UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549





**FORM
      10-KSB**





x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      year ended May 31, 2006




o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from ______________ to ______________





Commission
      file number:  0-27587





**ARKADOS
      GROUP, INC.**





(Name
      of
      small business issuer in its charter)





Delaware
                (State
                  or other jurisdiction
              22-3586087
                (I.R.S.
                  Employer Identification No.)of
                  incorporation or organization)


220
                    Old New Brunswick Road, Piscataway, NJ
                  (Address
                    of principal executive offices)
                08854
                  (Zip
                    Code)




Issuer’s
      telephone number: (732)
      465-9300




Securities
      registered under Section 12(b) of the Exchange Act:


Title
                of each class
            Name
                of each exchange on which registered___________________________________________
            ______________________________________________________________________________________
            ___________________________________________







Securities
      registered under Section 12(g) of the Exchange Act:


Common
      Stock, $.0001 par value


(Title
      of
      class)







(Title
      of
      class)




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. x Yes o
      No




Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B is not contained in this form, and no disclosure will be
        contained, to the best of registrant’s knowledge in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-KSB
        or any amendment to this Form 10-KSB. o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined by Rule
        12b-2 of the Exchange Act: o Yes x
        No
 
 State
        issuer’s revenues for its most recent fiscal year. $112,094
  The
        aggregate market value of the voting common equity held by non-affiliates
(1) computed
        by reference to the last price at which the common equity was sold on September
        30, 2006 was $8,170,610.
 As
        of
        September 30, 2006, there were 24,862,850 shares of common stock, $.0001
        par
        value, outstanding.
 
 Transitional
        Small Business Disclosure Format (check one): o Yes x
        No
  (1)
        The
        information provided shall in no way be construed as an admission that any
        person whose holdings are excluded from the figure is not an affiliate or
        that
        any person whose holdings are included is an affiliate and any such admission
        is
        hereby disclaimed. The information provided is included solely for record
        keeping purposes of the Securities and Exchange Commission.











NOTE
      RE:
      FORWARD LOOKING INFORMATION




All
      statements in this annual report on Form 10-KSB that are not historical are
      forward-looking statements, including statements regarding our “expectations,”
“beliefs,” “hopes,” “intentions,” “strategies,” or the like. Such statements are
      based on management’s current expectations and are subject to a number of risks
      and uncertainties that could cause actual results to differ materially from
      those set forth or implied by any forward looking statements. Some of these
      risks are detailed in Part I, Item 1 “Risk Factors” and elsewhere in this
      report. We caution investors that there can be no assurance that actual results
      or business conditions will not differ materially from those projected or
      suggested in such forward-looking statements as a result of various factors,
      including, but not limited to, the risk factors discussed in this Annual Report
      on Form 10-KSB. We expressly disclaim any obligation or undertaking to release
      publicly any updates or revisions to any forward-looking statements contained
      herein to reflect any change in our expectations with regard thereto or any
      change in events, conditions, or circumstances on which any such statements
      are
      based.


2


PART
      I





ITEM
              1.
            DESCRIPTION
                OF BUSINESS.








The
      registrant, Arkados Group, Inc., was incorporated in the State of Delaware
      in
      1998. We are principally engaged in developing and marketing technology and
      solutions enabling broadband communication and networking over standard
      electrical lines. We conduct these activities through Arkados, Inc., our wholly
      owned subsidiary and we recently changed our corporate name from CDKnet.com,
      Inc. to its current form to align our corporate identity with the “Arkados”
brand developed by our subsidiary. Arkados is a member of the HomePlug Power
      Alliance, an independent trade organization which has developed global
      specifications for high speed powerline communications.





Since
      we
      do not own any semiconductor fabrication facilities we are known as a “fabless”
semiconductor company. Our powerline communications solutions enable high-speed
      digital transmission of voice, video, and data over the existing powerline
      infrastructure. Our highly integrated semiconductors are designed for the home
      networking and broadband communications markets, within which we plan to address
      the needs of specific industries with customizable software.





We
      are
      principally engaged in developing and marketing semiconductors for home
      networking and broadband powerline communication (“BPL”) markets, such as the
      Multi-dwelling/Multi-tenant (MDU/MTU) and the so-called “last-mile” or “access”
markets. Arkados is a member of the HomePlug Alliance and IEEE P1901. HomePlug
      networking is the only globally recognized technology for high-speed powerline
      communication having multiple silicon manufacturers support and established
      interoperability certification. During the fiscal year ended May 31, 2006
      (“Fiscal 2006”) we introduced our first commercially available system-on chip,
      the ArkTICTM AI-1100. The ArkTICTM AI-1100 is designed to be embedded into various
      consumer electronics devices and deliver high-speed Internet connectivity and
      multimedia over the power lines in a home. The AI-1100 is the first in our
      ArkTICTM family of turnkey hardware and software solutions. Our system-on-a-chip
      designs aim to create easy-to-use digital connectivity between entertainment
      and
      networking devices used by consumers. In addition, our solutions are designed
      to
      permit ODM and OEM customers to produce sophisticated, full featured products
      with lower overall production cost, faster time to market, and a high degree
      of
      programmability.





We
      design, develop and market comprehensive platform solutions, including a
      system-on-chip, firmware and software, for manufacturers of networked multimedia
      appliances and feature-rich networking devices. Networked multimedia appliances
      play digital media such as audio, photos, and video. Networking devices allow
      consumers to share broadband connections and connect computers, laptops, gaming
      consoles, TiVO, and other devices together. Our platform solutions support
      a
      system based approach to networking and will allow our customers to build
      products that are simple and intuitive to install and operate with intuitive
      and
      customizable user interfaces.





Our
      executive offices are located at 220 Old New Brunswick Road, Piscataway, NJ
      08854. We can be reached at our principal offices by telephone at (732)
      465-9300. Arkados maintains a website at www.arkados.com .





Except
      for the documents on our websites that are expressly incorporated by reference
      into this report, the information contained on our websites is not incorporated
      by reference into this report and should not be considered to be a part of
      this
      report. This includes the websites referred to in the paragraph above, as




3




well
      as
      other websites that we refer to elsewhere in this report. All of these website
      addresses are included in this document as inactive textual references
      only.





**Corporate
      Background**





On
      May
      24, 2004, a wholly owned subsidiary we formed, filed a merger certificate
      completing the acquisition of Miletos, Inc., a previously unaffiliated Delaware
      corporation (the “Merger”). The consideration for the Merger was 16,090,577
      restricted shares of our common stock and the assumption of certain liabilities
      of Miletos’ predecessor and former controlling equity holders. The Merger was
      completed according to the terms of a Agreement and Plan of Merger dated as
      of
      May 7, 2004. Miletos merged into our wholly owned subsidiary and changed its
      name to “Arkados, Inc.”





Simultaneously
      with the Merger, we completed a private placement of 883,334 shares of our
      common stock for aggregate proceeds of $1,060,000, of which approximately
      $950,000 were subscriptions for cash, $50,000 (41,667 shares) was for
      outstanding debt of Arkados, and $59,800 (49,834) was in lieu of consulting
      fees. The sale was made to 10 accredited investors (“Investors”) directly by us
      without any general solicitation or broker. The offering is claimed to be exempt
      from registration pursuant to Section 4(2) under the Securities Act of 1933,
      as
      amended. In addition, we settled liabilities relating to outstanding convertible
      notes and payables for 700,000 common shares.





Prior
      to
      the Merger, on March 23, 2004, Miletos acquired the assets and business of
      Enikia, LLC, a Delaware limited liability company at a public foreclosure sale,
      including the intellectual property upon which Arkados’ development efforts are
      based. Miletos was formed in February 2004, by control affiliates of Enikia.
      These control affiliates were both secured creditors of Enikia and holders
      of
      the controlling equity interest in Enikia. They contributed a secured promissory
      note to Miletos in the initial principal amount of $9,221,000, dated June 1,
      2002. The promissory note also represents obligations to the lender for
      additional advances to Enikia by the control group which brought the aggregate
      principal due at the time of foreclosure to approximately $11,100,000. At the
      foreclosure sale, Miletos forgave $4,000,000 of the secured obligation in
      exchange for substantially all of the assets of Enikia. The Merger has been
      treated as a reorganization of Arkados, Inc. via a reverse merger with Arkados
      Group, Inc. (formerly CDKNet.com, Inc.). The assets acquired at the foreclosure
      sale and certain liabilities assumed by Arkados Group, Inc. have been recorded
      as historical cost.





**Dependence
      on Financing Activities**





Since
      we
      are not generating significant revenue, we are dependent on outside sources
      of
      financing. During Fiscal 2006 we completed a series of debt financings in the
      aggregate principal amount of $4,442,384. From June, 2006 to September 6, 2006
      we completed an additional $2,273,470.00 of debt financing, of which $1,500,000
      was for cash proceeds and $773,470 was for the cancellation of obligations
      to
      our Chairman, Andreas Typaldos, and related family limited partnerships for
      consulting fees due under a May 2004 consulting agreement and borrowed
      money.




