Ending Cash Balance                            $ 1,100,739    $   424,742
                                               ===========    ===========

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
motorcycle,  marine and RV  customers.  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. We have exceeded  federally  insured deposit  maximums during the
nine months ended December 31, 2006.

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

                                     Page 5
<PAGE>

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.

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)  Earnings per 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 Incentive Plan

In December 2001, we established a stock  incentive plan (the "Plan") to provide
equity-based 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.  To date,  the Company  has not granted any awards  under the Plan other
than stock  options.  Stock  options are granted at a price equal to fair market
value of the common stock on the date of grant;  those option  awards  generally
vest based on 4 years of continuous service and have 10-year  contractual terms.
In  connection  with a change of control of the Company,  the Board of Directors
has the  discretion  to permit the  options  to remain in  effect,  to cause the
options to be  converted  into  options to purchase  stock of the  surviving  or
acquiring  corporation or to designate an at least 10-day period for exercise in
connection  with the  transaction  after with all options  expire  (and,  in its
discretion, to accelerate vesting for such at least 10-day period).

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  employee  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.  The 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. The use of this valuation model requires the use of accounting
judgment and  financial  estimates,  including  estimates  of the expected  term
employees will retain their vested options before exercising them, the estimated
volatility of our stock price,  and the number of options that will be forfeited
prior  to  the  completion  of  their  vesting   requirements.   Application  of
alternative  assumptions could produce significantly  different estimates of the
fair value of stock-based  compensation  and  consequently,  the related amounts
recognized in our condensed  statements of operations.  Assumptions used for the
valuation model are set forth below:
<TABLE>
<CAPTION>

                                                       Three Months Ended                Nine Months Ended
                                                           December 31,                     December 31,
                                                  ----------------------------     -----------------------------
                                                      2006            2005               2006            2005

<S>                               <C>                  <C>            <C>               <C>             <C>
         Expected life (in years) (1)                  3.5            3.5               3.5             3.5
         Risk-free interest rate (2)              4.55%-4.58%      4.34%-4.58%      4.55%-4.80%      4.21%-4.58%
         Expected volatility factor (3)             126.1%           126.1%           126.1%           126.1%
         Expected dividend yield                        0%             0%                0%               0%
</TABLE>

     (1) For the three and nine months  ended  December  31, 2006 and 2005,  the
         expected  lives of options were  determined  based on the  "simplified"
         method  under the  provisions  of SAB 107. Due to limited  history,  we
         believe  that  we do not  have  appropriate  historical  experience  to
         estimate  future  exercise  patterns.   As  more  information   becomes
         available, we may revise this estimate on a prospective basis.

     (2) The  risk-free  rate for  periods  within the  contractual  life of the
         options is based on the U.S. Treasury yield curve in effect at the time
         of grant.

     (3) For the three and none months ended December 31, 2006, we estimated the
         expected volatility based on historical share price data.

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

                                                            Weighted          Weighted
                                                             Average           Average         Aggregate
                                                            Exercise          Remaining        Intrinsic
                                             Options          Price         Life in Years        Value
                                           ---------        --------        -------------      ----------
<S>                                        <C>               <C>                <C>            <C>
Outstanding at March 31, 2006               6,793,667         $0.38              6.6

Activity during the period:
         Granted                              130,000         $0.65
         Exercised                            (84,000)        $0.34
         Cancelled/Expired                   (203,000)        $0.57
                                           ----------
Outstanding at December 31, 2006            6,636,667         $0.39              6.6            $1,141,283

Exercisable at December 31, 2006            5,462,167         $0.31              6.5            $1,290,338
</TABLE>



                                     Page 7
<PAGE>

The  weighted-average  grant-date fair value of options granted during the three
months  ended  December 31, 2006 and 2005 was $.59 and $.62,  respectively.  The
weighted-average grant-date fair value of options granted during the nine months
ended  December  31,  2006 and 2005 was $.57 and $.61,  respectively.  The total
intrinsic value of options  exercised during the three months ended December 31,
2006 and 2005 was $9,000 and $15,520, respectively. The total intrinsic value of
options  exercised  during the nine months ended  December 31, 2006 and 2005 was
$24,850 and $55,575, respectively.

