##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 Form 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 TEKNIK DIGITAL ARTS, INC.
  Nevada
    
    68 053 9517State or jurisdiction of
    
    (I. R. S. Employer Identification No.)incorporation or organization
 P.O. Box 2800-314, Carefree, Arizona 85377
 (Issuers telephone number)
 þ o
 o þ
  o þ




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##### 



Teknik Digital Arts, Inc. and Subsidiary
Form 10-QSB
For the Quarter Ended June 30, 2006  Table of Contents
 PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June
30, 2006 (Unaudited) and September 30, 2005
    
    
    1Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended June
30, 2006 and 2005
    
    
    2Unaudited Condensed Consolidated Statement of
Changes in Stockholders Equity for the nine months
ended June 30, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Cash
Flows for the nine months ended June 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Controls and Procedures
    
    
    14PART II OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    14Item 6. Exhibits.
    
    
    15EX-31.1EX-32




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Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
  
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30,
    
    
    September 30,2006
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    67,654
    
    
    $
    7,060Accounts receivable
    
    
    223
    
    
    
    Prepaid expenses
    
    
    1,859
    
    
    
    28,678Total Current Assets
    
    
    69,736
    
    
    
    35,738Property and equipment, net
    
    
    7,492
    
    
    
    7,673Security deposit
    
    
    1,000
    
    
    
    3,200Total Assets
    
    $
    78,228
    
    
    $
    46,611Liabilities and Stockhoders Equity (Deficit)Current Liabilities:Note payable  related party
    
    $
    882,500
    
    
    $
    610,350Notes payable  current portion
    
    
    
    
    
    
    11,069Accounts payable
    
    
    351,254
    
    
    
    311,667Accrued vacation
    
    
    
    
    
    
    1,154Capital lease liability  current portion
    
    
    951
    
    
    
    2,283Accrued interest
    
    
    41,692
    
    
    
    17,667Total Current Liabilities
    
    
    1,276,397
    
    
    
    954,190Long-Term LiabilitiesCapital lease liability  long term portion
    
    
    
    
    
    
    380Notes payable  long term portion
    
    
    75,000
    
    
    
    Minority Interest in Joint Venture
    
    
    37,500
    
    
    
    37,500Total Liabilities and Minority Interest
    
    
    1,388,897
    
    
    
    992,070Stockholders Equity (Deficit):Common stock  $.001 par value; 50,000,000 shares
authorized, 9,425,000 and 9,125,000 shares issued and
8,925,000 and 9,125,000 outstanding, respectively
    
    
    9,425
    
    
    
    9,125Additional paid-in capital
    
    
    4,948,085
    
    
    
    4,604,010Accumulated deficit
    
    
    (6,267,404
    )
    
    
    (5,558,594
    )(1,309,894
    )
    
    
    (945,459
    )Less: Treasury stock at cost, 500,000 shares
    
    
    (775
    )
    
    
    Total Stockholders Deficit
    
    
    (1,310,669
    )
    
    
    (945,459
    )Total Liabilities and Stockholders Equity
    
    $
    78,228
    
    
    $
    46,611
  1




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three
    
    
    Three
    
    
    Nine
    
    
    NineMonths Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    201
    
    
    $
    
    
    
    $
    3,447
    
    
    $
    Cost of Sales
    
    
    265
    
    
    
    
    
    
    
    1,981
    
    
    
    Gross Profit
    
    
    (64
    )
    
    
    
    
    
    
    1,466
    
    
    
    General and Administrative Expenses
    
    
    168,906
    
    
    
    170,553
    
    
    
    622,052
    
    
    
    708,874Research and Development Costs
    
    
    509
    
    
    
    66,880
    
    
    
    38,868
    
    
    
    211,476Loss from Operations
    
    
    (169,479
    )
    
    
    (237,433
    )
    
    
    (659,454
    )
    
    
    (920,350
    )Other Income (Expense):Interest Expense
    
    
    (17,074
    )
    
    
    (9,725
    )
    
    
    (49,356
    )
    
    
    (19,778
    )Miscellaneous Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,172(17,074
    )
    
    
    (9,725
    )
    
    
    (49,356
    )
    
    
    (17,606
    )Minority Interest Portion of Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    $
    (186,553
    )
    
    $
    (247,158
    )
    
    $
    (708,810
    )
    
    $
    (937,956
    )Basic and diluted loss per share (Note 1)
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.08
    )
    
    $
    (0.11
    )Weighted Average Common Shares Outstanding
    
    
    8,665,778
    
    
    
    8,857,967
    
    
    
    8,940,641
    
    
    
    8,424,414
  2




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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 (UNAUDITED)
 TotalAdditional
    
    
    Treasury
    
    
    
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Stock
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    at Cost
    
    
    Deficit
    
    
    (Deficit)Balance at September 30, 2005
    
    
    9,125,000
    
    
    $
    9,125
    
    
    $
    4,604,010
    
    
    $
    
    
    
    $
    (5,558,594
    )
    
    $
    (945,459
    )Treasury stock, 500,000 shares (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (775
    )
    
    
    
    
    
    
    (775
    )Warrants issued for compensation
(Unaudited)
    
    
    
    
    
    
    
    
    
    
    129,375
    
    
    
    
    
    
    
    
    
    
    
    129,375Stock issued for compensation (Unaudited)
    
    
    50,000
    
    
    
    50
    
    
    
    44,950
    
    
    
    
    
    
    
    
    
    
    