We
      have
      sought and will continue to seek various sources of financing but there are
      no
      binding commitments from anyone to provide us with financing. In addition,
      under
      the terms of $5,649,354.38 principal amount of 6% Secured Convertible Debentures
      due December 28, 2008 issued during the period from December 2004 to September
      7, 2006, we are prohibited from issuing shares of our common stock, securities
      convertible into or giving right to purchase our common stock or debt securities
      without the consent of the holders of 60% of the outstanding principal amount
      of
      the secured debentures. Since December 2005 when we initially issued $2,000,000
      principal amount of secured debt, such holders have




4




consented
      to the issuance of additional 6% secured debentures and related warrants and
      have purchased $2,375,884.38 of the additional $5,649,354.38 principal amount
      sold. A substantial portion of the net proceeds of these sales have been used
      to
      repay pre-existing debt. There is no assurance that the holders will continue
      to
      provide additional funds to us or that they will consent to any future
      financing. Our ability to continue our operations depends on our ability to
      obtain financing. If adequate funds are not available on acceptable terms,
      we
      may not be able to retain existing and/or attract new employees, support product
      development and fabrication, take advantage of market opportunities, develop
      or
      enhance new products, pursue acquisitions that would complement our existing
      product offerings or enhance our technical capabilities to develop new products
      or execute our business strategy.





**Industry
      Background**





Multimedia
      distribution is experiencing the shift from old-fashioned analog signals into
      a
      digital distribution. InStat, in a report titled “Media Networking 2005: The
      Networked Living Room Becomes a Reality,” InStat predicted growth trends in home
      media networking, including the prediction that total media networking
      connections in homes will grow from over 50 million in 2005 to over 200 million
      in 2009, a 29% compound annual growth rate. We believe that this shift creates
      demand for new products, and new products will require new types of
      semiconductors that incorporate digital technologies supporting such functions
      as communication and media rendering. Our ArkTICTM family of turnkey hardware and
      software solutions is designed to address these requirements.





**Powerline
      Communication Enables Several Markets**





We
      view
      the market for powerline communication semiconductors comprising four major
      segments: In-Home Networking, Consumer Audio Visual Applications or Multimedia
      Networking, Broadband Powerline (BPL), and MDU/MTU Networking.





***In-Home
      Networking***





Technology
      and solutions used to connect devices in a home through powerline or wireless
      means, for the purpose of sharing entertainment content or connectivity using
      HomePlug standard technology. This is a proven marketplace with consumer
      products available today.





***Consumer
      Audio Visual Applications*** or
      Multimedia Networking





These
      applications permit Internet streaming audio, whole house audio distribution
      and
      control, whole house distribution of video either streamed over IP (IPTV) or
      stored locally (PVR/DVR type of applications). In addition, technologies based
      on HomePlug specifications can be used to connect portable devices such as
      portable audio players and satellite receivers to remote speaker systems,
      distribute multimedia and HDTV throughout the home by simple use of already
      installed electrical wires.





***MDU/MTU
      Networking***





Technology
      and solutions for the purpose of connecting individual rooms or units of a
      building (such as a hotel, apartment, or office complex) to an Internet
      connection or other services. It is a mature market with an ever-increasing
      need
      for products that offer non-invasive and cost-effective installation. Powerline
      communication technology has the potential to become a significant player in
      this market segment. Arkados has acquired significant experience in this market
      and conducted




5




feasibility
      studies that helped Arkados team to develop both the expertise and identify
      potential solutions suitable for this market.





***Broadband
      Powerline***





Technology
      and solutions used to deliver Internet access and broadband services to homes
      via power lines. This is an early stage market segment. Utilities and service
      operators are testing proprietary technologies and services. Standards
      development has begun, which will spur the market. Broadband Powerline has
      the
      potential to become a significant player along with DSL, Cable, and other access
      technologies. Overseas and rural markets offer substantial growth potential.





**Arkados
      and the HomePlug Powerline Alliance**





Members
      of the Arkados team participated in the creation of the HomePlug Powerline
      Alliance, an independent industry association.





The
      Alliance’s mission is to enable and promote rapid availability, adoption and
      implementation of cost effective, interoperable and standards-based home
      powerline networks and products.





Formed
      in
      2000, the Alliance developed the HomePlug 1.0 specification that unified product
      vendors in support of a single powerline solution for home networking. In 2005
      the Alliance ratified HomePlug AV specification that is going to enable 200Mbps
      class communication over power lines. In-Stat believes that HomePlug AV will
      be
      a potentially important technology for multimedia networking, as the technology
      could provide a home network backbone. Presently the alliance is working on
      the
      new HomePlug BPL and HomePlug Command and Control specifications.





Arkados
      is a Contributing Member of the Alliance. Members of the Arkados team hold
      leadership positions in the Alliance and in several HomePlug working groups.
      Oleg Logvinov, our president and CEO, serves as the Chief Strategy Officer
      of
      the HomePlug Alliance. Mr. Logvinov is also the immediate past president of
      the
      Alliance, having been succeeded by Matthew Theall of Intel. Jim Reeber, our
      Director of Marketing has served as Chair of Marketing Working
      Group.





Arkados
      is also a member of the IEEE P1901 group that is focused on the development
      of
      powerline communication Physical Layer (PHY) and Media Access Control (MAC)
      specifications.





***Our
      Solution***





We
      are a
      fabless semiconductor company that develops comprehensive platform solutions,
      including a system-on-chip, or SoC, firmware and software, for manufacturers
      of
      networked multimedia appliances and feature-rich networking devices. Our
      platform solutions are designed to enable a systems-based approach to networking
      and will allow our customers to build products that are simple and intuitive
      to
      install and operate with intuitive and customizable user
      interfaces.





Key
      elements of our solution are as follows:





·
            Comprehensive
                platform solutions.





Our
      platform solutions consist of an integrated package of hardware, firmware and
      software designed to enable our customers to develop differentiated products
      in
      a cost-effective manner with




6




short
      time to market. In addition to a high-performance SoC, we plan to provide our
      customers with customizable, high functionality firmware and software
      development kits to allow them to rapidly develop and differentiate their
      products. As a result, we would be able to reduce our customers’ investment in
      costly and time-consuming internal firmware and software development for their
      products, and from having to source different firmware and software for their
      end products from multiple suppliers.





·
            Customizable
                firmware and software.





Our
      firmware, which is sold as a bundled solution with our SoCs, includes a
      real-time operating system and a set of application specific modules that
      support a wide range of functions including Web-based management, audio
      distribution, traffic classifications, etc. Our software development kit will
      include a comprehensive suite of components, such as device link libraries
      and
      drivers, tools, sample code and documentation to create applications that would
      allow a wide range of networking devices and networked multimedia appliances.





·
            Targeted,
                high-performance SoCs.





Our
      SoC
      solutions are specifically designed for the powerline communication market.
      They
      are driven by function-specific blocks that allow simultaneous execution of
      complex operations, such as transmission of data over power lines and MPEG
      audio
      decoding and playback. Our SoCs support most major peripheral connection
      protocols, including USB, Ethernet, Infrared, I 2 S,
      and a
      number of specialized and general purpose interfaces. This support enables
      connectivity to a variety of playback, display and content creation devices
      including cameras, PCs, televisions and car and home audio systems.





In
      contrast, competitors that do not provide comprehensive platform solutions
      such
      as ours may be able to produce a greater variety of customized SoCs to more
      specifically address a particular OEM’s requirements. In addition, solutions
      which do not include customizable firmware and software like ours may allow
      OEMs
      to take advantage of a wider range of third-party developers. Furthermore,
      these
      alternative solutions may be lower in cost in comparison to our platform
      solutions due to lower performance levels or fewer interface options.





***Our
      Strategy***





Our
      objective is to be the leading supplier of comprehensive platform solutions
      for
      high-performance and feature-rich networked multimedia appliances and networking
      devices. Key elements of our strategy are:





·
            Maintain
                a full platform solution approach with industry-leading SoCs, firmware
                and
                software. We plan to continue committing resources of each of our
                hardware, firmware and software teams to drive innovation so that
                our
                integrated, comprehensive platform solutions are at the forefront
                of the
                networked multimedia appliances and networking devices industries
                and
                capture a leading market share. We intend to continue to devote resources
                to increase the performance and functionality of our SoCs and expand
                the
                features and capabilities of our firmware and software.




·
            Maintain
                our focus on feature-rich networked multimedia appliances and networking
                devices. We intend to build on our experience as a platform provider
                by
                continuing to focus primarily on customers that produce feature-rich
                networked multimedia appliances and networking devices.
                In


7
  addition,
                  we intend to continue to work closely with manufacturers of other
                  media
                  rendering components to ensure that our platform solutions interface
                  with
                  their current and future technology components for optimal performance
                  their end products.


·
            Building
                on our leadership in the integration of powerline and audio rendering
                functions secure the leadership position in networked multimedia
                appliances and networking devices. We believe that the networked
                audio
                markets will continue to represent the largest volume opportunity
                for
                networked multimedia appliance and networking device manufacturers
                in the
                near term. We intend to continue to focus on advancing functionality
                to
                win designs in this large and growing market.





·
            Enable
                new growth markets, such as photo- and video-enabled networked multimedia
                appliances. We intend to build on our existing expertise to be the
                leading
                provider of comprehensive platform solutions in new markets. We intend
                to
                continue to invest our research and development efforts and engineering
                resources to develop new platforms and products and to strengthen
                our
                technological expertise. For example, our recently announced reference
                design that employs both AI-1100 as well as BlackFin Processor from
                Analog
                Devices to provide a cost-effective platform for a variety of video
                applications based on powerline
                distribution.




·
            Expand
                our customer base while securing additional design wins with existing
                customers. We plan to be the leading supplier of new designs to our
                existing customers, and to secure high market share with new customers
                entering this market. We intend to continue the expansion of our
                customer
                base by marketing our platform solutions to additional manufacturers
                of
                consumer devices. Further, we intent to broaden our reach within
                our
                existing customer base into their adjacent product lines that can
                utilize
                technologies that we intend to implement in the near
                future.





