================================================================================


                                  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 June 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 August 1, 2006, there were issued and outstanding 32,502,323 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

                                                   30-Jun-06      31-Mar-06
                                                  (Un-audited)    (Audited
                                                                and Restated)
                                                ------------    ------------
 ASSETS

      Current Assets:
        Cash and cash equivalents               $    988,327    $    570,766
        Accounts receivable, net of allowance        674,207         904,001
        Prepaid expenses                              93,527          73,693
        Notes receivable - current portion            93,076          77,324
        Other                                          3,218           1,899
                                                ------------    ------------
     Total Current Assets                          1,852,355       1,627,683
                                                ------------    ------------
     Property & Equipment, net of
        accumulated depreciation                     654,671         623,505
                                                ------------    ------------
     Other Assets:
        Deferred tax assets                        1,596,400       1,560,000
        Capitalized software costs, net of
             accumulated amortization              1,311,159       1,215,041
        Other intangible assets, net of
           accumulated amortization                  233,042         233,042
        Security deposits                             75,690          75,690
        Long-term notes receivable                    44,508          40,192
                                                ------------    ------------
     Total Other Assets                            3,260,799       3,123,965
                                                ------------    ------------
TOTAL ASSETS                                    $  5,767,825    $  5,375,153
                                                ============    ============

LIABILITIES & STOCKHOLDERS' EQUITY

     Current Liabilities:
        Accounts payable                        $    203,699    $    159,901
        Accrued liabilities                          377,428         411,230
        Deferred revenue - current portion           628,114         434,019
        Note payable - related party                  50,000          50,000
        Notes payable - current portion               76,363          62,563
                                                ------------    ------------
     Total Current Liabilities                     1,335,604       1,117,713
                                                ------------    ------------

     Long-term Notes Payable                         161,951         166,123
     Long-term Deferred Revenue                      290,063         287,743
                                                ------------    ------------
     Total Liabilities                             1,787,618       1,571,579
                                                ------------    ------------
     Stockholders' Equity:
        Preferred stock ($.001 par value)                575             575
        Common stock ($.001 par value)                32,494          32,490
        Additional paid in capital                23,543,650      23,479,767
        Unearned compensation                           --            (5,848)
        Accumulated deficit                      (19,596,512)    (19,703,410)
                                                ------------    ------------
     Total Stockholders' Equity                    3,980,207       3,803,574
                                                ------------    ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $  5,767,825    $  5,375,153
                                                ============    ============


See notes to condensed financial statements.


                                      -2-
<PAGE>




                                  ARKONA, INC.

                       Condensed Statements of Operations

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

Revenues                                    $  2,965,506   $  2,520,545

Cost of Sales                                  1,510,005      1,365,606
                                            ------------   ------------
Gross Profit                                   1,455,501      1,154,939
                                            ------------   ------------
Operating Expenses:
     Sales, marketing & general
         administrative                        1,168,773        740,189
     Research and development                    217,283        229,326
                                            ------------   ------------
Total Operating Expenses                       1,386,056        969,515
                                            ------------   ------------

Operating Income                                  69,445        185,424

Other Income (Expense)                             1,053         (1,701)
                                            ------------   ------------

Net Income Before Taxes                           70,498        183,723

Income Tax Benefit                                36,400        252,980
                                            ------------   ------------

Net Income                                  $    106,898   $    436,703
                                            ============   ============


Basic Earnings per Common Share:
     Operating Income                       $      0.002   $      0.006
     Net Income                             $      0.003   $      0.014
     Average Number of Shares Outstanding     32,491,692     32,170,384

Diluted Earnings per Common Share:
     Operating Income                       $      0.002   $      0.005
     Net Income                             $      0.003   $      0.011
     Average Number of Shares Outstanding     39,480,003     38,974,917



See notes to condensed financial statements.

                                      -3-
<PAGE>

                                  ARKONA, INC.