A summary of the status of  non-vested  options as of  December  31,  2006,  and
changes during the nine months ended December 31, 2006, is presented below:

                                                               Weighted
                                                                Average
                                                              Grant Date
                                            Options           Fair Value
                                          -----------         -----------
Non-vested at March 31, 2006                2,143,000            $0.62

Activity during the period:
         Granted                              130,000            $0.65
         Vested                              (895,500)           $0.41
         Cancelled/Expired                   (203,000)           $0.57
                                           ----------
Non-vested at December 31, 2006             1,174,500            $0.69

For the three and nine months  ended  December 31,  2006,  stock-based  employee
compensation expense was recorded and classified as follows:

                                     Three Months Ended    Nine Months Ended
                                        December 31,          December 31,
                                    -------------------   -------------------
                                      2006       2005       2006        2005

Cost of Sales                       $ 12,573   $      0   $ 38,154   $      0
Sales, Marketing & General Admin      50,330          0    169,761      3,340
Research & Development                 5,587          0     18,360          0
                                    --------   --------   --------   --------
                                    $ 68,490   $      0   $226,275   $  3,340

As of December  31,  2006,  there was  approximately  $728,000  of  unrecognized
compensation  cost related to non-vested stock options,  which is expected to be
recognized over a weighted-average period of 1.9 years.

The following summarizes the stock-based  employee  compensation expense for the
nine months ended  December 31, 2005,  had we adopted the provisions of SFAS No.
123(R):

         Net income, as restated                              $ 1,488,518

         Add:  Stock-based employee compensation
               included in reported net income                      6,722

         Deduct:  Stock-based employee compensation
                  determined under fair value based
                  method for all awards                           (64,069)
                                                             ------------
         Pro forma net income, as restated                    $ 1,431,171

         Pro forma earnings per common share:
                  Basic                                       $     0.044
                  Diluted                                     $     0.036

Cash  received  from the  exercise  of stock  options  during the three and nine
months  ended  December 31, 2006 was $5,000 and  $23,900,  respectively.  No tax
benefit was realized from the exercise of the options.

                                     Page 8
<PAGE>

(h)  Stock Warrants

In fiscal years 2002 and 2003, we issued a total of 2,699,092  stock warrants in
connection  with the issuance of  convertible  debt and for  inducements to make
investments  in the  Company.  These  stock  warrants  were  granted at a prices
ranging from $.20 to $33 , have 5-year  contractual  terms and were fully vested
upon issuance.  On October 30, 2006 the Board approved an amendment to a warrant
agreement with a director to amend the termination  date on 1,212,122  warrants,
from December 21, 2006 to the earlier to occur of (a) the date 60 days following
the date the director  ceases to be a director of the Company,  and (b) December
21, 2007. As a result of that modification,  additional  compensation expense of
$14,061 will be recognized  during the  subsequent  twelve months ended December
31, 2007.

On May 10, 2006,  we finalized a letter  agreement  with CCG Investor  Relations
("CCG") 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  August 14,  2008  (vesting
14,000  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  May 31,  2009  (vesting  25% on the  last day of each
calendar  quarter,  beginning with  September 1, 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 CCG warrants contain a net exercise provision and
benefit from  "piggyback"  registration  rights.  Such  warrants  were issued on
August 14, 2006.

As of December 31, 2006, warrant activity is presented below:
<TABLE>
<CAPTION>

                                                          Weighted        Weighted
                                                           Average         Average        Aggregate
                                                          Exercise        Remaining       Intrinsic
                                            Warrants        Price        Life in Years     Value
                                          -----------   ----------       -------------    ----------
<S>                                         <C>            <C>                <C>         <C>
Outstanding at March 31, 2006               2,699,092      $0.28              1.7

Activity during the period:
         Granted                              100,000
         Exercised                             None
         Cancelled/Expired                     None
                                          ----------
Outstanding at December 31, 2006            2,799,092      $0.29              1.2          $ 756,597

Exercisable at December 31, 2006            2,729,092      $0.29              1.2          $ 764,997
</TABLE>

(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.