**Our
      Products**





We
      design
      and develop and are marketing highly integrated SoC semiconductors that are
      designed to cater to the markets for powerline communications. Our chip designs
      offer flexible solutions through programmability and remote firmware
      upgrades.





Arkados
      Total Integration Concept TM ,
      or
      ArkTIC TM ,
      family
      of converged multimedia and networking solutions targets data-, audio-, photo-,
      and video-enabled networked multimedia appliances and networking devices. The
      ArkTIC family is a portfolio of turnkey hardware and software solutions that
      enable OEMs and ODMs to quickly develop digitally networked consumer electronic
      products with a competitive cost structure to address this rapidly developing
      market. Among other networking interfaces the first member of the ArkTIC family
      will support a powerline communication interface based on the HomePlug Powerline
      Specification 1.0.1.





We
      started marketing our AI-1100 system-on-chip in Fiscal 2006. It is designed
      to
      be embedded into various consumer electronics and multimedia networking devices
      and deliver high-speed Internet/Networking connectivity and multimedia over
      the
      power lines in a home. The AI-1100 chip offers a single chip integration of
      HomePlug 1.0.1 powerline technology, ARM 926-JES CPU operating at 160 MHz,
      dual
      Ethernet interface, I 2 S
      Audio
      Interface, and a wide variety of other interfaces designed to support connected
      home applications. Furthermore, the programmable nature of our implementation
      allows ODMs/OEMs to extend the functionality of the these products and HomePlug
      technology.





8




ArkTIC
      AI-1100 system-on-chip features:




·Based
                on HomePlug
                1.0 Specification
              -PHY/MAC
                  sub-system
                  is designed to allow for compliance with the HomePlug
                  specification
                -Arkados
                  extensions
                  for increased performance and future-proofing
                -Programmable
                  MAC
                  functions for full flexibility
                ·ARM926
                    Processor
                  -16k
                      instruction
                      cache & 4k data cache
                    -Memory
                        Management
                        Unit
                      -Embedded
                          Trace
                          Macrocell (ETM9)
                        ·SDRAM
                              Controller
                          -Supports
                              external
                              parts up to 256Mb
                          ·SRAM
                              Controller/Expansion Bus Interface
                          -Supports
                              external
                              boot Flash or external SRAM and acts as a general-purpose
                              interface bus
                              for external logic
                          ·Ethernet
                              controllers
                          -Standard
                              MII port
                              (802.3u) - or - PHY Emulation Port (PEP) MII (emulates
                              Ethernet
                              PHY)
                          ·Video/Audio
                              DSP
                              Interface
                          ·USB
                              1.1 Device
                          ·Serial
                              I/O
                              Controllers
                          ·I2S
                              for direct
                              connection to audio DAC
                          ·IrDA
                          -6550d
                              compatible
                              UART
                          ·GPIO
                              Controller
                          ·JTAG
                              / Debug
                              Interface
                          ·0.18μ
CMOS,
                              1.8V
                              core, 3.3v I/O
            Graphic Image




Our
      AI-1100 is the first in a series of devices built around existing and emerging
      HomePlug Powerline Alliance networking specifications. This device supports
      the
      HomePlug 1.0.1 specification along with a variety of multimedia applications.
      Our Direct to SpeakerTM Internet Radio Reference Design (AI-1100 DTS-INTR)
      received HomePlug 1.0 certification in August 2006. Furthermore, the
      programmable nature of the Arkados implementation allows OEMs to extend the
      functionality of the HomePlug technology. Future devices will include among
      other enhancements the implementation of new HomePlug standards, such as
      HomePlug AV and BPL, as they become available.





We
      have
      modularized a core Orthogonal Frequency Division Multiplexing (OFDM) and
      communication platform to rapidly develop customized solutions for each
      powerline market. This enables efficient reuse and repurposing of technology
      blocks, which can be used to create many specific solutions.





We
      also
      provide consulting, software, and applications support, thereby facilitating
      system integration and reducing our customers’ time-to-market and our customers’
development costs.





In
      the
      in-home networking segment of the market we expect to deliver highly integrated
      circuits that combine both networking blocks and blocks that are capable of
      supporting end-use applications. Our chips




9




are
      designed to offer a high degree of programmability and may become an attractive
      solution for a diverse range of home-networking products.





In
      the
      MDU/MTU segment of the market we expect to deliver highly integrated circuits
      that combine both networking blocks and blocks that are capable of supporting
      communications applications in demand from service providers and utility
      companies. Downloadable firmware management capabilities make this an attractive
      solution for remote management and service applications.





In
      the
      broadband powerline segment of the market we expect to deliver highly integrated
      circuits that combine both networking blocks and blocks that are capable of
      supporting communications applications in demand from service providers and
      utility companies. Downloadable firmware management capabilities would make
      this
      an attractive solution for remote management and service applications.





Some
      of
      the examples of the products that could be built based on the above-described
      semiconductors by original equipment manufacturers (OEM) are:




·
            CONSUMER
                ELECTRONICS - A growing market that includes audio & video devices
                with embedded powerline technology. We expect this market to grow
                over the
                next few years as more video and audio products are released with
                networking technologies built-in. Televisions, stereos, powered speakers,
                receivers, DVD and CD players, are targeted applications for powerline
                networking technology. Internet streaming content and home content
                servers
                should greatly increase the demand for HomePlug 1.0 and AV
                products.




·
            SOHO
                NETWORK GEAR - New types of routers, switches, gateways, network
                attached
                storage, and other devices that offer various types of services to
                the
                SOHO (Small Office Home Office) network.




·
            INTERNET
                TELEPHONY - As companies like Vonage, Comcast, Verizon and other
                service
                providers begin to roll-out new voice services to the home, an easy-to-use
                and reliable home network is needed. VoIP (Voice-over-IP) phones
                are
                currently produced by several vendors and we expect to see such products
                with HomePlug technology embedded into them.




·
            HOME
                SECURITY - Many companies have created home security cameras that
                are
                networked through various means. Early market entrants GigaFast,
                ST&T,
                and Asoka have already created powerline networked security cameras
                with
                embedded web servers that allow direct access to the camera’s
                feed.





**Customers**





Most
      of
      our revenue has come from design and development agreements. We expect that
      such
      agreements will lead to volume orders, but we cannot assure you that they will.
      We are targeting the sale of our powerline connectivity products to a broad
      range of communications, computing and consumer electronics ODMs/OEMs. We have
      not yet derived significant product revenue from these ODMs/OEMs. We have
      received initial orders for limited quantities of our AI-1100 SoC. We are
      working closely with many of the leading communications, digital entertainment
      and consumer electronics companies some of which may result in design wins
      and
      orders for our integrated circuits. Several OEM’s are sampling and testing our
      AI-1100 SoC chips, and one has announced a product incorporating our chip,
      but
      factors such as design flaws, compatibility issues and manufacturing errors
      could delay the functioning of the products and prevent us from making sales.
      As
      it is evidenced by the recent compliance certification of one of our




10




reference
      designs we are focused on delivering a wide array of reference designs that
      can
      help out customers through the productization cycle.





**Strategic
      Relationships**





In
      July
      2004, Arkados entered into a five-year Silicon Product Development and Product
      Collaboration Agreement with GDA Technologies, Inc., under which GDA will assist
      Arkados in translating Arkados chip designs into a mask that can be used by
      a
      semiconductor foundry to manufacture Arkados designed integrated circuits in
      a
      cost effective manner. We paid GDA $175,000 under the agreement in Fiscal 2006
      and will pay GDA 20% of production costs as compensation for production
      management services. In addition, we issued 150,000 shares of our restricted
      common stock to GDA for nominal consideration.,





**Manufacturing**




We
      contract with third parties for all of our wafer fabrication and assembly,
      as
      well as for a portion of our design and testing. Our fabless manufacturing
      strategy is designed to allow us to concentrate on our design strengths,
      minimize fixed costs and capital expenditures, access advanced manufacturing
      facilities, and provide flexibility on sourcing multiple leading-edge
      technologies through strategic alliances. Our manufacturing process is designed
      to follow the following steps. After wafer fabrication by the foundry,
      third-party assembly vendors package the wafer die. The finished products are
      then sent for testing, either to third-party testers or to our internal test
      facility, before shipment to our customers. We expect to qualify each product,
      participate in process and package development, define and control the
      manufacturing process at our suppliers were possible and practicable, develop
      or
      participate in the development of test programs, and perform production testing
      of products in accordance with our quality management system. If possible,
      we
      plan to use multiple foundries, assembly houses, and test houses. At present,
      we
      are using foundries in Japan owned by Fujitsu and we also use third parties
      to
      aid in our test and qualification process.





**Patents,
      Licenses and Trademarks**





We
      rely
      on trade secret, patent, copyright, and trademark laws to protect our
      intellectual property in our products and technology. We intend to continue
      this
      practice in the future. As of August 31, 2006, Arkados has 4 issued U.S.
      patents, 20 pending U.S. patent applications, and various corresponding
      international patents and applications.





To
      complement our own research and development efforts, we have also licensed,
      and
      expect to continue to license, from third parties a variety of intellectual
      property and technologies important to our business.





