##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 Form 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 TEKNIK DIGITAL ARTS, INC.
  Nevada
    
    68-0539517State or jurisdiction of 
incorporation or organization
    
    (I. R. S. Employer Identification No.)
  
  
  
  þ o
 o
 o þ
   o þ




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##### 



TABLE OF CONTENTS
 PART IItem 1 Description of BusinessItem 2 Description of PropertyItem 3 Legal ProceedingsItem 4 Submission of Matters to a Vote of Security HoldersPart IIItem 5 Market for Common Stock and Related Stockholder MattersItem 6 Managements Discussion and Analysis or Plan of OperationItem 7 Financial Statements and Supplementary DataItem 8 Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresItem 8A Controls and ProceduresItem 8B Other InformationPart IIIItem 9 Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange ActItem 10 Executive CompensationItem 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12 Certain Relationships and Related TransactionsItem 13 ExhibitsItem 14 Principal Account Fees and ServicesEX-10.2EX-10.3EX-10.4EX-10.5EX-10.6EX-10.7EX-10.8EX-10.9EX-31.1EX-32.1
  ii




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Part I
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
    
 Item 1. BUSINESS
 Company Overview
    3




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##### Table of Contents



Our Strengths
  Multiple Platforms
 Exclusive Rights To Award Winning Technology.
 Innovative, Experienced Management and Advisory Team.
 Our Strategy
  
    
    We contemplate entering into additional strategic endorsement agreements with respect to
high-profile individuals such as popular motion pictures, television shows, characters, and
sports figures, and developing and marketing our physically interactive video game systems
based on these endorsements.
    
    We anticipate assuming the role of publisher or developer, as appropriate, for potential
products, outsourcing development activities as we deem advisable to mitigate certain risks
and manage up-front expenditures.
    
    We intend to focus our marketing efforts with respect to the physically interactive
video game systems that we develop to generate profit margins on equipment sold and monthly
league subscription revenues.
    4




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##### Table of Contents



Our Products
 Physically Interactive Video Gaming System .
 Pep Pad Training Systems .
   Mobile Phones. Fear Factor, Next Action
Star
 Fear Factor and Next Action Stargames. Fear Factor
 Next Action Star Fear Factor
 Next Action Star
 5




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##### Table of Contents



Fear Factor Next Action Star
 Phil Mickelson Gameand other interactive golf entertainment software
    Buddy Rice car racing video game
 Phil Weber basketball game product.
 Joe Johnson mobile basketball product.
 6




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##### Table of Contents



Our Markets
 Physically Interactive Video Gaming Market.
 Mobile applications market.
    Personal computer and console markets.
   
 Item 2. DESCRIPTION OF PROPERTY
  7




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Item 3. LEGAL PROCEEDINGS
 AniDragon.
 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Part II
 
 Item 5. Market for Common Stock and Related Stockholder Matters
  Dividend Policy
  EQUITY COMPENSATION PLAN INFORMATION
  Number of SecuritiesRemaining Available ForNumber of Securities
    
    
    
    
    
    Future Issuance UnderTo Be Issued Upon
    
    Weighted-Average
    
    Equity CompensationExercise of Outstanding
    
    Exercise Price of
    
    Plans (ExcludingOptions, Warrants
    
    Outstanding Options,
    
    Securities ReflectedPlan Category
    
    and Rights
    
    Warrants and Rights
    
    in First Column)Equity compensation
plans not approved
by securityholders
    
    
    (1) 4,127,500
    
    
    $
    2.51
    
    
    
    (2) 1,850,000
 
 (1)
    
    Represents shares of common stock that may be issued pursuant to outstanding options granted
under the 2004 Stock Option Plan as well as outstanding warrants granted to purchase common
stock. See Note 5 to our Consolidated Financial Statements for a detailed description of the
terms of these options and warrants.(2)
    