                       Condensed Statements of Cash Flows

                                                    Three Months Ended
                                               ---------------------------
                                                30-Jun-06     30-Jun-05
                                                (Un-audited)  (Un-audited
                                                                  and
                                                              Restated)
                                               ------------   ------------
Cash Flows Provided By Operating Activities:
     Net income                                $   106,898    $   436,703
     Adjustments to reconcile net income
         to net cash provided by
         operating activities:
         Depreciation and amortization             150,233        113,906
         Bad debt expense                           29,749           --
         Loss on asset disposition                     123           --
         Stock-based compensation                   67,335          2,190
         Deferred income tax                       (36,400)      (252,980)
         Changes in assets & liabilities:
              Accounts receivable                  200,045       (193,722)
              Prepaid expense                      (19,834)       (74,974)
              Security deposits                       --           (3,287)
              Notes receivable                     (20,068)
              Other assets                          (1,319)         3,499
              Accounts payable                      43,798        (25,244)
              Accrued liabilities                  (33,802)         8,617
              Deferred revenue                     196,415         54,006
                                               -----------    -----------
Net Cash Provided By Operating Activities          683,173         68,714
                                               -----------    -----------
Cash Flows Used In Investing Activities:
     Additions to equipment                        (97,052)       (35,504)
     Software development costs                   (180,588)       (85,017)
                                               -----------    -----------
Net Cash Used In Investing Activities             (277,640)      (120,521)
                                               -----------    -----------
Cash Flows Provided By Financing Activities:
     Proceeds from issuance of common stock          2,400          3,300
     Proceeds from notes payable                     9,628           --
                                               -----------    -----------
Net Cash Provided By Financing Activities           12,028          3,300
                                               -----------    -----------

Net Increase (Decrease) in Cash
     and Cash Equivalents                          417,561        (48,507)

Beginning Cash Balance                             570,766        141,179
                                               -----------    -----------
Ending Cash Balance                            $   988,327    $    92,672
                                               ===========    ===========

See notes to condensed financial statements.


                                      -4-
<PAGE>

                                  ARKONA, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS


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

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

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

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

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

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

(a)      Revenue Recognition

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

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

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

                                      -5-
<PAGE>


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

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

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

(b)  Income Taxes

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

(c)  Net Income per Common Share

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

(d)  Cash & Cash Equivalents

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

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

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,  disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could differ from those estimates.

(f)  Capitalization of Software Expense

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

(g)  Stock-Based Compensation

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

                                      -6-
<PAGE>

As of June 30, 2006,  there were  outstanding a total of 6,720,667 stock options
to  purchase  our  common  stock  granted  under the Plan,  all of which have an
exercise price of between $0.20 and $0.75 per share. Stock options granted under
the Plan vest over a one to four year period. No options were granted during the
three months ended June 30, 2006.

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

Following  the  provisions  of SFAS No.  123(R),  we have  adopted the  modified
prospective  method of accounting and reporting for share-based  payments and we
recognize the related cost of an option over the period during which an employee
is required to provide the requisite  service.  We have estimated the fair value
of options using the  Black-Scholes  option  valuation  model. We use historical
data to estimate the expected volatility and expected life. Assumptions used for
the valuation model are set forth below:

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

     Risk-free interest rate         3.0%     Dividend yield                  0

For the quarter ended June 30, 2006,  total  stock-based  employee  compensation
expense recognized was $67,335.

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

         Net income, as restated                              $ 439,867

         Add:  Stock-based employee compensation
               included in reported net income                    2,190

         Deduct:  Stock-based employee compensation
                  determined under fair value based
                  method for all awards                         (18,858)
                                                             ----------
         Pro forma net income, as restated                    $ 423,199

(h)  Advertising Costs

Advertising costs are charged to expense as incurred.

(i)  Equipment

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

(j)  Reclassifications

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

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

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

                                      -7-
<PAGE>

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:

                                                 FY               Qtr.
                                                Ended            Ended
                                              03/31/06         06/30/05
                                            -----------      -----------

Revenues
   As Previously Reported                   $11,129,798      $ 2,529,199
   Adjustment                                    82,373           (8,654)
                                            -----------      -----------
   Restated Amount                          $11,212,171      $ 2,520,545

Net Income Before Tax
   As Previously Reported                   $   821,062      $   193,404
   Adjustment                                    82,373           (9,681)
                                            -----------      -----------
   Restated Amount                          $   903,435      $   183,723

Tax Benefit
   As Previously Reported                   $ 1,244,000      $      -
   Adjustment                                     -              252,980
                                            -----------      -----------
   Restated Amount                          $ 1,244,000      $   252,980

Net Income
   As Previously Reported                   $ 2,065,062      $   193,404
   Adjustment                                    82,373          243,299
                                            -----------      -----------
   Restated Amount                          $ 2,147,435      $   436,703