(k)      Recent Accounting Pronouncements

In  July  2006,  the  FASB  issued  Financial  Interpretation  ("FIN")  No.  48,
"Accounting  for  Uncertainty  in Income  Taxes." This  interpretation  requires
recognition  and   measurement  of  uncertain   income  tax  positions  using  a
"more-likely-than-not"  approach.  FIN No.  48 is  effective  for  fiscal  years
beginning  after December 15, 2006. We are currently  evaluating the impact that
FIN No. 48 may have on our financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
standard defines fair value, establishes a framework for measuring fair value in
generally  accepted  accounting  principles,  and expands  disclosure about fair
value measurements.  This statement is effective for financial statements issued
for  fiscal  years  beginning  after  November  15,  2007.   Early  adoption  is
encouraged. We are currently evaluating the impact that SFAS No. 157 may have on
our financial condition or results of operations.

                                     Page 9
<PAGE>

In  September  2006,  the  Securities  and  Exchange   Commission  issued  Staff
Accounting  Bulletin  ("SAB")  No. 108,  "Considering  the Effects of Prior Year
Misstatements   when   Quantifying   Misstatements  in  Current  Year  Financial
Statements." SAB No. 108 provides  guidance on the  consideration of the effects
of prior year  misstatements in quantifying  current year  misstatements for the
purpose of a materiality  assessment.  SAB No. 108  establishes an approach that
requires  quantification  of financial  statement errors based on the effects of
each of the Company's  financial  statements and the related financial statement
disclosures.  SAB No.  108  permits  existing  public  companies  to record  the
cumulative  effect of initially  applying this approach in the first year ending
after November 15, 2006 by recording the necessary correcting adjustments to the
carrying  values of assets and liabilities as of the beginning of that year with
the offsetting  adjustment recorded to the opening balance of retained earnings.
Additionally,  the  use of the  cumulative  effect  transition  method  requires
detailed  disclosure  of the nature and amount of each  individual  error  being
corrected  through  the  cumulative  adjustment  and how and when it  arose.  We
believe we are in compliance with SAB No. 108.


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        Nine Months
                               Ended              Ended               Ended
                             03/31/06            12/31/05            12/31/05

Revenues
   As Previously Reported   $11,129,798        $ 2,611,319         $ 7,872,823
   Adjustment                    82,373             52,294              73,044
                            -----------        -----------         -----------
   Restated Amount          $11,212,171        $ 2,663,613         $ 7,945,867

Net Income Before Tax
   As Previously Reported   $   821,062        $   119,082         $   553,181
   Adjustment                    82,373             52,295              73,045
                            -----------        -----------         -----------
   Restated Amount          $   903,435        $   171,377         $   626,226

Tax Benefit
   As Previously Reported   $ 1,244,000        $      --           $      --
   Adjustment                      --              235,980             862,292
                            -----------        -----------         -----------
   Restated Amount          $ 1,244,000        $   235,980         $   862,292

Net Income
   As Previously Reported   $ 2,065,062        $   119,082         $   553,181
   Adjustment                    82,373            288,275             935,337
                            -----------        -----------         -----------
   Restated Amount          $ 2,147,435        $   407,357         $ 1,488,518

Basic EPS
   As Previously Reported   $     0.064        $     0.004         $     0.017
   Adjustment                     0.003              0.009               0.029
                            -----------        -----------         -----------
   Restated Amount          $     0.067        $     0.013         $     0.046

Diluted EPS
   As Previously Reported   $     0.053        $     0.003         $     0.014
   Adjustment                     0.002              0.007               0.024
                            -----------        -----------         -----------


                                     Page 10
<PAGE>

   Restated Amount          $     0.055        $     0.010         $     0.038

Deferred Tax Asset
   As Previously Reported   $ 1,560,000        $ 5,039,237         $ 5,039,237
   Adjustment                      --           (3,864,945)         (3,864,945)
                            -----------        -----------         -----------
   Restated Amount          $ 1,560,000        $ 1,174,292         $ 1,174,292

Deferred Contract Revenue
   As Previously Reported   $   207,417        $   205,385         $   205,385
   Adjustment                   514,345            523,673             523,673
                            -----------        -----------         -----------
   Restated Amount          $   721,762        $   729,058         $   729,058


Item 2.  Management's Discussion and Analysis

Overview

We develop and market fully-integrated,  on-demand business management solutions
to  new  and  independent   automobile  dealerships  and  to  a  lesser  extent,
motorcycle, marine and RV dealerships.