    Represents shares of common stock that may be issued pursuant to options available for future
grant under the 2004 Stock Option Plan. 
 Item 6. Managements Discussion and Analysis or Plan of Operation
  8




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Critical Accounting Policies
     Results of Operations
  9




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Fiscal Year
    
    Fiscal YearEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2005Statement of Operations Data:Revenue
    
    $
    3,551
    
    
    $
    Cost of Sales
    
    
    2,056
    
    
    
    Gross Profit
    
    
    1,495
    
    
    
    General and administration
expense
    
    
    1,109,835
    
    
    
    1,878,028Research and development costs
    
    
    38,868
    
    
    
    257,744Loss from operations
    
    
    (1,147,208
    )
    
    
    (2,135,772
    )Other Income (Expenses):Total other income (expenses)
    
    
    (108,870
    )
    
    
    (30,833
    )Net loss
    
    
    (1,256,078
    )
    
    
    (2,166,605
    )Shares used in computing basic
and diluted loss per common share
    
    
    8,986,207
    
    
    
    8,900,178Basic and diluted loss per
common share
    
    $
    (0.14
    )
    
    $
    (0.24
    )
 September 30,
    
    September 30,2006
    
    2005Balance Sheet Data:Cash and cash equivalents
    
    
    42,387
    
    
    
    7,060Working capital
    
    
    (1,036,250
    )
    
    
    (918,452
    )Total assets
    
    
    361,408
    
    
    
    46,611Total liabilities and minority interest
    
    
    1,709,399
    
    
    
    992,070Common stock
    
    
    9,990
    
    
    
    9,125Additional paid-in-capital
    
    
    5,457,466
    
    
    
    4,604,010Accumulated deficit
    
    
    (6,814,672
    )
    
    
    (5,558,594
    )Stockholders equity (deficit)
    
    
    (1,347,991
    )
    
    
    (945,459
    )
 Overview
   10




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Summary Plan of Operations
   Revenue
  Expenses
    11




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Comparisons of the fiscal year ended September 30, 2006 and 2005
   Liquidity and capital resources
      12




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Off-Balance sheet arrangements
  Inflation and seasonality
  
 Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO FINANCIAL STATEMENTS
 Contents
 Report of Semple & Cooper, LLP, Independent Registered Accounting Firm
    
    
    F-1Audited Financial Statements for the Fiscal
Year Ended September 30, 2006, and the Fiscal Year
Ended September 30, 2005Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Operations
    
    
    F-3Consolidated Statements of Changes in Stockholders Equity (Deficit)
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-7
 13




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Report of Independent Registered Public Accounting Firm
 
      
 F-1




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    September 30,2006
    
    
    2005Current Assets:Cash and cash equivalents
    
    $
    42,387
    
    
    $
    7,060Accounts receivable
    
    
    90
    
    
    
    Prepaid expenses
    
    
    238,072
    
    
    
    28,678Total Current Assets
    
    
    280,549
    
    
    
    35,738Property and equipment, net
    
    
    8,583
    
    
    
    7,673Other Assets:Prepaid expenses  long term portion
    
    
    71,176
    
    
    
    Licenses
    
    
    100
    
    
    
    Security deposit
    
    
    1,000
    
    
    
    3,200Total Other Assets
    
    
    72,276
    
    
    
    3,200Total Assets
    
    $
    361,408
    
    
    $
    46,611Current Liabilities:Note payable  related party
    
    $
    882,500
    
    
    $
    610,350Notes payable  current portion
    
    
    
    
    
    
    11,069Accounts payable
    
    
    372,689
    
    
    
    311,667Due to related party
    
    
    25,000
    
    
    
    Accrued vacation
    
    
    
    
    
    
    1,154Capital lease liability  current portion
    
    
    380
    
    
    
    2,283Accrued interest
    
    
    36,230
    
    
    
    17,667Total Current Liabilities
    
    
    1,316,799
    
    
    
    954,190Long-Term Liabilities:Capital lease liability  long term portion
    
    
    