Basic EPS
   As Previously Reported                   $     0.064      $     0.006
   Adjustment                                     0.003            0.008
                                            -----------      -----------
   Restated Amount                          $     0.067      $     0.014

Diluted EPS
   As Previously Reported                   $     0.053      $     0.005
   Adjustment                                     0.002            0.006
                                            -----------      -----------
   Restated Amount                          $     0.055      $     0.011

Deferred Tax Asset
   As Previously Reported                   $ 1,560,000      $ 5,039,237
   Adjustment                                     -           (4,474,257)
                                            -----------      -----------
   Restated Amount                          $ 1,560,000      $   564,980

Deferred Contract Revenue
   As Previously Reported                   $   207,417      $   245,678
   Adjustment                                   514,345          605,372
                                            -----------      -----------
   Restated Amount                          $   721,762      $   851,050

Note 5 - Subsequent Events
--------------------------

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

                                      -8-
<PAGE>

Item 2.  Management's Discussion and Analysis

Overview

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

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

We provide installation services, including G/L setup, data conversion,  Virtual
Private Network ("VPN") connection,  forms programming and consultative training
to employees of the dealerships who purchase the right to use of the ADMS. For a
continuing  monthly  fee,  we  provide  post-installation  services,   including
continuous access to the latest version of the ADMS hosted on our servers,  data
hosting, technical support and 24x7 maintenance and security of the servers.

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

Our main target market is composed of new and independent  (used-car) automobile
dealerships.  Because of operating similarities with automobile dealerships,  we
are expanding our target market to include dealers of RV, marine and powersports
equipment.  We estimate there are between 22,000 and 23,000 new car  dealerships
in the United States and over 60,000  independent car  dealerships.  We estimate
there  are  approximately  6,000  dealers  of  powersports   (motorcycle,   ATV,
watercraft/sportboats 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"). According to a 2005 Woods & Seaton automotive retailing study, ADP
and Reynolds  together  control  about 80% of the market for  automobile  dealer
management  systems.  ADP and Reynolds are large,  well-financed  organizations.
They have good brand name  recognition and their systems  integrate with all the
major  automobile  manufacturers.  Their market  dominance  creates  significant
hurdles for us because many  dealerships  are hesitant to abandon their existing
systems  and switch to a new system  provided by a smaller  vendor with  limited
resources.  Their  ability  to  integrate  their  systems  with  all  the  major
automobile  manufacturers is highly  appealing to large  automobile  dealerships
selling  automobiles  from  most  of  the  major  automobile  manufacturers  and
especially automobile  manufacturers with systems with which our ADMS cannot yet
integrate. However, the price of ADP's and Reynolds' dealer systems is generally
much higher than our price for the ADMS,  and we believe that ADP and  Reynolds'
products generally do not reflect recent technological  developments,  including
the  ability  to run on an ASP model.  Our  success  in  competing  with ADP and
Reynolds in the market for  independent  automobile  dealerships  supports  this
belief.

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%


                                      -9-
<PAGE>


to 20% of the total  installation  charge.  Following  discussions  and analysis
stemming from  comments  received  from the SEC staff,  we  determined  that VPN
connection fees are not a separate  deliverable  (i.e., do not have  stand-alone
value)  and,  therefore,  should  be  recognized  over the  expected  period  of
performance  under  the  customer  Service  Agreement,   rather  than  upon  the
completion of installation.

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

Results of Operations

Total revenues  increased for the three months ended June 30, 2006 compared with
2005. Total revenues were $2,965,506 for the three months ended June 30, 2005, a
17.7%  increase  compared  with  $2,520,545  for the three months ended June 30,
2005.  This increase  continues to reflect the Company's  success in penetrating
the  dealer  management  system  market  controlled  by ADP  and  Reynolds.  The
combination of our products' superior features and capabilities, the ASP model's
cost savings and  efficiencies,  our practice of not locking our customers  into
long-term  contracts,  as well as,  our  reputation  for  providing  outstanding
service and support  contribute  to the  Company's  continuing  revenue  growth.
Revenues include one-time fees from installation services,  including G/L setup,
data   conversion,    VPN   connection,    forms   programming   and   training;
post-installation  services,  including on-going monthly support and maintenance
fees, sales of hardware, and miscellaneous consulting fees.