Although
      we have not received any notification from third parties that we are infringing
      any of their intellectual property, there may be third party patents or other
      intellectual property that we are infringing. If that were the case, third
      parties could assert infringement claims against us or seek an injunction on
      the
      sale of any of our products in the future. If such infringement were found
      to
      exist, we may attempt to acquire the requisite licenses or rights to use such
      technology or intellectual property. However, we cannot assure you that such
      licenses or rights could be obtained on favorable terms or at all.




11





**Research
      and Development**




We
      concentrate our research and development efforts on the design and development
      of new products for each of our principal markets. We also fund certain research
      activities focused on other emerging product opportunities. Our future success
      is highly dependent upon our ability to develop complex new products, to
      transfer new products to volume production in a timely fashion, to introduce
      them to the marketplace ahead of the competition, to maintain competitive
      features, and to have them selected for design into products of leading systems
      manufacturers. Our future success may also depend on assisting our customers
      with integration of our components into their new products, including providing
      support from the concept stage through design, launch, and production ramp.
      We
      believe that our focus on application related features and software may
      contribute to our success.





**Competition**





Markets
      for our products are highly competitive, and we expect that competition will
      continue to increase. We compete with other semiconductor suppliers that offer
      standard semiconductors, application-specific integrated circuits, and fully
      customized integrated circuits, including embedded software, chip, and
      board-level products. Our competitive strategy has been to provide
      cost-effective integrated products bundled with software that is designed to
      support a variety of applications.





We
      face
      significant competition in our present and future product lines. We face
      competition both from established players that are beginning to focus on
      powerline networking technology as well as recent entrants in the field. Some
      of
      these competitors already have products in the market place that are compliant
      with HomePlug Alliance 1.0.1 specification while other competitors’ products are
      based on proprietary technologies. Immediate key competitors in the powerline
      networking segment include Conexant (CNXT), Maxim Integrated Products (MXIM),
      Intellon, DS2, Gigle Semiconductor, Panasonic, Spidcom, and Yitran, many of
      whom
      have substantially greater resources than we do. Some of them have already
      announced HomePlug AV based products. We expect to face additional competition
      from new entrants in each of our markets, which may include both large domestic
      and international integrated circuit manufacturers and smaller, emerging
      companies.





In
      addition, there are other organizations worldwide that seek to foster the
      development of powerline connectivity technology solutions and may attempt
      to
      create technology standards that compete with the industry specifications
      established by the HomePlug Powerline Alliance. These include the R7.3
      subcommittee of the Consumer Electronics Alliance (CEA), PLCForum, industry
      groups such as CEPCA and Universal Powerline Association (UPA), and the IEEE
      P1901. The R7.3 subcommittee of the CEA, a consumer electronics trade
      association, had pursued a specification for powerline connectivity in the
      past,
      but later abandoned it. The PLCForum is a European organization primarily
      focused on addressing regulatory issues, market factors, and business cases
      for
      the technology. The two recent entrants, CEPCA and UPA, are focused on
      generating industry acceptance of certain technologies from individual
      companies, and both have announced intentions to build co-existence methods
      that
      would allow standards-based and proprietary technologies to divide bandwidth
      on
      the powerline, allowing co-existence. The IEEE P1901 has announced the focus
      on
      both co-existence and PHY/MAC development. We believe the HomePlug alliance
      is
      the only organization solely focused on using open standardization processed
      to
      build interoperable solutions for both in-home and to-the-home applications
      that
      allow for the co-existence of services. We also participate in IEEE efforts.





The
      HomePlug 1.0 and AV specifications consist of the electrical characteristics
      and
      protocols related to the transmission of data over conventional power lines.
      As
      a member of the HomePlug Alliance




12




we
      are
      obligated to license Necessary Patent Claim (intellectual property rights
      without the use of which products cannot conform to the HomePlug specifications)
      to any member of the alliance as defined in the Sponsor Agreement and
      Contributor Agreement on a non-discriminatory basis. Under our license and
      development agreements we retain title to our patents, patent applications
      and
      other licensed technology, and to any improvements that we develop.





As
      a
      provider of powerline home connectivity integrated circuits, we face additional
      competition from other home connectivity technologies such as twisted pair
      cable, coaxial cable and wireless media. Despite the broad array of different
      technologies deployed to date, we believe those technologies that do not require
      new wires such as HomePNA, MoCA, 802.11 and other wireless alternatives, will
      provide the strongest competition to powerline solutions.





Many
      HomePlug members are also promoting these competing connectivity technologies.
      Although several of these competing technologies have already been introduced
      in
      the market, none has achieved 100% penetration, particularly in the transmission
      of entertainment content. We believe the principal factors driving competition
      between home connectivity technologies include pervasiveness, performance,
      reliability, ease-of-use and cost effectiveness. We believe powerline based
      home
      connectivity solutions will compete favorably with respect to each of these
      competitive factors. Many of our competitors have substantially greater
      financial, engineering, manufacturing, marketing, technical, distribution and
      other resources, broader product lines, greater intellectual property rights,
      and longer relationships with customers than we have.





The
      principal competitive factors in our markets include time-to-market; total
      cost
      of the finished product; quality of hardware/ software design and end-market
      systems expertise; price; product benefits that are characterized by
      performance, features, quality and compatibility with standards; access to
      advanced process and packaging technologies at competitive prices; and sales
      and
      technical support, including assisting our customers with integration of our
      components into their new products, including providing support from the concept
      stage through design, launch, and production ramp.




**Sales
      and Marketing**





We
      expect
      to sell our products worldwide using the following channels:





·
            Sales
                and Marketing Partnerships with established companies. These relationships
                generally help to establish the presence in the specific regions
                and
                access customers through already developed relationships. The benefits
                of
                using this channel are numerous, among them are added credibility,
                reduction of upfront sales and marketing expenses, acceleration of
                volume
                sales through incumbency of the customer base, and local customer
                support
                and account management.





·
            Advanced
                Development Partnerships with strategic customers. The benefits of using
                this channel are numerous. Among them are creation of product focus,
                reduction of upfront sales and marketing expenses, acceleration of
                sales
                volumes through early commitments, and creation of incremental development
                revenues.





·
            We
                are also developing a network of distributors that can support our
                customers worldwide. Recently we announced an agreement with Jedcom,
                a
                distributor in Taiwan. Under the terms of this agreement Jedcom is
                going
                to provide us with distribution, sales and marketing, and field
                application engineering support in Taiwan and certain regions of
                China.





13
 
  We
        expect
        to develop our domestic sales force to include a network of regional direct
        sales offices. We expect to establish international sales offices and develop
        relationships with appropriate organizations located worldwide. We expect
        to
        supplement our direct sales force with sales representative organizations
        and
        distributors. The scope and development of our sales and marketing organization
        will depend among other things, on the amount of capital available to us
        and
        when products are ready for testing.




**Government
      Regulation**




Fabrication
      suppliers we plan to contract with are subject to a variety of U.S. and foreign
      government regulations, including regulations related to the discharge or
      disposal of toxic, volatile or otherwise hazardous chemicals used in their
      manufacturing processes. Our failure or the failure of our suppliers to comply
      with present or future governmental regulations could result in fines,
      suspension of production or cessation of operations. Environmental regulations
      could also require the acquisition of equipment or the incurrence of other
      substantial expenses to comply with environmental regulations. If substantial
      unanticipated expenses were incurred by the us or our suppliers (and such costs
      were passed on to us), our manufacturing costs could significantly increase,
      thus materially and adversely affecting our business, financial condition and
      operating results. We are also subject to a variety of government regulations
      relating to our operations, including environmental, labor and export control
      regulations. Our failure to maintain compliance with present or future
      regulations could result in fines being imposed on us or suspension or cessation
      of our operations.




When
      communicating over powerline, our technology operates on frequencies that are
      not currently restricted by FCC regulations. Products incorporating our
      semiconductors are regulated by the Federal Communications Commission (“FCC”) in
      US market and respective regulatory bodies in the rest of the world. In certain
      countries, there may be regulations restricting the transmission of high
      frequency over power lines. We cannot assure you that this will continue to
      be
      the case. Should government regulations change in the future, making operation
      of our customers’ products at their current radio frequency bands subject to
      restrictive regulation, or subjecting the frequencies on which our products
      operate to restrictions, OEMs’ desire to purchase our products could diminish
      and our business may suffer.





On
      August
      3, 2006, the FCC generally affirmed its rules for Access Broadband over Power
      Line (Access BPL) systems while maintaining safeguards against harmful
      interference to existing radio services. The decision was adopted in response
      to
      a number of petitions for reconsideration of the BPL rules established in
      October of 2004. In the Memorandum Opinion and Order (MO&O), the FCC again
      acknowledged the significant benefits of Access BPL, reaffirmed its commitment
      to address interference issues, and reemphasized that the Part 15 rule changes
      were made to ensure that Access BPL operations do not become a source of
      interference to licensed radio services. The full text of the rules can be
      found
      on FCC website at www.fcc.gov.





**Backlog**





We
      expect
      sales outside of the strategic partnership agreements to be made primarily
      pursuant to standard short-term purchase orders for delivery of standard
      products. We expect the quantity actually ordered by the customer, as well
      as
      the shipment schedules, to be frequently revised, without significant penalty,
      to reflect changes in the customer’s needs. As a result, we believe that in the
      future, our backlog at any given time should not be used as a meaningful
      indicator of future revenues.