Our principal product is the Arkona Dealer Management Suite or "ADMS".  The ADMS
is  an  on-demand,  software-based  dealership  management  system  that  allows
dealerships to manage 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  significantly  reduces upfront and ongoing hardware costs for the
dealership because data processing is done on computers  maintained by Arkona at
offsite  locations.  The  dealership  generally  needs  only  standard  personal
computers with reliable  Internet  access to use the ADMS. The ASP model reduces
the need for  technical  computer  personnel  because the  software  and related
hardware are managed at an offsite location.

Customers  find  the  adoption  and  use of the  ADMS  easier  if it  seamlessly
integrates  with existing data format,  input and transfer  protocols  currently
used by their suppliers. In the case of automobile dealerships,  these suppliers
are the major  automobile  manufacturers.  The ADMS  integrates with many of the
major automobile  manufacturers and we continue to work towards integration with
the remaining manufacturers.

Our revenues are  generated  from several  sources.  At the outset of a customer
relationship,  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 the ADMS.  Once the ADMS is  installed,  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 these  recurring  monthly  post-installation  services,  which
comprise 59% of our total revenues.  We also provide additional training,  forms
programming and other consulting services following initial  installation.  When
consulting services are considered together with the post-installation  services
that we provide to our existing  customer  base,  almost 66% of our revenues are
recurring in nature.

We also sell computer  hardware,  peripherals and supplies to our customers.  We
sell these as an additional service to our customers.

For all types of dealerships,  we market our products primarily through regional
sales representatives,  in-house sales 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


                                     Page 11
<PAGE>

in the United  States  and over  60,000  independent  car  dealerships.  We also
estimate there are approximately 6,000 dealers of powersports (motorcycle,  ATV,
watercraft/sport boats and snowmobiles) equipment.

The market for automobile  dealer  management  systems is dominated by two major
players:  Automatic  Data  Processing,  Inc.  ("ADP")  and  Reynolds  & Reynolds
("Reynolds").  Following  the merger noted below,  it is estimated  that ADP and
Reynolds  together  control  about  86%  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.  Some  dealerships  also have long term contracts with their existing
suppliers  that would be expensive or  impractical  to terminate  prior to their
expiration.  ADP's and Reynolds' ability to integrate their systems with all the
major   automobile   manufacturers  is  highly  appealing  to  large  automobile
dealerships  which sell vehicles  from the major  automobile  manufacturers  and
especially  automobile  manufacturers with which our ADMS is not yet integrated.
However, the price of ADP's and Reynolds' dealer management systems is generally
much higher than the price for the ADMS, and we believe that ADP's and Reynolds'
products generally do not include recent technological developments, such as the
ability  to run on a true ASP  model.  Our  success  in  competing  with ADP and
Reynolds in the independent automobile dealership market supports this belief.

As noted  above,  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 with the combined  companies  retaining the
name of Reynolds. The merger closed on October 23, 2006. Industry analysts state
that the merger brings up questions  regarding product strategy,  leadership and
business culture. We believe that the merger is causing considerable uncertainty
in the DMS arena,  which has  apparently  caused  many  dealerships  to consider
alternative  suppliers  while at the same time  deferring  new  system  purchase
decisions from all suppliers. In the long run, we believe the merger will create
opportunities  for us to increase market share as Reynolds'  customers  consider
alternative  DMS  providers.  In the interim,  we believe that  knowledge of the
merger  has  slowed  the  rate at  which  potential  customers  have  closed  on
installation bids for our products because 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 final  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  (effective  July  1,  2006),  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  December  31,  2006,  approximates  70 months - see  "Note 4 - Prior  Period
Adjustments."

Results of Operations

Total  revenues  increased for the three and nine months ended December 31, 2006
compared with 2005.  Total revenues were $3,472,421 and $9,578,304 for the three
and nine months  ended  December  31,  2006,  which  represents  30.4% and 20.5%
increases, respectively, compared to $2,663,613 and $7,945,867 for the three and
nine months  ended  December  31, 2005.  This  increase in revenues  continues a
quarter over quarter  growth trend over the last several  years and reflects the
Company's continuing success in penetrating the dealer management system market.
The combination of our products' 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 our 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.

                                     Page 12
<PAGE>

Installation  Services - Installation  services revenues  increased  $225,888 or
28.3%,  from $798,516 for the three months ended December 31, 2005 to $1,024,404
for the three  months  ended  December  31,  2006.  For the nine  month  period,
installation services revenues decreased 5.7%, from $2,713,354 to $2,559,937 for
the nine months ended December 31, 2006.