    
    
    
    380Notes payable  convertible debt, net
    
    
    355,000
    
    
    
    Total Liabilities
    
    
    1,671,799
    
    
    
    954,570Minority interest in joint ventures
    
    
    37,600
    
    
    
    37,500Total Liabilities and Minority Interest
    
    
    1,709,399
    
    
    
    992,070Stockholders Equity (Deficit):Common stock  $.001 par value; 50,000,000 shares
authorized, 9,989,704 and 9,125,000 shares issued and
9,489,704 and 9,125,000 outstanding at September 30,
2006 and 2005, respectively
    
    
    9,990
    
    
    
    9,125Additional paid-in capital
    
    
    5,457,466
    
    
    
    4,604,010Accumulated deficit
    
    
    (6,814,672
    )
    
    
    (5,558,594
    )(1,347,216
    )
    
    
    (945,459
    )Less: Treasury stock at cost, 500,000 shares
    
    
    (775
    )
    
    
    Total Stockholders Deficit
    
    
    (1,347,991
    )
    
    
    (945,459
    )Total Liabilities and Stockholders Equity
    
    $
    361,408
    
    
    $
    46,611
  F-2




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years EndedSeptember 30,2006
    
    
    2005Sales
    
    $
    3,551
    
    
    $
    Cost of Sales
    
    
    2,056
    
    
    
    Gross Profit
    
    
    1,495
    
    
    
    General and Administrative Expenses
    
    
    1,109,835
    
    
    
    1,878,028Research and Development Costs
    
    
    38,868
    
    
    
    257,744Loss from Operations
    
    
    (1,147,208
    )
    
    
    (2,135,772
    )Other Income (Expense):Interest Expense
    
    
    (108,870
    )
    
    
    (33,005
    )Miscellaneous Income
    
    
    
    
    
    
    2,172(108,870
    )
    
    
    (30,833
    )Net Loss
    
    $
    (1,256,078
    )
    
    $
    (2,166,605
    )Basic and diluted net loss per share
    
    $
    (0.14
    )
    
    $
    (0.24
    )Basic and diluted weighted average common
shares outstanding
    
    
    8,986,207
    
    
    
    8,900,178
  F-3




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 Years Ended September 30, 2006 and 2005
 TotalAdditional
    
    
    Treasury
    
    
    
    
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Stock
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    at Cost
    
    
    Deficit
    
    
    (Deficit)Balance at September 30, 2004
    
    
    8,805,000
    
    
    $
    8,805
    
    
    $
    3,202,830
    
    
    $
    
    
    
    $
    (3,391,989
    )
    
    $
    (180,354
    )Issuance of common stock for compensation
and consulting
    
    
    320,000
    
    
    
    320
    
    
    
    799,680
    
    
    
    
    
    
    
    
    
    
    
    800,000Options and warrants issued for
compensation
    
    
    
    
    
    
    
    
    
    
    601,500
    
    
    
    
    
    
    
    
    
    
    
    601,500Net loss for the twelve months ended
September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166,605
    )
    
    
    (2,166,605
    )Balance at September 30, 2005
    
    
    9,125,000
    
    
    
    9,125
    
    
    
    4,604,010
    
    
    
    
    
    
    
    (5,558,594
    )
    
    
    (945,459
    )Warrants granted for compensation
    
    
    
    
    
    
    
    
    
    
    293,400
    
    
    
    
    
    
    
    
    
    
    
    293,400Stock issued for compensation
    
    
    614,704
    
    
    
    615
    
    
    
    354,973
    
    
    
    
    
    
    
    
    
    
    
    355,588Issuance of common stock
for litigation settlement
    
    
    250,000
    
    
    
    250
    
    
    
    169,750
    
    
    
    
    
    
    
    
    
    
    
    170,000Beneficial coversion feature
of convertible debt
    
    
    
    
    
    
    
    
    
    
    35,333
    
    
    
    
    
    
    