14




**Employees**





As
      of May
      31, 2006, we had 12 full-time equivalent employees, including our CEO, Oleg
      Logvinov. All of our full time employees are engaged in research, development,
      engineering or marketing. Andreas Typaldos, our Chairman of the Board provides
      us with product marketing services, strategic planning and leadership in our
      capital raising efforts on a part-time basis and Kirk Warshaw, our Chief
      Financial Officer serves on a part-time basis as well. Our future success
      depends, in part, on our ability to continue to attract, retain and motivate
      highly qualified technical, marketing, engineering, and management personnel. Due
      to
      the highly competitive nature of the marketplace that we operate in, we may
      from
      time to time lose key employees to certain of our competitors. We expect to
      be
      able to hire qualified personnel to fill open positions created by such
      occurrences, although there can be no assurance that we will be able to do
      this
      in the future. None of our employees are represented by collective bargaining
      agreements





**Risk
      Factors**





An
      investment in our common stock is speculative in nature, involves a high degree
      of risk and should not be made by any investor who cannot afford the loss of
      his
      entire investment. Each prospective purchaser should carefully consider the
      following risks and speculative factors associated with our business and capital
      structure, as well as others described elsewhere in this report, before making
      any decision to buy, sell or hold our common stock.





This
      report contains certain statements relating to future events or the future
      financial performance of our company. Readers are cautioned that such statements
      are only predictions, involve risks and uncertainties, and that actual events
      or
      results may differ materially. In evaluating such statements, prospective
      investors should specifically consider the various factors identified in this
      memorandum, including the matters set forth below, which could cause actual
      results to differ materially from those indicated by such forward-looking
      statements.





Risks
      Related to Our Business and Financial Condition





***Dependence
      on financing.***





Since
      we
      are not generating significant revenue we are dependent on outside sources
      of
      financing. We have financed our operations by offering convertible debt (secured
      and unsecured) securities in private placements, in some cases with equity
      incentives for the investor in the form of warrants to purchase our common
      stock
      and have borrowed from affiliates of our Chairman of the Board. We have sought
      and will continue to seek various sources of financing but there are no
      commitments from anyone to provide us with financing. If we are unable to obtain
      financing, we may have to suspend operations, sell assets and will not be able
      to execute our business plan.





**Inability
      to obtain additional financing would result in the suspension of our
      business**.





Our
      ability to continue our operations depends on our ability to obtain financing.
      If adequate funds are not available on acceptable terms, we may not be able
      to
      retain existing and/or attract new employees, support product development and
      fabrication, take advantage of market opportunities, develop or enhance new
      products, pursue acquisitions that would complement our existing product
      offerings or enhance our technical capabilities to develop new products or
      execute our business strategy.





15





***We
      are dependent on the consent of the holders of 60% of the principal amount
      of
      our outstanding 6% Secured Convertible Debentures due December 28, 2008 to
      obtain future financing.***





Under
      the
      terms of $5,649,354.38 principal amount of 6% Secured Convertible Debentures
      due
      December 28, 2008 issued during the period from December 2004 to September
      7,
      2006, we are prohibited from issuing shares of our common stock, securities
      convertible into or giving right to purchase our common stock or debt securities
      without the consent of the holders of 60% of the outstanding principal amount
      of
      the secured debentures. Since December 2005 when we initially issued $2,000,000
      principal amount of secured debt, such holders have consented to the issuance
      of
      additional 6% secured debentures and related warrants and have purchased
      $2,375,884.38 of the additional $5,649,354.38 principal amount sold. There
      is no
      assurance that the holders will continue to provide additional funds to us
      or
      that they will consent to any future financing. Our ability to continue our
      operations depends on our ability to obtain financing. If adequate funds are
      not
      available on acceptable terms, we may not be able to retain existing and/or
      attract new employees, support product development and fabrication, take
      advantage of market opportunities, develop or enhance new products, pursue
      acquisitions that would complement our existing product offerings or enhance
      our
      technical capabilities to develop new products or execute our business
      strategy.





***If
      we fail to comply with the new rules under the Sarbanes-Oxley Act related to
      accounting controls and procedures, or if material weaknesses or other
      deficiencies are discovered in our internal accounting procedures, our stock
      price could decline significantly and raising capital could be more difficult.***





If
      we
      fail to comply with the new rules under the Sarbanes-Oxley Act related to
      accounting controls and procedures, or if material weaknesses or other
      deficiencies are discovered in our internal accounting procedures, our stock
      price could decline significantly and raising capital could be more difficult.
      Section 404 of the Sarbanes-Oxley Act requires annual management assessments
      of
      the effectiveness of our internal controls over financial reporting and a report
      by our independent auditors addressing these assessments. We are in the process
      of documenting and testing our internal control procedures, and we may identify
      material weaknesses in our internal control over financial reporting and other
      deficiencies. If material weaknesses and deficiencies are detected, it could
      cause investors to lose confidence in our Company and result in a decline in
      our
      stock price and consequently affect our financial condition. In addition, if
      we
      fail to achieve and maintain the adequacy of our internal controls, we may
      not
      be able to ensure that we can conclude on an ongoing basis that we have
      effective internal controls over financial reporting in accordance with Section
      404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
      particularly those related to revenue recognition, are necessary for us to
      produce reliable financial reports and are important to helping prevent
      financial fraud. If we cannot provide reliable financial reports or prevent
      fraud, our business and operating results could be harmed, investors could
      lose
      confidence in our reported financial information, and the trading price of
      our
      Common Stock could drop significantly. In addition, we cannot be certain that
      additional material weaknesses or significant deficiencies in our internal
      controls will not be discovered in the future.





***We
      have identified significant deficiencies in our disclosure controls and if
      we
      are not able to remediate them the timeliness of our periodic reporting could
      be
      impacted.***





Our
      management determined, in connection with their evaluation of the effectiveness
      of the design and operation of our disclosure controls and procedures, that
      such
      procedures were not effective to ensure that information required to be
      disclosed by us was recorded, processed and reported within the time periods
      specified in the SEC’s rules and forms Although our management has taken actions
      to improve the effectiveness of these procedures, its has not been able to
      conclude that such controsls are effective. Our




16




stock
      price, ability to obtain financing and the listing of our common stock on the
      OTCBB would be adversely impacted if we are not able to improve these
      procedures.





***We
      have not generated significant revenue from our principal intended activities
      and we have been dependent on one customer for substantially all of out
      revue***





As
      a
      development stage company, we have generated limited revenue principally from
      providing development services and generating data in field test scenarios.
      We
      have not sold mass produced semiconductors, which is the primary part of our
      expected revenue stream going forward. In addition, substantially all of our
      revenue has been from one customer. It is difficult, in a market that is rapidly
      evolving, to evaluate the future sales performance of powerline technology,
      and
      our implementation of it. We may not successfully address any of these risks
      and
      may never have significant revenue.





***We
      expect losses will continue for the foreseeable future. Our stock price may
      be
      affected by such losses*** .





In
      our
      short history, we have not reported an operating profit and do not expect to
      report a profit in the near future, if at all. We have experienced losses from
      operations since Enikia, from whom we indirectly acquired our intellectual
      property assets, began operations. Losses are likely to continue, and may cause
      volatility in our stock price.





***Consumer
      demand may not develop as we anticipate, and our business will suffer.***





The
      initial and primary customers of our semiconductors are expected to be OEMs
      of
      devices with uses for connectivity. OEM acceptance of powerline technology
      will
      be driven by consumer demand for home connectivity. If consumer demand does
      not
      develop as we anticipate, our products will sell slowly, or not at all, and
      our
      business will suffer.





There
      are
      several factors that may affect the expansion of the home connectivity market:





·
            the
                emergence of competing standards for home
                connectivity


·
            new
                content or products that attract a large consumer
                base


·
            interoperability
                between different products in the same
                market


·
            the
                success of marketing by OEMs


·
            the
                cost and availability of connected products using this technology
                or
                competing technologies





We
      have
      only limited ability to influence in the resolution of the
      foregoing.





***Powerline
      solutions for home connectivity may not gain acceptance.***





Ethernet
      and Wireless technologies enjoy a large market share of the home connectivity
      market. As the market broadens to include audio/video applications, it is
      unclear which medium will be predominant. Among the competing physical mediums,
      including coaxial cable, Ethernet, phone line, and wireless, many are actively
      supported by various trade associations that represent the interests of a
      variety of companies. Some have greater market acceptance. If powerline
      technology does not achieve market acceptance, there may be less demand or
      no
      demand at all, and our business will suffer.





17




***Powerline
      technologies, other than the technologies implemented by Arkados may
      proliferate.***





Arkados
      is developing products that comply with the specification for in-home powerline
      networking developed by members of the HomePlug Powerline Alliance. However,
      there may be other competing, independent efforts in this market. To the extent
      that a competing effort establishes the predominant industry standard for
      powerline technologies that are not based on Arkados’ chosen technologies, or if
      no standard predominates in each market, our business will suffer.





***Products
      that incorporate our chosen technologies may fail in operation, or fail to
      be
      certified by standards organizations.***





Our
      ODM/OEM customers may produce products that fail to work properly, either as
      a
      consequence of the inclusion of our semiconductors and software, or an unrelated
      problem, our business may suffer. If products that incorporate our solutions
      fail to pass standards test, our business will suffer.





***We
      may be unable to sell volumes of semiconductors.***





While
      we
      plan to attract customers with plans for large numbers of products, there may
      be
      cases when significant effort results in few semiconductors sold. When a company
      agrees to develop products that use our solutions, and agrees to purchase our
      solutions in volume, we consider the agreement a “design win.” Achieving a
      design win does not create a binding commitment from that customer. A design
      win
      is merely an expression of interest by a customer to make volume purchases,
      but
      at any time a customer can discontinue using our solutions. To the extent that
      we are unable to convert design wins into volume sales, our business will
      suffer.