The decrease in  installation  revenues  for the nine months ended  December 31,
2006 compared to the same period in the prior year reflects slower than expected
installation  services  revenues  growth  during the first two  quarters  of the
fiscal  year ended March 31, 2007  ("fiscal  2007").  Higher fuel prices and the
resulting  decline in domestic auto sales caused  dealerships to cancel or delay
new  capital  investment.  Lower  demand  was  also a  result  of poor  economic
performances  by OEMs  such as Ford and GM,  which  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 discussed above caused potential customers to defer
their  purchase  decisions for longer than was previously the case. We believe a
number of these  factors  are  beginning  to abate.  We base this  belief on our
installation  revenue growth in the third quarter ended December 31, 2006, which
was 28.3% compared to the same quarter in the prior year.

The slower than expected rate of new system  installations  during the first six
months of this  fiscal year has caused the year to date number of systems in our
installed  base to be behind  expectations.  As of December 31, 2006, we had 736
total rooftop  customers,  compared to 539 rooftop  customers as of December 31,
2005. For the three and nine months ended  December 31, 2006,  total new rooftop
installations  were  65  and  142,  respectively,  compared  with  39  and  124,
respectively, for the three and nine months ended December 31, 2005.

Support and  Maintenance  - We earn a  significant  portion of our revenues from
recurring  support  and  maintenance  revenues  from our  installed  base of 736
rooftop customers. For the three months ended December 31, 2006, monthly support
and maintenance  revenues increased $477,808 or 31.9%, to $1,975,037 compared to
$1,497,229  for the three  months ended  December 31, 2005.  For the nine months
ended December 31, 2006, support and maintenance revenue increased $1,470,076 or
35.6%,  to $5,600,827  compared to $4,130,751 for the nine months ended December
31, 2005. These increases reflect continued growth of our customer base, both in
new and independent automobile dealerships of all sizes. As noted above, for the
nine  months  ended  December  31,  2006 our  customer  base grew by 142 rooftop
customers,  to a  total  of 736  rooftop  customers,  compared  to  594  rooftop
customers as of March 31, 2006.  Overall,  the proportion of revenues  generated
from the  existing  installed  base  continues  to grow.  We earned 58.5% of our
revenues for the nine months ended December 31, 2006 from recurring  support and
maintenance and 66.7% when considering  additional monthly  consulting  revenues
provided to existing customers.

Hardware - Hardware  revenues  increased 69.8%, to $348,547 for the three months
ended  December 31, 2006 compared  with  $205,292 for the prior period.  For the
nine-month  period,  hardware revenues increased 40.6%, to $936,731 for the nine
months ended  December 31, 2006  compared to $666,377 for the prior  period.  We
expect hardware revenues to continue to increase as we expand our customer base.

Consulting - Consulting  fees increased  31.0%, to $213,042 for the three months
ended  December 31, 2006 compared  with  $162,582 for the prior period.  For the
nine-month  period,  consulting  fees increased  63.4%, to $685,781 for the nine
months ended  December 31, 2006  compared to $419,610 for the prior  period.  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.

Cost of sales increased  $395,396 or 28.3%, from $1,398,111 for the three months
ended  December 31, 2005 to $1,793,507  for the three months ended  December 31,
2006.  For the  nine-month  period,  total cost of sales  increased  $790,777 or
19.0%, from $4,161,919 for the nine months ended December 31, 2005 to $4,952,696
for the nine months ended  December 31,  2006.  Gross  margins grew to 48.3% for
both the three and nine months  ended  December  31, 2006  compared to 47.5% and
47.6%,  respectively,  for the three and nine months ended December 31, 2005. We
expect  overall  gross  margins  to  continue  to  strengthen  as higher  margin
recurring  support  and  maintenance  revenues  grow as a  proportion  of  total
revenues.  Margins on the various types of installations  (new car,  independent
and/or  powersports)  and  consulting  engagements  can vary from 25% to 40% but
margins from recurring support and maintenance are approximately 70%.