    
    
    
    
    35,333Treasury stock, 500,000 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (775
    )
    
    
    
    
    
    
    (775
    )Net loss for the year
ended September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,256,078
    )
    
    
    (1,256,078
    )Balance at September 30, 2006
    
    
    9,989,704
    
    
    $
    9,990
    
    
    $
    5,457,466
    
    
    $
    (775
    )
    
    $
    (6,814,672
    )
    
    $
    (1,347,991
    )
  F-4




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years EndedSeptember 30,2006
    
    
    2005Decrease in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (1,256,078
    )
    
    $
    (2,166,605
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    1,415
    
    
    
    1,255Common stock issued and warrants granted for
compensation of consultants
    
    
    648,988
    
    
    
    1,401,500Beneficial conversion feature expense
    
    
    35,333
    
    
    
    Common stock issued for litigation settlement
    
    
    170,000
    
    
    
    Changes in Assets and Liabilities:Accounts receivable
    
    
    (90
    )
    
    
    Prepaid expenses
    
    
    (280,570
    )
    
    
    (18,916
    )Security deposit
    
    
    2,200
    
    
    
    (1,000
    )Accounts payable
    
    
    61,022
    
    
    
    186,487Due to related party
    
    
    25,000
    
    
    
    Accrued vacation
    
    
    (1,154
    )
    
    
    (1,252
    )Accrued interest  related party
    
    
    18,563
    
    
    
    2,318Net cash used by operating activities
    
    
    (575,371
    )
    
    
    (596,213
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (3,100
    )
    
    
    (3,239
    )Net cash used in investing activities
    
    
    (3,100
    )
    
    
    (3,239
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    272,150
    
    
    
    585,350Proceeds from note payable
    
    
    355,000
    
    
    
    11,069Payments on capital lease
    
    
    (2,283
    )
    
    
    (1,902
    )Payments on debt
    
    
    (11,069
    )
    
    
    Net cash provided by financing activities
    
    
    613,798
    
    
    
    594,517Net change in cash and cash equivalents
    
    
    35,327
    
    
    
    (4,935
    )Cash and cash equivalents at beginning of period
    
    
    7,060
    
    
    
    11,995Cash and cash equivalents at end of period
    
    $
    42,387
    
    
    $
    7,060
  F-5




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Years EndedSeptember 30,2006
    
    2005Supplemental Information:Interest paid
    
    $
    54,974
    
    
    $
    23,958Income taxes paid
    
    $
    
    
    
    $
    Non-cash Investing and Financing ActivitiesCommon stock issued and warrants granted for compensation
of consultants
    
    $
    648,988
    
    
    $
    1,401,500Common stock issued for litigation settlement
    
    $
    170,000
    
    
    $
    Capital lease obligation
    
    $
    
    
    
    $
    4,565Fixed assets exchanged for treasury stock
    
    $
    775
    
    
    $
    Beneficial conversion feature relative to convertible debt
    
    $
    35,333
    
    
    $
    
  F-6




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates
 Operations
  Consolidated Statements
  Use of Estimates
   Revenue Recognition
  Advertising Costs
  Software Development Costs
  F-7




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Impairment of Long Lived Assets
  Cash and Cash Equivalents
  Prepaid Expenses
  Property and Equipment, net
  Office furniture and equipment
    
    5-7 years
 Research and Development Costs
  Fair Value of Financial Instruments
   Deferred Income Taxes
  F-8




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Loss Per Share
   Stock-Based Compensation
     F-9




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Stock-Based Compensation (Continued)
  Year EndedSeptember 30,2005Net loss as reported
    
    $
    (2,166,605
    )Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards,
net of related tax effects
    
    
    Pro forma net loss
    
    $
    (2,166,605
    )Basic loss per share:As reported
    
    $
    (0.24
    )Pro forma
    
    $
    (0.24
    )
  New Accounting Pronouncements
   F-10




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 New Accounting Pronouncements (Continued)
   ®
 Note 2
Related Party Transactions
    F-11