Installation  Services - Installation  services revenues  decreased  $255,141 or
26.7%,  from  $954,169  for the three months ended June 30, 2005 to $699,028 for
the three months ended June 30, 2006. We believe this  decrease is  attributable
to several  factors,  although  the  magnitude  of the effect of each  factor is
difficult to determine. Factors such as higher gas prices have resulted in lower
domestic  vehicle  sales.  This may be causing  dealership  management  to delay
capital  investment  decisions.  In  addition,  there  have been  changes in the
proposal  process used throughout the rest of the dealer software  industry.  We
believe this may have  lengthened our sales cycle by as much as an additional 60
days.  Overall we believe that these  factors are affecting our sales process by
increasing  the general level of uncertainty  amongst our target market.  Rather
than  causing  potential  customers to decide to buy other  systems,  we believe
these factors are causing potential  customers to defer their purchase decisions
for longer than was previously the case. We base this belief on the level of our
sales orders in process or "funnel," which remains strong when compared to prior
quarters.

Support and  Maintenance  - The main  reason for growth in revenues  overall was
growth in our monthly support and maintenance  revenues which increased $533,197
or 42.8%, from $1,245,800 for the three months ended June 30, 2005 to $1,778,997
for the three months ended June 30, 2006.  This increase  reflects growth of our
customer base, both in new and independent  automobile dealerships of all sizes.
We now  earn  more  than  60.0%  of our  revenues  from  recurring  support  and
maintenance.

Hardware - Hardware revenues increased 7.7%, to $242,958,  lower than historical
increases due to the lower installation revenue for the quarter.

Consulting - Consulting  fees increased  151.7%,  to $246,192,  reflective of an
increasing customer base.

Cost of sales increased  $144,399 or 10.6%, from $1,365,606 for the three months
ended June 30, 2005 to $1,510,005  for the three months ended June 30, 2006. The
increase in cost of sales is due primarily to having staffed  appropriately  for
expected higher installations in the first quarter. Additionally,  cost of sales
increased  because of the  increased  demand for  post-installation  support and
training. As the number of installed dealerships increase, new employee training
due to  turnover  at  these  dealerships  increases  and  incoming  calls to our
customer support department  increases.  Margins on these activities are smaller
than the margins on installation.  As we expand our operations, we will maintain
a priority on customer service.

Operating expenses, consisting of research and development, sales, marketing and
general administrative expenses,  increased $416,541 or 43.0%, from $969,515 for
the three  months ended June 30, 2005 to  $1,386,056  for the three months ended
June 30, 2006. We have  significantly  increased  our sales  capacity by opening
sales offices in Texas,  New York and Florida.  We have  increased the number of


                                      -10-
<PAGE>

our  engineering  development  staff in  order  for us to  continue  to focus on
developing new and enhanced products. 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 was $69,445,  or $.002 per diluted  common share for the three
months  ended  June 30,  2006,  a decrease  of  $115,979  over the prior  period
operating  income of  $185,424,  or $.005 per diluted  common  share.  Excluding
stock-based  compensation  expense of $67,335,  operating income for the quarter
was  $136,780,  a  decrease  of  $48,644  over the  prior  period.  There was no
stock-based  compensation  expense  included during the prior year quarter ended
June 30,  2005.  Included in net income for the three months ended June 30, 2006
and 2005 is the  recognition  of income tax  benefits of $36,400  and  $252,980,
respectively,  recorded  to account  for the future tax  benefit  from  previous
years' net operating  losses.  The  recognition of profit for the first quarter,
while lower than that of the previous year's quarter, reflects the impact of the
deferral of installations.

Liquidity and Capital Resources

Our liquidity position is steadily improving. As of June 30, 2006 we had working
capital of $516,751  compared to $509,970  as of March 31,  2006.  We  generated
$683,173 of  operating  cash flow during the three  months  ended June 30, 2006.
Cash and cash equivalents totaled $988,327 as of June 30, 2006, growing $417,561
during the quarter.  Accounts  receivable,  net of allowance  for bad  accounts,
totaled  $674,207 as of June 30, 2006 compared to $904,001 as of March 31, 2006.
Current  liabilities  totaled  $1,335,604  as  of  June  30,  2006  compared  to
$1,117,713  as of March 31, 2006.  Debt  (principally  from the  utilization  of
long-term lease financing of equipment) remained  consistent,  at $288,314 as of
June 30, 2006 and $278,686 as of March 31, 2006.  During fiscal year ended March
31, 2006 we entered into a $250,000  line of credit  agreement  with a financial
institution.  As of June 30, 2006 we had not utilized any funds  available under
the line of credit.