    45,000Issuance of common stock
for litigation settelement (Unaudited)
    
    
    250,000
    
    
    
    250
    
    
    
    169,750
    
    
    
    
    
    
    
    
    
    
    
    170,000Net Loss for the nine months
ended June 30, 2006 (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (708,810
    )
    
    
    (708,810
    )Balance at June 30, 2006 (Unaudited)
    
    
    9,425,000
    
    
    $
    9,425
    
    
    $
    4,948,085
    
    
    $
    (775
    )
    
    $
    (6,267,404
    )
    
    $
    (1,310,669
    )
  3




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine
    
    
    NineMonths Ended
    
    
    Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005Increase/(Decrease) in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (708,810
    )
    
    $
    (937,956
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    1,006
    
    
    
    917Common stock and warrants issued
for compensation and consulting
    
    
    174,375
    
    
    
    346,062Common stock issued
for litigation settlement
    
    
    170,000
    
    
    
    Changes in Assets and Liabilities:Accounts receivable
    
    
    (223
    )
    
    
    Prepaid expenses
    
    
    26,819
    
    
    
    (27,091
    )Security deposit
    
    
    2,200
    
    
    
    (1,000
    )Accounts payable
    
    
    39,587
    
    
    
    114,607Accrued vacation
    
    
    (1,154
    )
    
    
    Other accrued expenses
    
    
    
    
    
    
    (1,637
    )Accrued interest  related party
    
    
    24,025
    
    
    
    (7,660
    )Net cash used by operating activities
    
    
    (272,175
    )
    
    
    (513,758
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (1,600
    )
    
    
    (3,239
    )Net cash used in investing activities
    
    
    (1,600
    )
    
    
    (3,239
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    272,150
    
    
    
    488,150Proceeds from debt payable
    
    
    75,000
    
    
    
    19,166Payments of note payable
    
    
    (11,069
    )
    
    
    Payments related to capital lease
    
    
    (1,712
    )
    
    
    (1,331
    )Net cash provided by financing activities
    
    
    334,369
    
    
    
    505,985Net change in cash and cash equivalents
    
    
    60,594
    
    
    
    (11,012
    )Cash and cash equivalents at beginning of period
    
    
    7,060
    
    
    
    11,995Cash and cash equivalents at end of period
    
    $
    67,654
    
    
    $
    983
  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Nine
    
    NineMonths Ended
    
    Months EndedJune 30,
    
    June 30,2006
    
    2005Supplemental Information:Interest paid
    
    $
    25,331
    
    
    $
    23,958Income taxes paid
    
    $
    
    
    
    $
    Non-cash Investing and Financing ActivitiesCommon Stock and warrants issued for compensation and consulting
    
    $
    174,375
    
    
    $
    1,111,500Common Stock issued for litigation settlement
    
    $
    170,000
    
    
    $
    Capital lease obligation
    
    $
    
    
    
    $
    4,565Fixed assets exchanged for treasury stock
    
    $
    775
    
    
    $
    
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates
 Presentation of Interim Information:
   Nature of Corporation
  Reclassifications
  Liquidity
  Revenue Recognition
  Software Development Costs
  6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Software Development Costs (Continued)
  Recent Accounting Pronouncements
    Consolidated Statements
  Use of Estimates
  Loss Per Share
   7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Loss Per Share (Continued)
  Stock-Based Compensation
      (Unaudited)
    
    
    (Unaudited)Three
    
    
    NineMonths Ended
    
    
    Months EndedJune 30, 2006
    
    
    June 30, 2006Stock based compensation expense by type of award:Stock options
    
    $
    
    
    
    $
    Total stock based compensation expense
    
    $
    
    
    
    $
    Tax effect on stock based compensation expense
    
    $
    
    
    
    $
    Net effect on net income available to common shareholders
    
    $
    
    
    
    $
    Effect on earnings per share:Basic
    
    $
    
    
    
    $
    Diluted
    
    $
    
    
    
    $
    
 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Stock-Based Compensation (Continued)
  (Unaudited)ThreeMonths EndedDecember 31,2005Net loss:As reported
    
    $
    (279,071
    )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
    
    $
    (279,071
    )Basic loss per share:As reported
    
    $
    (0.03
    )Pro forma
    
    $
    (0.03
    )Diluted loss per share:As reported
    
    $
    (0.03
    )Pro forma
    
    $
    (0.03
    )
 Note 2
Related Party Transactions
   Note 3
Notes Payable
  9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Notes Payable (Continued)
   Note 4
Going Concern
  Note 5
Subsequent Events
     10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Note Regarding Forward-Looking Statements
      Overview
  Fear Factor.
    11




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Summary Plan of Operations
   Revenue
  Expenses
     12




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Comparisons of the three months ended June 30, 2006 and 2005
  Comparisons of the nine months ended June 30, 2006 and 2005
  Liquidity and capital resources
     13




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Off-Balance sheet arrangements
  
 Item 3. Controls and Procedures.
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  14




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Item 6. Exhibits.
  Exhibit Index
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of President, Chief Executive Officer
and Chief Financial Officer32
    
    Section 906 Certification
 15




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SIGNATURES
  TEKNIK DIGITAL ARTS, INC.Dated: August 14, 2006By
    
    /s/ John R. WardJohn R. Ward
President, Chief Executive Officer,
and
 Chief Financial Officer
 16




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ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of President, Chief Executive Officer
and Chief Financial Officer32
    
    Section 906 Certification
 17