##### Table of Contents



UNITED STATES 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition from  to
 commission file number
 TEKNIK DIGITAL ARTS, INC.
  Nevada
    
    68- 0539517State or other jurisdiction of 
incorporation or organization
    
    (IRS Employer Identification No.)
 
  
  þ o
  o þ
  o þ




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Teknik Digital Arts, Inc. and Subsidiaries
Form 10-QSB
For the Quarter Ended June 30, 2007  Table of Contents
 PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June
30, 2007 (Unaudited) and September 30, 2006
    
    
    1Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended June
30, 2007 and 2006
    
    
    2Unaudited Condensed Consolidated Statement of
Changes in Stockholders Equity for the nine months
ended June 30, 2007
    
    
    3Unaudited Condensed Consolidated Statements of Cash
Flows for the nine months ended June 30, 2007 and
2006
    
    
    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-31.2EX-32




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Part I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)June 30,
    
    
    September 30,2007
    
    
    2006Current Assets:Cash and cash equivalents
    
    $
    155,358
    
    
    $
    42,387Accounts receivable
    
    
    109
    
    
    
    90Prepaid expenses
    
    
    39,920
    
    
    
    238,072Total Current Assets
    
    
    195,387
    
    
    
    280,549Property and equipment, net
    
    
    24,282
    
    
    
    8,583Other Assets:Prepaid expenses  long term portion
    
    
    5,412
    
    
    
    71,176Licenses
    
    
    100
    
    
    
    100Security deposit
    
    
    1,000
    
    
    
    1,000Total Other Assets
    
    
    6,512
    
    
    
    72,276Total Assets
    
    $
    226,181
    
    
    $
    361,408Current Liabilities:Note payable  related party
    
    $
    61,354
    
    
    $
    882,500Note payable
    
    
    410,913
    
    
    
    Notes payable  current portion of convertible debt
    
    
    355,000
    
    
    
    Accounts payable
    
    
    345,058
    
    
    
    372,689Due to related party
    
    
    38,750
    
    
    
    25,000Capital lease liability
    
    
    
    
    
    
    380Accrued interest
    
    
    29,504
    
    
    
    36,230Total Current Liabilities
    
    
    1,240,579
    
    
    
    1,316,799Long-Term Liabilities:Notes payable  convertible debt
    
    
    
    
    
    
    355,000Total Liabilities
    
    
    1,240,579
    
    
    
    1,671,799Minority interest in joint ventures
    
    
    142,390
    
    
    
    37,600Total Liabilities and Minority Interest
    
    
    1,382,969
    
    
    
    1,709,399Stockholders Equity (Deficit):Common stock  $.001 par value; 50,000,000 shares
authorized, 15,239,704 and 9,989,704 shares issued;
14,645,588 and 9,489,704 outstanding at June 30, 2007
and September 30, 2006, respectively
    
    
    15,240
    
    
    
    9,990Additional paid-in capital
    
    
    7,124,186
    
    
    
    5,457,466Accumulated deficit
    
    
    (8,243,674
    )
    
    
    (6,814,672
    )(1,104,248
    )
    
    
    (1,347,216
    )Less: Treasury stock at cost, 594,116 and 500,000 shares
at June 30, 2007 and September 30, 2006, respectively
    
    
    (52,540
    )
    
    
    (775
    )Total Stockholders Deficit
    
    
    (1,156,788
    )
    
    
    (1,347,991
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    226,181
    
    
    $
    361,408
  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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    
    
    
    $
    201
    
    
    $
    23
    
    
    $
    3,447Cost of Sales
    
    
    
    
    
    
    265
    
    
    
    4
    
    
    
    1,981Gross Profit
    
    
    
    
    
    
    (64
    )
    
    
    19
    
    
    
    1,466General and Administrative Expenses
    
    
    159,163
    
    
    
    168,906
    
    
    
    1,479,053
    
    
    
    622,052Research and Development Costs
    
    
    
    
    
    
    509
    
    
    
    254
    
    
    
    38,868Loss from Operations
    
    
    (159,163
    )
    
    
    (169,479
    )
    
    
    (1,479,288
    )
    
    
    (659,454
    )Other Income (Expense):Interest Expense
    
    
    (3,642
    )
    
    
    (17,074
    )
    
    
    (56,174
    )
    
    
    (49,356
    )(3,642
    )
    
    
    (17,074
    )
    
    
    (56,174
    )
    
    
    (49,356
    )Minority Interest Portion of Joint
Venture Loss
    
    
    106,460
    
    
    
    
    
    
    
    106,460
    
    
    
    Net Income / (Loss)
    
    $
    (56,345
    )
    
    $
    (186,553
    )
    
    $
    (1,429,002
    )
    
    $
    (708,810
    )Basic and diluted loss per share (Note 1)
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.12
    )
    
    $
    (0.08
    )Weighted Average Common Shares
Outstanding
    
    
    14,401,083
    
    
    
    8,665,778
    
    
    
    12,053,054
    
    
    
    8,940,641
  2




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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2007
 TotalAdditional
    
    
    Treasury
    
    
    
    
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Stock
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    at Cost
    