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 3
Property and Equipment
  September 30,
    
    
    September 30,2006
    
    
    2005Equipment
    
    $
    10,903
    
    
    $
    8,967Less: Accumulated Depreciation
    
    
    (2,320
    )
    
    
    (1,294
    )$
    8,583
    
    
    $
    7,673
 Note 4
Notes Payable
    F-12




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 5
Equity
 Stock Options
   WeightedAverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding at September 30, 2004
    
    
    330,000
    
    
    $
    1.00Granted
    
    
    150,000
    
    
    
    1.00Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Forfeited
    
    
    (130,000
    )
    
    
    1.00Outstanding at September 30, 2005
    
    
    350,000
    
    
    
    1.00Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    (50,000
    )
    
    
    1.00Forfeited
    
    
    (150,000
    )
    
    
    1.00Outstanding at September 30, 2006
    
    
    150,000
    
    
    $
    1.00
 F-13




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 5
Equity (Continued)
 Stock Options (Continued)
  Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedContractural
    
    Average
    
    Aggregate
    
    Number
    
    Average
    
    AggregateExercise
    
    Number of
    
    Life
    
    Exercise
    
    Intrinsic
    
    of
    
    Exercise
    
    IntrinsicPrice
    
    Shares
    
    (In Years)
    
    Price
    
    Value
    
    Shares
    
    Price
    
    Value$1.00
    
    
    150,000
    
    
    
    1.50
    
    
    $
    1.00
    
    
    $
    
    
    
    
    150,000
    
    
    $
    1.00
    
    
    $
    
 Warrants
     WeightedAverageNumber of
    
    
    ExerciseWarrants
    
    
    PriceOutstanding at September 30, 2004
    
    
    3,300,000
    
    
    $
    2.80Granted  Peb Pad, LLC
    
    
    250,000
    
    
    
    2.50Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2005
    
    
    3,550,000
    
    
    $
    2.78Granted  Girard Securities
    
    
    427,500
    
    
    
    0.75Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    3,977,500
    
    
    $
    2.56
 F-14




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TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 5
Equity (Continued)
 Warrants (Continued)
  Warrants Outstanding
    
    Warrants ExercisableWeightedAverageRemaining
    
    
    
    
    
    WeightedContractural
    
    Number
    
    Average
    
    WeightedExercise
    
    Number of
    
    Life
    
    of
    
    Exercise
    
    AveragePrice
    
    Shares
    
    (In Years)
    
    Shares
    
    Price
    
    Fair Value$2.50
    
    
    2,900,000
    
    
    
    0.25
    
    
    
    2,900,000
    
    
    $
    2.50
    
    
    $
    0.26$5.00
    
    
    400,000
    
    
    
    1.25
    
    
    
    400,000
    
    
    $
    5.00
    
    
    $
    0.10$2.50
    
    
    250,000
    
    
    
    1.72
    
    
    
    250,000
    
    
    $
    2.50
    
    
    $
    1.47$0.75
    
    
    427,500
    
    
    
    2.68
    
    
    
    427,500
    
    
    $
    0.75
    
    
    $
    0.69
   Common Stock Grants
  (i)
    
    20,000 shares to Kentucky Eleven, Inc. (valued and expensed at $2.50 per share)
under the terms of our Development Agreement with Phil Simms.(ii)
    
    300,000 shares to Pep Pad, LLC (valued and expensed at $2.50 per share) in
conjunction with Pep Pad, LLC converting their joint venture interest into equity.
 F-15




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##### Table of Contents



TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 5
Equity (Continued)
 Stock (Continued)
  (i)
    
    50,000 shares to Waterville Investment Research, Inc. (valued and expensed at
$0.90 per share) under the terms of our marketing agreement with Waterville Investment
Research, Inc.(ii)
    