***We
      may not be able to attract and retain engineering and technical talent, our
      business may suffer.***





The
      needs
      of the business will dictate our hiring, but we expect to need personnel in
      our
      technical and engineering disciplines, as well as in operational roles. Since
      powerline technologies is a narrow engineering and technical specialty and
      we
      have limited financial resources, attracting experienced talent is difficult.
      If
      we are unable to attract and retain qualified personnel our ability to develop
      and produce our products will be limited.





***Our
      solutions have a long development and sales cycle. We may continue to incur
      significant expenses before revenues are realized.***





Significant
      company resources must be dedicated to research and development, production
      and
      sales and marketing in order to properly sell solutions into our target markets.
      Products are developed based on a forecasts from analysts, and we will incur
      substantial product development expenses before generating associated revenues.
      Customers typically spend two to nine months in testing before volume production
      of its own products, which incorporate our solution. Sales cycles are lengthy
      and produce delays between the time we incur expenses for research, development,
      sales and marketing efforts, and the time that we generate revenue, if any
      revenue is generated. If we do not generate revenue after we have incurred
      substantial expenses to develop and market any of our products, our business
      will suffer.





18




***We
      will depend on our OEM and ODM customers to produce successful products that
      incorporate our solutions*** .





Our
      customers are OEMs and ODMs in our target markets. They integrate our IC’s into
      their products. If their products are not successful, we may not sell volume
      quantities of our semiconductors. OEM and ODM products may be unsuccessful
      for
      many reasons which are beyond our control. Any of these reasons may harm our
      business.





***We
      will rely on third parties to fabricate, assemble and test our solutions, which
      may increase costs or create delays*** .





As
      a
“fabless” semiconductor manufacturer, we do not own or operate a semiconductor
      fabrication, assembly or testing facility. For our first semiconductor product
      we have entered into an agreement with GDA Technologies, Inc. to manage this
      process for us. In the future GDA or contract foundries, and assembly, and
      test
      houses selected by us may also be adversely affected for reasons beyond our
      control. This may result in our inability to obtain products within the time
      frames, volumes or costs we require, or at all. Any disruption in the
      availability of products, or problems associated with the delivery, quality
      or
      cost of fabrication, assembly and testing of our products may cause our business
      to suffer.





***Our
      specifications may result in unacceptable manufacturing yields from our
      suppliers, which may increase our product costs or reduce supplies.***





We
      write
      specifications and create designs and our third-party suppliers manufacture
      chips based on those specifications and designs. We have not yet entered into
      volume production of our products, and our specifications may fall short of
      producing volumes of semiconductors effectively and efficiently. This may cause
      dies on our wafers to function poorly, if at all. The term “yield” is used to
      express the proportion of functional die expressed as a percentage of total
      die
      on a wafer. If expected yields are not reached, our product costs will increase.
      We may also experience problems when our products are scaled to smaller
      geometries. Problems with yield may not be identified until late in the product
      development cycle, or even once an end-product is built and sold. Yield problems
      are difficult to detect, time consuming and expensive to correct. These issues
      could affect our intention to delver products to customers in a timely manner.





***Defects
      in our products could hurt the business by harming our reputation, decreasing
      our market acceptance, losing customer accounts, and creating liabilities for
      our company.***





Integrated
      circuits are highly complex products, and may contain defects or bugs which
      may
      not be detected until other products that incorporate ours are shipped and
      being
      used by end-users. Defects may harm our reputation and make customers reluctant
      to buy our products. Correcting these defects is an expensive process. If
      defects are not discovered until after we have commenced commercial production
      of a new product, we might incur substantial additional development costs.
      If we
      fail to solve problems in time, we may incur product recall, repair or
      replacement costs. These problems may also result in claims against us by our
      customers or consumers. Any such problems could divert our company resources
      from other development efforts. Moreover, we would likely lose, or experience
      a
      delay in, the market acceptance of our products. We could also lose credibility
      with our current and prospective customers.





***Regulation
      in certain regions of the world (Japan as an example), which limits our
      international market.***





Our
      powerline communication products are designed to operate on frequencies that
      are
      currently restricted by government regulations in certain areas of the world,
      Japan as an example, As a result, our




19




semiconductors
      cannot be used in products used in such areas at this time. The international
      market will remain limited unless the existing regulations are changed or until
      we develop products that can operate within the constrains imposed by the
      existing regulations.





***Future
      Federal Communications Commission, or FCC, regulation may restrict sales of
      our
      products adversely affecting our business.***





Our
      powerline communication products are designed to operate on frequencies that
      are
      not currently restricted by FCC regulations. OEM products incorporating our
      ICs
      are regulated by the FCC. Operation of these products currently is not
      restricted by the FCC as long as the products do not interfere with other radio
      frequency, or RF, bands licensed by the FCC. We cannot assure you that this
      will
      continue to be the case. Should government regulations change in the future,
      making operation of our customers’ products at their current radio frequency
      bands subject to restrictive regulation, or subjecting the frequencies on which
      our products operate to restrictions, our customers’ desire to purchase our
      products could diminish and our business may suffer.




***Our
      business is highly dependent on the expansion of the consumer digital
      entertainment electronics market.***





We
      expect
      that the main growth in our product demand will be driven by the consumer
      digital entertainment electronics market. We are focusing on audio/video
      transmission and distribution products for the in-home use. We expect the
      consumer digital market to expand; however, our strategy may not be successful.
      Given current economic conditions in the United States and internationally,
      as
      well as the large installed base of consumer electronics products, consumer
      spending on home electronic products may not increase as expected. In addition,
      the potential decline in consumer confidence and consumer spending relating
      to
      future terrorist attacks could have a material adverse effect on our business.





***Our
      success depends on our ability to introduce new products on a timely
      basis.***





Our
      success depends upon our ability to develop new products for new and existing
      markets, to introduce these products in a timely manner, and to have these
      products gain market acceptance. The development of new products is highly
      complex and we may experience delays in developing and introducing them.
      Successful product development and introduction depend on a number of factors,
      including:




·
            proper
                new product definition,


·
            timely
                completion of design and testing of new products,


·
            assisting
                our customers with integration of our components into their new products,
                including providing support from the concept stage through design,
                launch
                and production ramp,


·
            successfully
                developing and implementing the software necessary to integrate our
                products into our customers’ products,


·
            achievement
                of acceptable manufacturing yields,


·
            availability
                of wafer, assembly, and test capacity,


·
            market
                acceptance of our products and the products of our customers


·
            obtaining
                and retaining industry certification requirements.





Although
      we seek to design products that have the potential to become industry standard
      products, we cannot assure you that the market leaders will adopt any products
      introduced by us, or that any products that may be initially accepted by our
      customers that are market leaders will become industry standard




20




products.
      Both revenues and margins may be materially affected if new product
      introductions are delayed, or if our products are not designed into successive
      generations of our customers’ products. We cannot assure you that we will be
      able to meet these challenges, or adjust to changing market conditions as
      quickly and cost-effectively as necessary to compete successfully. Our failure
      to develop and introduce new products successfully could harm our business
      and
      operating results.





Successful
      product design and development is dependent on our ability to attract, retain,
      and motivate qualified design engineers, of which there is a limited number.
      Due
      to the complexity and variety of CMOS, precision linear, and mixed-signal
      circuits, the limited number of qualified circuit designers and software
      engineers, and the limited effectiveness of computer-aided design systems in
      the
      design of such circuits, we cannot assure you that we will be able to
      successfully develop and introduce new products on a timely basis.




***Strong
      competition in the high-performance integrated circuit market may harm our
      business.***





The
      integrated circuit industry is intensely competitive and is characterized by
      rapid technological change, price erosion, and design and other technological
      obsolescence. Because of shortened product life cycles and even shorter
      design-in cycles in a number of the markets that we serve, particularly consumer
      entertainment, our competitors have increasingly frequent opportunities to
      achieve design wins in next-generation systems. In the event that competitors
      succeed in supplanting our products, our desired market share may not be
      attainable and/or sustainable and net sales, gross margins, and results of
      operations would be adversely affected.





In
      powerline communication segment our principal competitors include Intellon,
      Conexant, Maxim, DS2, Panasonic Gigle Semiconductor, and Spidcom. In Network
      and
      Media Processors Conexant, Cirrus Logic, Micrel, Texas Instruments, Atmel,
      and
      Sharp. Many of our competitors have substantially greater financial,
      engineering, manufacturing, marketing, technical, distribution and other
      resources, broader product lines, greater intellectual property rights, and
      longer relationships with customers than we have. We also expect intensified
      competition from emerging companies and from customers who develop their own
      integrated circuit products. In addition, some of our current and future
      competitors maintain their own fabrication facilities, which could benefit
      them
      in connection with cost, capacity and technical issues.





Increased
      competition could adversely affect our business. We cannot assure you that
      we
      will be able to compete successfully in the future or that competitive pressures
      will not adversely affect our financial condition and results of operations.
      Competitive pressures could reduce market acceptance of our products and result
      in price reductions and increases in expenses that could adversely affect our
      business and our financial condition.