    
    Deficit
    
    
    (Deficit)Balance at September 30, 2006
    
    
    9,989,704
    
    
    $
    9,990
    
    
    $
    5,457,466
    
    
    $
    (775
    )
    
    $
    (6,814,672
    )
    
    $
    (1,347,991
    )Cancellation of consulting agreement (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,765
    )
    
    
    
    
    
    
    (51,765
    )Stock issued for services (unaudited)
    
    
    250,000
    
    
    
    250
    
    
    
    57,250
    
    
    
    
    
    
    
    
    
    
    
    57,500Stock issued for conversion
of related party note payable (unaudited)
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    1,745,000
    
    
    
    
    
    
    
    
    
    
    
    1,750,000Adjust fair market value of stock compensation
issued for services (unaudited)
    
    
    
    
    
    
    
    
    
    
    (135,530
    )
    
    
    
    
    
    
    
    
    
    
    (135,530
    )Net loss for the nine months
ended June 30, 2007 (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,429,002
    )
    
    
    (1,429,002
    )Balance at June 30, 2007 (unaudited)
    
    
    15,239,704
    
    
    $
    15,240
    
    
    $
    7,124,186
    
    
    $
    (52,540
    )
    
    $
    (8,243,674
    )
    
    $
    (1,156,788
    )
  3




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine
    
    
    NineMonths Ended
    
    
    Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006Increase/(Decrease) in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (1,429,002
    )
    
    $
    (708,810
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    2,301
    
    
    
    1,006Common stock issued in excess of conversion
of related party note payable
    
    
    850,000
    
    
    
    Market value adjustment of compensation
    
    
    (187,295
    )
    
    
    Common stock and warrants issued for compensation and consulting
    
    
    57,500
    
    
    
    174,375Common stock issued for litigation settlement
    
    
    
    
    
    
    170,000Accrued management fees
    
    
    300,000
    
    
    
    Accrued financing fees
    
    
    10,913
    
    
    
    Changes in Assets and Liabilities:Accounts receivable
    
    
    (19
    )
    
    
    (223
    )Prepaid expenses
    
    
    263,916
    
    
    
    26,819Deposits
    
    
    
    
    
    
    2,200Accounts payable
    
    
    (27,631
    )
    
    
    39,587Accrued vacation
    
    
    
    
    
    
    (1,154
    )Accrued interest
    
    
    (6,726
    )
    
    
    24,025Minority interest portion of loss
    
    
    (106,460
    )
    
    
    Net cash used by operating activities
    
    
    (272,503
    )
    
    
    (272,175
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (18,000
    )
    
    
    (1,600
    )Net cash used in investing activities
    
    
    (18,000
    )
    
    
    (1,600
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    90,545
    
    
    
    272,150Proceeds from note payable
    
    
    400,000
    
    
    
    75,000Payments on note payable  related party
    
    
    (11,691
    )
    
    
    (11,069
    )Payments related to capital lease
    
    
    (380
    )
    
    
    (1,712
    )Distribution to minority interest
    
    
    (75,000
    )
    
    
    Net cash provided by financing activities
    
    
    403,474
    
    
    
    334,369Net change in cash and cash equivalents
    
    
    112,971
    
    
    
    60,594Cash and cash equivalents at beginning of period
    
    
    42,387
    
    
    
    7,060Cash and cash equivalents at end of period
    
    $
    155,358
    
    
    $
    67,654
  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Nine
    
    NineMonths Ended
    
    Months EndedJune 30,
    
    June 30,2007
    
    2006Supplemental Information:Interest paid
    
    $
    62,900
    
    
    $
    25,331Income taxes paid
    
    $
    
    
    
    $
    Non-cash Investing and Financing ActivitiesCancellation of consulting agreement
    
    $
    51,765
    
    
    $
    Common stock and warrants issued for compensation and consulting
    
    $
    57,500
    
    
    $
    174,375Common stock issued for litigation settlement
    
    $
    
    
    
    $
    170,000Common stock issued for conversion of related party note payable
    
    $
    1,750,000
    
    
    $
    Fixed assets exchanged for treasury stock
    
    $
    
    
    
    $
    775Financing fees related to note payable
    
    $
    10,913
    
    
    $
    Conversion of due to related party to minority interest
    
    $
    211,250
    
    
    $
    
  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
  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)
 Recent Accounting Pronouncements
  Consolidated Statements
  Use of Estimates
  Loss Per Share
   Stock-Based Compensation
   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)
 Stock-Based Compensation (continued)
     Note 2
Related Party Transactions
    8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 3
Notes Payable
    Note 4
Equity
   9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 5
Going Concern
  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
     11




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Summary Plan of Operations
   Revenue
  Expenses
     12




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Comparisons of the three months ended June 30, 2007 and 2006
  Comparisons of the nine months ended June 30, 2007 and 2006
  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
    
    Section 302 Certification of President, Chief Executive Officer
and Chief Financial Officer32
    
    Section 906 Certification
 SIGNATURES
  Dated: August 13, 2007
    TEKNIK DIGITAL ARTS, INC.By  /s/ John R. WardJohn R. WardPresident, Chief Executive Officer,
and Chief Financial Officer 15