    250,000 shares to Codefire, Inc. (valued and expensed at $0.68 per share) in
conjunction with a litigation settlement.(iii)
    
    141,176 shares to Ray Artigue (valued at $0.55 per share, expensed as the
stock vests over a one year period, resulting in expense for the year of $6,471) under
the terms of our marketing agreement with Ray Artigue.(iv)
    
    141,176 shares to Charles Corbin (valued at $0.55 per share, expensed as the
stock vests over a two year period, resulting in expense for the year of $3,235) under
the terms of our exercise advisory service agreement with Charles Corbin.(v)
    
    141,176 shares to Craig Phelps (valued at $0.55 per share, expensed as the
stock vests over a two year period, resulting in expense for the year of $3,235) under
the terms of our medical and wellness advisory agreement with Craig Phelps.(vi)
    
    141,176 shares to Alare Capital Partners, LLC (valued at $0.55 per share,
expensed as the stock vests over a one year period, resulting in expense for the year
of $6,471) under the terms of our consulting agreement with Alare Capital Partners,
LLC.
 Note 6
Commitments and Contingencies
 Legal Proceedings
  Operating leases (Continued)
  F-16




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##### Table of Contents



TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 6
Commitments and Contingencies (Continued)
 Operating Leases (Continued)
 Year EndingSeptember 30,
    
    Amount2007
    
    
    $6,981
  Capital leases
  Other commitments and contingencies
     F-17




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##### Table of Contents



TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 6
Commitments and Contingencies (Continued)
 Other commitments and contingencies (Continued)
       F-18




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##### Table of Contents



TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 6
Commitments and Contingencies (Continued)
 Other commitments and contingencies (Continued)
   Note 7
Income Taxes
  September 30,
    
    
    September 30,2006
    
    
    2005Benefit of Net Operating Loss
    
    $
    1,975,000
    
    
    $
    1,614,000Less: Valuation Allowance
    
    
    (1,975,000
    )
    
    
    (1,614,000
    )$
    
    
    
    $
    
   F-19




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##### Table of Contents



TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 7
Income Taxes (Continued)
 September 30,
    
    
    September 30,2006
    
    
    2005Federal income tax benefit
    
    $
    400,000
    
    
    $
    690,000State tax benefit
    
    
    90,000
    
    
    
    155,000Less: valuation allowance
    
    
    (490,000
    )
    
    
    (845,000
    )$
    
    
    
    $
    
  Federal
    
    StateNOL
    
    NOLExpires 2008
    
    $
    
    
    
    $
    340,000Expires 2009
    
    
    
    
    
    
    2,232,000Expires 2010
    
    
    
    
    
    
    1,565,000Expires 2011
    
    
    
    
    
    
    928,000Expires 2023
    
    
    340,000
    
    
    
    Expires 2024
    
    
    2,232,000
    
    
    
    Expires 2025
    
    
    1,565,000
    
    
    
    Expires 2026
    
    
    928,000$
    5,065,000
    
    
    $
    5,065,000
 Note 8
Investments  Joint Venture
     F-20




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##### Table of Contents



TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 8
Investments  Joint Venture (Continued)
    Note 9
Profit Sharing Plan
  Note 10
Going Concern
   F-21




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##### Table of Contents



Item 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
   
 Item 8A. CONTROLS AND PROCEDURES
  
 Item 8B. OTHER INFORMATION
  
 Part III
 
 Item 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
  Name
    
    Age
    
    PositionJohn R. Ward
    
    
    50
    
    
    Chairman, Chief Executive OfficerBenjamin Robins
    
    
    52
    
    
    DirectorKristine E. Ward
    
    
    56
    
    
    Secretary and Treasurer
 John R Ward
 Benjamin D. Robins
 14




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##### Table of Contents



Compliance with Section 16(a) of the Securities Exchange Act of 1934
   Compensation Committee
   
 Item 10. EXECUTIVE COMPENSATION
 Director Compensation
  Executive Compensation
  15