***Our
      products may be characterized by average selling prices that decline over short
      time periods; if we are unable to introduce new products with higher selling
      prices or reduce our costs, our business and operating results could be harmed.***





Historically
      in the integrated circuit industry, average selling prices of products have
      decreased over time, while manufacturing costs may remain fixed. If we are
      unable to introduce new products with higher margins or to reduce manufacturing
      costs to offset anticipated decreases in the prices of our products, our
      operating results may be adversely affected. In addition, because of high fixed
      costs in our industry, we are limited in our ability to reduce total costs
      quickly in response to any revenue shortfalls. Because of these factors, we
      may
      experience material adverse fluctuations in our future operating results on
      a
      quarterly or annual basis.




21




***Our
      products are complex and could contain defects, which could reduce sales of
      those products or result in claims against us.***





Product
      development in the markets we serve is becoming more focused on the integration
      of multiple functions on individual devices. In addition to that powerline
      communication is a relatively new technology. There is a general trend towards
      increasingly complex products. The greater integration of functions and
      complexity of operations of our products increase the risk that our customers
      or
      end users could discover latent defects or subtle faults after volumes of
      product have been shipped. This could result in:




·
            material
                recall and replacement costs for product warranty and support,


·
            adverse
                impact to our customer relationships by the occurrence of significant
                defects,


·
            delay
                in recognition or loss of revenues, loss of market share, or failure
                to
                achieve market acceptance, and


·
            diversion
                of the attention of our engineering personnel from our product development
                efforts.





The
      occurrence of any of these problems could result in the delay or loss of market
      acceptance of our products and would likely harm our business, and may result
      into our inability to secure a reasonable share of the market, In addition,
      any
      defects or other problems with our products could result in financial or other
      damages to our customers who could seek damages from us for their losses. A
      product liability claim brought against us, even if unsuccessful, would likely
      be time consuming and costly to defend.




***We
      rely on independent foundries to manufacture our products, which will subject
      us
      to increased risks.***




We
      rely
      on independent foundries to manufacture all of our wafers. In order to produce
      our silicon we need to secure appropriate manufacturing services and capacities.
      Our reliance on outside foundries involves several risks and uncertainties,
      including the:





·
            inability
                to secure appropriate manufacturing services and capacities


·
            possibility
                of an interruption or loss of manufacturing
                capacity


·
            lack
                of control over delivery schedules, quality assurance, manufacturing
                yields and costs


·
            possible
                misappropriation of our intellectual
                property


·
            inability
                to reduce our costs as quickly as competitors who manufacture their
                own
                products and are not bound by set prices.





Market
      conditions could result in wafers being in short supply and prevent us from
      having adequate supply to meet our customer requirements. In addition, any
      prolonged inability to utilize third-party foundries because of fire, natural
      disaster, or otherwise would have a material adverse effect on our financial
      condition and results of operations. If we are not able to obtain additional
      foundry capacity as required, our relationships with our customers would be
      harmed and, consequently, our sales would likely be reduced, and we may be
      forced to purchase wafers from higher-cost suppliers or to pay expediting
      charges to obtain additional supply, if we are able to acquire wafers at all.





In
      order
      to secure additional foundry capacity, we may enter into contracts that commit
      us to purchase specified quantities of silicon wafers over extended periods.
      In
      the future, we may not be able to secure sufficient capacity with foundries
      in a
      timely fashion or at all, and such arrangements, if any, may not be on terms
      favorable to us. Moreover, if we are able to secure foundry capacity, we may
      be
      obligated to




22




utilize
      all of that capacity or incur penalties. These penalties may be expensive and
      could harm our financial results.





***We
      will be dependent on our subcontractors to perform some of the design and key
      manufacturing functions for us.***




We
      will
      depend on third-party subcontractors for the elements of the design, assembly,
      packaging, and testing of our products. International operations and sales
      may
      be subject to political and economic risks, including political instability,
      currency controls, exchange rate fluctuations, and changes in import/export
      regulations, tariff, and freight rates, as well as the risks of natural
      disaster. Although we will seek to reduce our dependence on a limited number
      of
      subcontractors, as demand for our products merits, the concentration of
      subcontractors and manufacturing operations in certain areas of the World could
      subject us to the risks of conducting business internationally, including
      political and economic conditions in such regions as Asia, India, etc.
      Disruption or termination of the assembly, packaging or testing of our products
      could occur, and such disruptions could harm our business and operating results.
      In addition, we are unable to predict whether events such as the epidemic of
      SARS will have a negative effect on the design, supply, testing, and packaging
      of our products.





***We
      may be unable to protect our intellectual property rights from third-party
      claims and litigation.***





Our
      success depends on our ability to obtain patents and licenses and to preserve
      our other intellectual property rights covering our technology, applications,
      products, and development and testing tools. We seek patent protection for
      those
      inventions and technologies for which we believe such protection is suitable
      and
      is likely to provide a competitive advantage to us. We also rely substantially
      on trade secrets, proprietary technology, non-disclosure and other contractual
      agreements, and technical measures to protect our technology, application,
      design, and manufacturing know-how, and work actively to foster continuing
      technological innovation to maintain and protect our competitive position.
      We
      cannot assure you that steps taken by us to protect our intellectual property
      will be adequate, that our competitors will not independently develop or patent
      substantially equivalent or superior technologies or be able to design around
      patents that we may receive, or that our intellectual property will not be
      misappropriated. Also, the laws of some foreign countries may not protect our
      intellectual property as much as the laws of the United States.




***Potential
      intellectual property claims and litigation could subject us to significant
      liability for damages and could invalidate our proprietary
      rights.***




The
      semiconductor industry is characterized by frequent litigation regarding patent
      and other intellectual property rights. Even if we receive a patent grant we
      would not be able to offer any assurance that it will not be invalidated,
      circumvented, or challenged, that rights granted under the patent will provide
      competitive advantages to us, or that any of our pending or future patent
      applications will be issued with the scope of the claims sought by us, if at
      all. As is typical in the semiconductor industry, we expect that we and our
      customers may have received and may receive in the future, communications from
      third parties asserting patents, mask work rights, or copyrights on certain
      of
      our products and technologies. In the event third parties were to make a valid
      intellectual property claim and a license was not available on commercially
      reasonable terms, our operating results could be harmed. Litigation, which
      could
      result in substantial cost to us and diversion of our resources, may also be
      necessary to defend us against claimed infringement of the rights of others.
      An
      unfavorable outcome in any such suit could have an adverse effect on our future
      operations and/or liquidity.




23





***If
      we are unable to make continued substantial investments in research and
      development, we may not be able to sell our products.***




We
      plan
      significant expenditures in research and development activities to develop
      products and solutions. If we fail to make sufficient expenditures in research
      and development programs, new technologies and process improvements implemented
      by our competitors could render our current and planned products obsolete,
      and
      our business could be harmed. Substantially all of our operating expenses are
      related to research and development.





***Pending
      litigation.***





We
      have
      reported that former officers of Enikia, LLC, the company from which we
      indirectly acquired patents and other assets relating to our planned products,
      have filed a lawsuit against Andreas Typaldos, our Chairman, Oleg Logvinov,
      our
      CEO, Enikia, Enikia’s counsel, Arkados and us. The action is captioned Robert
      Dillon, et al. v. Andreas Typaldos et al. ,
      and was
      commenced in the Superior Court of New Jersey, Chancery Division, Somerset
      County (Docket No. C-12102-04).





***Obligation
      to license certain intellectual property rights.***





As
      a
      member of the HomePlug Alliance, TIA TR30.1 and IEEE P1901, we are
      obligated to license certain intellectual property rights to our competitors,
      on
      a non-discriminatory basis, which may adversely affect our ability to
      compete.





**Available
      Information**





We
      file
      annual, quarterly and current reports, proxy statements and other information
      with the Securities and Exchange Commission (“SEC”). You may read and copy any
      document the Company files at the SEC’s public facilities located at 100 F
      Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
      for
      information on the public reference room. The SEC maintains a web site
      ( www.sec.gov )
      that
      contains annual, quarterly and current reports, proxy statements and other
      information that we and other issuers file electronically with the SEC.





**Executive
      Officers of the Registrant**





Our
      current executive officers are:





**Name**
            **Position**Andreas
                Typaldos
            Chairman
                of the BoardOleg
                Logvinov
            President,
                CEO and a DirectorKirk
                Warshaw
            CFO,
                Treasurer and Secretary





Andreas
      Typaldos is a principal stockholder and was appointed Chairman of our Board
      in
      February, 2005. Although our by-laws provide that the Chairman of the Board’s
      primary responsibilities relate to the conduct of board and stockholder
      meetings, Mr. Typaldos also serves as a consultant to us on a part-time basis
      and has a significant impact on our strategic planning, marketing and capital
      raising activities. He has thirty years of software experience as an
      entrepreneur and founder/investor of a number of technology companies. In 1997,
      Mr. Typaldos founded Enikia, LLC, whose technology and assets were subsequently
      acquired by an entity controlled by Mr. Typaldos and merged into our Arkados,
      Inc. subsidiary in May 2004. Mr. Typaldos serves as CEO of Xandros, Inc., a
      privately held company engaged in the sale of Linux




24




desktop
      applications. From September 1998 until June 2003, as founder and principal
      investor, Mr. Typaldos also built a multi-million dollar software consulting
      business, e-Vantage Solutions, Inc., until that company’s consulting activities
      ended shortly after September 11, 2001. In addition, from September 1999 until
      December 2001, **** Mr.
      Typaldos was active as Interim Chairman and CEO at NetGain Development, Inc.,
      which was an internet incubator/investment firm that funded internet and
      enabling technology companies, including Enikia, Linux Global Partners, and
      other internet and technology companies. Prior to that, Mr. Typaldos founded
      his
      first consulting and software company in 1973 and in 1978, founded a successor
      company, AxsOne (formerly known as Compuiron), which he took public in 1995
      and
      of which he as President until 1994 and Chairman/CEO until 1996. AxsOne is
      an
      international client/server and internet-based enterprise applications software
      company that supplies Fortune 5000 companies with records and content management
      and compliance software (i.e., email and Instant Messaging-IM management),
      as
      well as financial applications and workflow solutions .