Operating expenses, consisting of research and development, sales, marketing and
general administrative expenses,  increased $298,075 or 34.6%, from $862,443 for
the three months  ended  December  31, 2005 to  $1,160,518  for the three months


                                     Page 13
<PAGE>

ended December 31, 2006. For the nine-month period, operating expenses increased
$1,153,077 or 47.6%, from $2,423,842 for the nine months ended December 31, 2005
to $3,576,919 for the nine months ended  December 31, 2006.  These costs reflect
our continuing focus on developing new and enhanced  products and increasing our
sales and marketing focus. Research and development costs (including capitalized
software costs) increased $77,530 and $223,038,  respectively, for the three and
nine months  ended  December  31, 2006 over the prior  periods.  As a percent of
sales, research and development costs total 11.0% and 12.2%,  respectively,  for
the three and nine months ended  December 31, 2006.  Sales and  marketing  costs
increased  $211,726 and  $634,188,  respectively,  for the three and nine months
ended  December  31,  2006 over the prior  periods.  Administrative  costs  have
increased  $86,349  and  $518,889,  respectively,  for the three and nine months
ended December 31, 2006 over the prior periods.  We have  instituted an investor
relations  program in an attempt to communicate  our business and prospects more
widely and effectively to the investment community. Additionally, 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 increased  $174,741 or 101.1%, to $347,588 or $.011 per diluted
common  share for the  three  months  ended  December  31,  2006  compared  with
operating  income of $172,847 or $.005 per  diluted  common  share for the three
months ended  December  31, 2005.  The current  quarter  results were  adversely
affected by stock-based employee  compensation expense of $68,817.  There was no
stock-based employee compensation expense included during the prior year quarter
ended  December  31,  2005.  For the  nine-month  period,  operating  income was
$405,499 or $0.012 per diluted  common share for the nine months ended  December
31, 2006 compared with operating income of $631,381 or $0.020 per diluted common
share for the prior period.  The results for the nine months ended  December 31,
2006 were adversely  affected by stock-based  employee  compensation  expense of
$226,275 and $3,340,  respectively,  for the nine months ended December 31, 2006
and 2005. For the first nine months,  operating  income continues to be impacted
by expected  higher  operating costs not being offset because of the deferral of
installations  and  related  revenues  during the first and second  quarters  of
fiscal year 2007.

Included in net income for the three and nine months ended  December 31, 2006 is
the recognition of a provision for income tax benefits of $124,779 and $161,179,
respectively.  For the three and nine months ended December 31, 2005, net income
included  the  recognition  of income tax  benefits  of $235,980  and  $862,292,
respectively.  Our income tax  calculations  are impacted by the  existence of a
$1,785,000  deferred tax asset as of December  31,  2006.  We believe that it is
more  likely  than  not that  our  projected  future  operations  will  generate
sufficient  taxable  income to utilize the deferred tax asset  outstanding as of
December 31, 2006 before its expiration.

Liquidity and Capital Resources

Our liquidity  position at December 31, 2006 has improved compared to the period
ending  March 31,  2006.  As of  December  31,  2006 we had  working  capital of
$834,849  compared to $509,970 as of March 31, 2006. We generated  $1,238,092 of
operating cash flow during the nine months ended December 31, 2006 compared with
$646,078  for the  corresponding  period  in  fiscal  year  2005.  Cash and cash
equivalents  exceeded $1 million for the first time,  reaching  $1,100,739 as of
December 31, 2006, growing $529,973 since March 31, 2006.  Accounts  receivable,
net of allowance for doubtful accounts, totaled $994,078 as of December 31, 2006
compared to $904,001 as of March 31, 2006.  Current assets totaled $2,309,709 as
of  December  31, 2006  compared to  $1,627,683  as of March 31,  2006.  Current
liabilities totaled $1,474,860 as of December 31, 2006 compared to $1,117,713 as
of March 31, 2006.  Debt  (principally  from the  utilization of long-term lease
financing of  equipment)  totaled  $362,282 as of December 31, 2006  compared to
$278,686  as of March 31,  2006.  During the fiscal year ended March 31, 2006 we
entered into a $250,000 line of credit  agreement with a financial  institution.
As of December 31, 2006 we had not utilized any funds  available  under the line
of credit.