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##### Table of Contents



Executive Compensation (Continued)
 Summary Compensation Table
 Annual
    
    Long-TermCompensation
    
    CompensationSecuritiesName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnderlyingPrincipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Annual
    
    Stock
    
    LTIP
    
    All OtherPosition(1)
    
    Year
    
    Salary
    
    Bonus
    
    Compensation
    
    Options
    
    Payouts
    
    CompensationJohn R. Ward
    
    
    2006
    
    
    $
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0President, CEO and
CFO (2)
    
    
    2005
    
    
    $
    20,667
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02004
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Keith B. Dimond (3)
    
    
    2006
    
    
    $
    13,219
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02005
    
    
    $
    3,581
    
    
    
    0
    
    
    
    0
    
    
    
    150,000
    
    
    
    0
    
    
    
    02004
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Corey Comstock (1) (4)
    
    
    2006
    
    
    $
    20,833
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02005
    
    
    $
    100,000
    
    
    
    0
    
    
    
    0
    
    
    
    50,000
    
    
    
    0
    
    
    
    02004
    
    
    $
    100,000
    
    
    
    0
    
    
    $
    125,000
    
    
    
    50,000
    
    
    
    0
    
    
    
    0Anthony Eaton (1) (5)
    
    
    2006
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02005
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02004
    
    
    $
    10,000
    
    
    
    0
    
    
    $
    12,500
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    The disclosure in this table (and in subsequent tables in this report) for Corey Comstock
has been provided for informational purposes only and in light of his prior status as a
significant employee of the Company. The disclosure in this table for Anthony Eaton has
similarly been provided for informational purposes only. Mr. Eaton joined the Company as
Chief Financial Officer in February 2004 and resigned in May 2004.(2)
    
    Mr. Ward accepted no salary from the Company for the fiscal year ended September 30, 2004 or
fiscal year ended September 30, 2006.(3)
    
    Mr. Dimond is currently compensated at a rate of $75.00 per hour. In March 2005, Mr. Dimond
was issued 150,000 options for assuming responsibilities as Chief Financial Officer effective
June 2005. Mr. Dimond resigned as CFO in April 2006 but continues to act as a consultant to
the Company on an ongoing contractual basis. The amount of salary listed in the table above
reflects total wages earned since becoming CFO in June 2005 up until his resignation as CFO in
April 2006.(4)
    
    Under the terms of his employment agreement with the Company, Mr. Comstock was entitled to an
annual salary of $100,000. On July 1, 2003, Mr. Comstock was issued 250,000 shares of common
stock (valued at the par value of $0.001 per share) See Employment Agreements. In addition,
under his employment agreement, Mr. Comstock was issued a total of 150,000 stock options,
50,000 options vested December 31, 2003, another 50,000 options vested December 31, 2004 and
the remaining 50,000 options vested December 31, 2005. Additionally, in April 2004, our board
of directors granted Mr. Comstock a bonus of 250,000 shares of common stock (valued at $0.50
per share) for assuming the responsibilities of President in April 2004. Mr. Comstocks other
annual compensation reflects the value of the shares issued. Mr. Comstock resigned during the
year ended September 30, 2006, forfeiting 500,000 shares of common stock and 150,000 warrants.
The Company has no further financial liability due to the former employee.(5)
    
    Other annual compensation reflects the fair market value of 25,000 shares issued in fiscal
2004 (valued at $0.50 per share) in connection with Mr. Eatons resignation. 16




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##### Table of Contents



Option Grants In Last Fiscal Year
(Individual Grants)
  Percent of TotalSecurities
    
    Options Granted to
    
    ExerciseUnderlying Options
    
    Employees in fiscal
    
    Price
    
    ExpirationName
    
    Fiscal Year
    
    Granted (#)
    
    year
    
    ($/share)
    
    DateKeith Dimond
    
    
    2005
    
    
    
    150,000
    
    
    
    75
    %
    
    $
    1.00
    
    
    