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

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

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


                              Less Than
                   Total        1 Year      1-3 years    4-5 Years     After 5
---------------- ----------   ----------   ----------   ----------   ----------

Office Lease     $1,992,652   $  468,843   $1,481,527   $   42,282         --
---------------- ----------   ----------   ----------   ----------   ----------
Equipment Leases    238,314       76,363      158,522        3,429         --
---------------- ----------   ----------   ----------   ----------   ----------
Note Payable         50,000       50,000         --           --           --
---------------- ==========   ==========   ==========   ==========   ==========
Total            $2,280,966   $  595,206   $1,640,049   $   45,711      None



Capital expenditures,  principally for computer related equipment, for the three
months  ended  June 30,  2006  totaled  $97,052.  There are no  planned  capital
expenditures  for the upcoming  quarter  outside of normal  operating  equipment
needs.

                                      -11-
<PAGE>


Critical Accounting Policies and Estimates

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

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

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

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

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

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

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

     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.

                                      -12-
<PAGE>


     *   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.  Stockholders  and
prospective  stockholders  should understand that several factors govern whether
the results  described by any such  forward-looking  statement will be or can be
achieved.  Any one of  those  factors  could  cause  actual  results  to  differ
materially from those projected in this report.

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

Factors That May Affect Future Results

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


                                      -13-
<PAGE>


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
profitability or to increase profitability in the future.

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

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

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

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

         Our  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.

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

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

                                      -14-
<PAGE>

         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 other  factors that could cause  interruptions  in
service,  reduced  capacity for our customers and claims against us. Despite the
implementation of security measures,  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 copyright  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


                                      -15-
<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; and/or

     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 and discoveries 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


                                      -16-
<PAGE>

developing  products  that are more  effective  or less costly than any products
that  we may  develop,  or  that  gain  market  acceptance  prior  to any of our
products, making market penetration or retention more difficult for us.

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

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

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

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

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

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

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

                                      -17-
<PAGE>


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

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

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

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

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

     o   developments in the automobile or automobile dealership industry; and

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

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

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

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

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

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 June 30, 2006. Based on this evaluation, our
principal  executive officer and principal  financial officer concluded that our
disclosure  controls and procedures  are effective in ensuring that  information
required to be  disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded,  processed,  summarized and reported, within
the time periods specified in the Commission's rules and forms.


Changes in Internal Controls over Financial Reporting

With  the  participation  of  our  principal  executive  officer  and  principal
financial  officer,  our management has, as required by Rule 13a-15(d) under the
Exchange Act,  determined  that there were no changes  during the fiscal quarter
ended June 30, 2005 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


                                      -18-
<PAGE>

PART II. OTHER INFORMATION

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

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

The offer and sale of such warrants, and the underlying shares, were 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,  based upon the
following:   (a)  the  holders  confirmed  to  us  that  they  were  "accredited
investors,"  as  defined  in Rule 501 of  Regulation  D  promulgated  under  the
Securities  Act and had 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 each offering;  (c) the holders were provided with
certain disclosure materials and all other information requested with respect to
our company;  (d) the holders  acknowledged  that all securities being purchased
were  "restricted  securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction  registered  under the Securities
Act or exempt from  registration  under the Securities Act; and (e) a legend was
placed (and will be placed) on the agreements or certificates  representing each
such security  stating that it was  restricted  and could only be transferred if
subsequently registered under the Securities Act or transferred in a transaction
exempt from registration under the Securities Act.

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 August 14,
2006 by the undersigned thereunto duly authorized.

                                   ARKONA, Inc.

August 14, 2006                    /s/ Alan Rudd
                                   --------------------------------------------
                                   Alan Rudd, Chief Executive Officer


August 14, 2006                    /s/ Leland H. Boardman
                                   --------------------------------------------
                                   Leland H. Boardman, Chief Financial Officer


                                      -19-
<PAGE>


                                    EXHIBIT INDEX


   Exhibit
    Number                  Title of Document                      Location
------------  ----------------------------------------------    ----------------
4.1           Warrant to Purchase Common Stock                  Filed herewith

10.1          Stand-Alone Revolving Note                        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



                                      -20-