In order to meet operating costs during the nine months ended December 31, 2006,
we were  able  to  rely  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 while those expansion plans are
ongoing.  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 not currently  contemplated,
engage in a significant  acquisition  transaction 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


                                     Page 14
<PAGE>

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 a note payable,
and the periods in which payments are due as of December 31, 2006:
<TABLE>
<CAPTION>


                                         Less Than
                                Total      1 Year      1-3 years      4-5 Years     After 5
                         ------------- ------------- -------------- ------------- -------------
<S>                        <C>           <C>           <C>          <C>           <C>
Office Lease               $1,792,205    $ 484,432     $1,307,773
------------------------ ------------- ------------- -------------- ------------- -------------
Equipment Leases              312,282      108,859        192,252        11,171
------------------------ ------------- ------------- -------------- ------------- -------------
Note Payable                   50,000       50,000
------------------------ ------------- ------------- -------------- ------------- -------------
Total                      $2,154,487    $ 643,291     $1,500,025     $  11,171       None
                         ============= ============= ============== ============= =============
</TABLE>

Capital  expenditures,  principally  for computer  related  equipment and office
cubicles,  for the three and nine months ended December 31, 2006 totaled $84,309
and $318,205,  respectively.  There are no planned capital  expenditures for the
upcoming quarter outside of normal operating equipment needs.

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


                                     Page 15
<PAGE>

      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.

      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


                                     Page 16
<PAGE>

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
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, engage in an acquisition
transaction  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 86% 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 installations we do in a quarter or fiscal year.
         -----------------------------------------------------------------------

In any given  reporting  period,  approximately  27% 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


                                     Page 17
<PAGE>

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.

     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.
         -----------------------------------------------------------------------

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.

         Our position in the market may be adversely  affected by potential  new
         competitors.
         -----------------------------------------------------------------------

Our market is  dominated  by ADP and  Reynolds &  Reynolds,  and our  historical
success in adding new customers is based, in part, on our position as one of few
alternatives to these high-priced market leaders. Microsoft(R) has announced its
intention to enter into the dealer  management  software  market in the next few
years, and other companies with significant  brand name recognition  could enter
into the market. In addition,  smaller companies with a lower pricing structure,
new software or other innovation could enter the market. If additional companies
enter the market,  our  ability to add new  customers  and retain our  customers
would  be  harmed,  particularly  if the  new  entrants  brought  a  significant
competitive  advantage  such as a name brand or an innovative  development.  Any
reduction in our ability to add new customers,  or retain customers,  would lead
to a reduction in the growth  rate,  or total amount of, our revenues and likely
lead to decreasing net income or a net loss.

         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 and
Quarterly  Reports on Form 10-QSB  with  respect to the  restatement  of certain
financial  statements.  Remedying  such  non-compliance  has  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


                                     Page 18
<PAGE>

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.

     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
thereunder 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


                                     Page 19
<PAGE>

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.

     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
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.

                                     Page 20
<PAGE>

         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
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.

                                     Page 21
<PAGE>

     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.

     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.

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 December 31, 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 December 31, 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 1.       Legal Proceedings

From time to time,  we are a party to litigation  matters  arising in connection
with the normal  course of our  business,  none of which is  expected  to have a


                                     Page 22
<PAGE>

material adverse effect on us. In addition to the litigation  matters arising in
connection  with  the  normal  course  of  our  business,  we are  party  to the
litigation described below.

On November 22, 2006,  Dealer  Computer  Services,  d/b/a as Universal  Computer
Systems,  Inc. ("UCS") and party to a recent business  combination with Reynolds
and  Reynolds,  filed a complaint  against  Arkona in  District  Court of Harris
county Texas, 152d Judicial District, asserting claims for tortuous interference
with contracts with six of its clients or former clients.  The complaint alleges
that,   through  the  action  of  a  regional  sales  manager  (formerly  a  UCS
representative),  Arkona induced several UCS clients to breach their  agreements
with UCS and become clients of Arkona,  which  allegedly  resulted in damages in
excess of $6  million.  Although  some former UCS  clients  have  become  Arkona
clients,  including  some,  but  not  all,  of  the  clients  identified  in the
complaint, Arkona denies any wrongdoing and is vigorously contesting the claims.
The parties have not yet conducted any factual discovery; however, based upon an
initial  analysis  of the facts and the  claims,  Arkona  and its legal  counsel
believe the UCS claims are without  merit and that the  evidence  will show that
Arkona has not engaged in any tortuous conduct.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