    3/31/08
 Stock Option Plan
    17




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##### Table of Contents



Option Exercise
  Aggregate Option Exercises In Last Fiscal Year And Year End Option Values
 Number of SecuritiesUnderlying
    
    Value of UnexercisedShares
    
    
    
    
    
    Unexercised
    
    In-The-Money OptionsAcquired
    
    
    
    
    
    Options at
    
    aton
    
    Value
    
    September 30, 2006 (#)
    
    September 30, 2006 ($)Exercise
    
    Realized
    
    Exercisable/
    
    Exercisable/Name
    
    (#)
    
    ($)
    
    Unexercisable
    
    UnexercisableKeith Dimond
    
    
    0
    
    
    $
    0
    
    
    
    150,000/0
    
    
    $
    0
 Employment Agreements
  
 Item 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Number ofCommon Shares
    
    Percent ofName of Beneficial Owner
    
    Beneficially Owned
    
    Outstanding sharesJohn R. Ward
    
    
    3,766,000
    (1)
    
    
    39.7
    %Benjamin Robins
    
    
    100,000
    
    
    
    1.1
    %CodeFire Acquisition Corp.
    
    
    950,000
    (2)
    
    
    10.0
    %Cede & Co
    
    
    530,000
    
    
    
    5.6
    %All officers and directors as a group (2 persons)
    
    
    3,866,000
    
    
    
    40.7
    %
 18




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##### Table of Contents



(1)
    
    Includes 950,000 shares held by CodeFire Acquisition Corp., of which Mr. Ward is the
president. In addition, CodeFire Acquisition Corp. owns 2,900,000 shares issuable upon
exercise of outstanding warrants not included in the above table.(2)
    
    CodeFire Acquisition Corp. also owns 2,900,000 shares issuable upon exercise of outstanding
warrants. 
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   
 Item 13. EXHIBITS
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  September 30, 2006
    
    September 30, 2005(i)
    
    Audit Fees
    
    $
    46,469
    
    
    $
    52,878(ii)
    
    Audit Related Fees
    
    $
    0
    
    
    $
    0(iii)
    
    Tax Fees
    
    $
    0
    
    
    $
    0(iv)
    
    All Other Fees
    
    $
    0
    
    
    $
    29,050
 Audit Committee Pre-Approval Policies and Procedures
  19




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##### Table of Contents



SIGNATURES
  TEKNIK DIGITAL ARTS, INC./s/ John R. WardJohn R. Ward, 
(President, Chief Executive Officer, and Chief Financial Officer)   POWER OF ATTORNEY
  Signatures
    
    Title
    
    Date/s/ John R. Ward
    
    President, CEO and CFO
    
    December 28, 2006John R. Ward
    
    (President,
Chief Executive Officer,
and Chief Financial Officer)/s/ Benjamin Robins
    
    Director
    
    December 28, 2006Benjamin Robins
 20




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Title3.1
    
    Articles of incorporation
    
    *3.2
    
    By-laws
    
    *10.1
    
    2004 Stock Option Plan, effective December 31, 2003
    
    *10.2
    
    Convertible Note Purchase Agreement
    
    +10.3
    
    Convertible Promissory Note
    
    +10.4
    
    Artigue Marketing Consulting Agreement
    
    +10.5
    
    Corbin Exercise and Wellness Consulting Agreement
    
    +10.6
    
    Phelps Medical and Wellness Consulting Agreement
    
    +10.7
    
    Alare Capital Partners Consulting Agreement
    
    +10.8
    
    Teknik-Powergrid Joint Venture Agreement
    
    +10.9
    
    Teknik-Powergrid Joint Venture License Agreement
    
    +31.1
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a)
of the Securities Exchange Act of 1934
    
    +32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
    
    +
 
 *
    
    Included in the original filing of Form SB-2 on August 10, 2004, SEC File Number 333-118101.+
    
    Filed herewith. 21