         In fiscal years 2002 and 2003,  we issued  warrants to purchase a total
of  2,699,092  shares of our common  stock in  connection  with the  issuance of
convertible debt and for inducements to make  investments in the Company.  These
stock  warrants  were granted at a prices  ranging from $.20 to $33, have 5-year
contractual  terms and were fully vested upon issuance.  On October 30, 2006 our
Board of  Directors  approved an  amendment  to a warrant to purchase  1,212,122
shares of common  stock held by Paul  Henriod,  who has become a director of the
Company subsequent to his purchase of the warrant, to extend the expiration date
from  December  21, 2006 to the earlier to occur of (a) the date the director is
no longer a director of the Company,  and (b) December 21, 2007.  As a result of
that modification, additional compensation expense of $14,061 will be recognized
during the subsequent twelve months ended December 31, 2007.

         The amendment was effected in reliance upon the exemptions for sales of
securities not involving a public offering,  as set forth in Section 4(2) of the
Securities Act and rules promulgated there under, based upon the following:  (a)
the holder is a director and, as a result, an "accredited  investor," as defined
in Rule 501 of Regulation D promulgated  under the  Securities  Act and has such
background,  education and experience in financial and business matters as to be
able to evaluate the merits and risks of an  investment in the  securities;  (b)
there was no  public  offering  or  general  solicitation  with  respect  to the
amendment;  (c) as a director, the holder has access to all material information
with respect to our company;  (d) the  warrants,  and shares  issuable  upon the
exercise  thereof,  are  "restricted  securities" for purposes of the Securities
Act; (e) the warrant contains a standard restrictive legend.

Item 4.  Submission of Matters to a Vote of Security Holders

         The Company  held an Annual  Meeting of  Shareholders  on December  13,
2006, at which the Company's shareholders considered and voted as follows on the
items described below:

         1. Our shareholders  considered  whether to elect the following persons
as  directors  of the  Company,  each to serve until the next annual  meeting of
shareholders  of the Company and until his respective  successor shall have been
duly elected and shall qualify:
<TABLE>
<CAPTION>

                                                                                 Broker
           Name of Nominee            Votes For         Abstentions            Non-Votes
           ---------------            ---------         -----------            ---------
<S>                                  <C>                   <C>                     <C>
     Alan Rudd                       20,599,234            62,015                  0
     Richard Holland                 20,599,234            62,015                  0
     Marc Fuller                     20,599,234            62,015                  0
     Paul Henriod                    20,599,234            62,015                  0
     Kent Misener                    20,599,234            62,015                  0
</TABLE>

         2. Our shareholders  considered and voted upon a proposal to ratify the
appointment of Mantyla McReynolds,  a Professional  Corporation,  as independent


                                     Page 23
<PAGE>

auditors of the Company for the fiscal year ending  March 31,  2007.  There were
20,613,959 votes cast in favor,  29,700 votes cast against,  17,589 abstentions,
and no broker non-votes.

         3. Our shareholders  considered and voted upon a resolution,  including
an  amendment  to the  Certificate  of  Incorporation  of the Company  contained
therein, authorizing the Board of Directors of the Company, in its discretion at
any time prior to  November  1, 2007,  to take all steps  necessary  to effect a
consolidation  of the Common Stock of the Company on the basis of a ratio within
the  range of one  post-consolidation  share of  Common  Stock  for  every  four
pre-consolidation  shares of  Common  Stock to one  post-consolidation  share of
Common Stock for every twelve pre-consolidation shares of Common Stock, with the
ratio to be selected and implemented by the Corporation's  Board of Directors in
its sole  discretion,  if at all.  There  were  20,010,537  votes cast in favor,
611,733 votes cast against, 38,978 abstentions, and no broker non-votes.

All items considered at the meeting were approved by the stockholders.

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 February
12, 2007 by the undersigned thereunto duly authorized.

                                   ARKONA, Inc.

February 14, 2007                    /s/ Alan Rudd
                                   ---------------------------------------------
                                   Alan Rudd, Chief Executive Officer


February 14, 2007                    /s/ Leland H. Boardman
                                   ---------------------------------------------
                                   Leland H. Boardman, Chief Financial Officer


                                     Page 24
<PAGE>




                                    EXHIBIT INDEX


   Exhibit
    Number                  Title of Document                      Location
------------  ----------------------------------------------    ----------------

4.1           Warrant Amendment                                 Filed herewith

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


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