Mr.
      Typaldos has a Bachelors of Science Degree from Columbia University in
      Mathematical Methods for Engineering and Operations Research. He also holds
      a
      Masters of Science Degree in Computer Science from Pratt Institute. Mr. Typaldos
      serves on the Board of Directors and Advisory Boards of a number of companies
      and non-profit organizations.





Oleg
      Logvinov was appointed President, CEO and a director on August 12, 2004 and
      has
      served as President of Arkados since we merged Miletos into Arkados. Prior
      to
      the merger, from February, 2000 to March, 2004, Mr. Logvinov served as Vice
      President of Engineering and later as President of Enikia LLC. From March,
      1998
      to February, 2000, he served as Senior Director of Product Development and
      System Engineering at OpenCon Systems Inc., a telecommunications software
      service provider, and later CyberPath Inc., a venture-funded VoDSL Gateway
      company spun off by OpenCon Systems Inc. Prior to that, he held senior
      management positions at NITECH, INC from1996 to 1998, and CEM, Inc from 1991
      to
      1996. Mr. Logvinov holds a masters degree in electrical engineering from the
      Technical University of Ukraine (KPI). He has also worked as a senior research
      scientist and later research team leader at an R&D laboratory at the
      Technical University of Ukraine and the Ukraine Department of Energy.  Oleg
      Logvinov is the Chief Strategy Officer and immediate past President of the
      HomePlug Powerline Alliance. Mr. Logvinov is a frequent industry speaker,
      representing both the HomePlug alliance and Arkados at conferences around the
      world.




Kirk
      Warshaw, CPA was appointed CFO of Arkados in June 2004 and was appointed our
      CFO, Treasurer and Secretary August 12, 2004. Mr. Warshaw started his career
      at
      Deloitte Haskins & Sells (Deloitte & Touch) as a Senior Accountant.
      Subsequently, Mr. Warshaw was employed in the banking industry, including a
      position as the CFO of Amerifederal Savings Bank from 1987 to 1990 where he
      supervised the accounting, retail branches, corporate services, consumer
      lending, and data processing departments. He was directly responsible for asset
      / liability, and interest rate risk management; tax, budget, and insurance
      functions; capital planning, regulatory compliance and financing activities.
      From 1990 to 1991 he was the bank President and CEO where he resolved numerous
      non-performing assets and operating problems, prepared business plans,
      negotiated loan workout plans, and participated in the resolution and sale
      of
      the bank. For the last 14 years, he has invested in and served in managerial
      capacity in a variety of private businesses, including radio stations, an
      executive recruitment entity, and a firm which provides personal financial
      planning services. In addition, he acts as a financial and business consultant
      to several small businesses. Mr. Warshaw is currently the Chief Financial
      Officer of Entrust Financial Services, Inc. (OTCBB:ENFN), the Chief Financial
      Officer and Director of 24 Holdings, Inc. (OTCBB:TFHD), a Director of Empire
      Financial Holding Company (AMEX:EFH), Chief Financial Officer of Twin Lakes
      Delaware, Inc. (a publicly reporting, non-trading company), Chief Financial
      Officer and Secretary of R&R Acquisition II, Inc., R&R Acquisition III,
      Inc., R&R Acquisition IV, Inc., R&R Acquisition V, Inc., R&R
      Acquisition




25




VI,
      Inc.,
      R&R Acquisition VII, Inc., R&R Acquisition VII, Inc., R&R
      Acquisition IX, Inc., and R&R Acquisition X, Inc. (each a publicly
      reporting, non-trading company), and a Director of two privately owned entities.
      Mr. Warshaw, a Certified Public Accountant since 1982, holds a BS in accounting
      and marketing from Lehigh University.





ITEM
              2.
            DESCRIPTION
                OF PROPERTY.




Our
      executive offices are located at 220 Old New Brunswick Road, Piscataway, NJ
      08854. The facility is approximately 6,500 sq. feet, occupied pursuant to a
      lease which expires on June 30, 2009 and is adequate for our current activities.
      We may add to the space or seek larger facilities as our operations
      expand.





ITEM
              3.
            LEGAL
                PROCEEDINGS.




In
      December 2004, Robert Dillon, William Simons and Stephen Schuster (the
“Plaintiffs”) named us, our Arkados, Inc. subsidiary, Enikia, LLC, Oleg
      Logvinov, our CEO, Andreas Typaldos, our Chairman, and others in a lawsuit.
      The
      action is captioned Robert
      Dillon, et al. v. Andreas Typaldos et al. ,
      and was
      commenced in the Superior Court of New Jersey, Chancery Division, Somerset
      County (Docket No. C-12102-04). The plaintiffs claim damages and allege, among
      other things entitlement to a portion of the Common Shares issued as
      consideration for Miletos, Inc. (an affiliate of Mr. Typaldos’) merging into our
      Arkados subsidiary. We do not believe there is any merit to these claims, but
      discussions about settlement with plaintiffs’ counsel occurred several months
      ago but did not result in a settlement. Whether or not any future discussions
      lead to a settlement, the resolution of this litigated matter could require
      a
      significant amount of our management’s time and is detrimental to our business.
      Plaintiff Dillon, a holder of membership interests in Enikia and the other
      plaintiffs that hold options to acquire Enikia interests allege, among other
      things, that they are entitled to various forms of equitable relief and
      unspecified damages. Litigation is currently pending regarding what parties
      and
      what issues should be decided in an arbitration rather than in Superior Court
      of
      New Jersey. We believe claims against the Company are wholly without merit
      and
      intend to vigorously defend against the claims against us unless the claims
      can
      be settled for nuisance value.





The
      outcome of any litigation is inherently uncertain and we are required under
      our
      certificate of incorporation, bylaws and employment agreements to indemnify
      our
      officers and directors for certain liabilities, including the cost of defending
      litigation brought against them in their capacity as such. Nevertheless, a
      portion of our indemnification liability is insured and shares of our common
      stock were escrowed at the time of the merger in which Arkados is the surviving
      corporation, to indemnify us against certain claims being made in the above
      actions.





ITEM
              4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS.





Not
      applicable.


26





PART
      II





ITEM
              5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.





Our
      common stock is currently quoted on the Over-The-Counter Bulletin Board under
      the symbol “AKDSE.OB” and we anticipate that the symbol will change to AKDS.OB”
shortly after this report is filed..




**Market
      Information**





Our
      shares of common stock were first quoted on the Over-The-Counter Bulletin Board
      in 1999. The following table presents the high and low bid prices per share
      of
      our common stock as quoted for the quarter ended August 31, 2006 and each
      quarter in the years ended May 31, 2006 and May 31, 2005 which information
      was
      provided by NASDAQ Trading and Market Services.




High
                Bid
            Low
                Bid*Quarter
                ended:*August
                31, 2006
            $0.95
            $0.51Fiscal
                Year ended May 31, 2006High
                Bid
            Low
                Bid*Quarter
                ended:*May
                31, 2006
            $0.88
            $0.47February
                28, 2006
            $0.85
            $0.51November
                30, 2005
            $1.05
            $0.56August
                31, 2005
            $0.90
            $0.41Fiscal
                Year ended May 31, 2005High
                Bid
            Low
                Bid*Quarter
                ended:*May
                31, 2005
            $0.21
            $0.42February
                29, 2005
            $0.80
            $0.50November
                30, 2004
            $1.20
            $0.53August
                31, 2004
            $3.00
            $0.56




The
      above
      prices represent inter-dealer quotations, without markup, markdown or
      commissions, and may not represent actual transactions. The trading volume
      of
      our common stock fluctuates and may be limited or nonexistent from time to
      time.
      As a result, the above prices should not be considered to represent a liquid
      trading market.





**Holders**





As
      of
      August 31, 2006 we had 195 stockholders of record of our common
      stock.





27




**Dividend
      Policy**




We
      have
      paid no dividends on our common stock and we do not expect to pay cash dividends
      in the foreseeable future. The terms of $5,649,354.38 principal amount
      outstanding of 6% Secured Convertible Debentures due December 28, 2008 prohibit
      our payment of any cash dividends or distributions without the consent of the
      holders of 60% of the principal amount outstanding at the time of such dividend
      or distribution. We currently do not have surplus from which we could pay
      dividends and intend to retain any future earnings to finance the growth and
      development of our business.





**Recent
      Sales Of Unregistered Securities; Use Of Proceeds From Registered
      Securities**




Information
      concerning our sales of unregistered securities during the period covered by
      this report has been reported by us on previously filed reports on Form 10-QSB
      and Form 8-K.





**Equity
      Compensation Plan Information**





The
      following table sets forth certain information about our equity compensation
      plans and agreements as of May 31, 2006:





**Plan
                Category**
            **Number
                of securities**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding
                options,**
              **warrants
                and rights**
              
              **(a)**
            **Weighted-average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
              
              **(b)**
            **Number
                of securities**
              **remaining
                available**
              **for
                future issuance**
              **under
                equity**
              **compensation
                plans**
              **(excluding
                securities**
              **reflected
                in column**
              **(a))**
              
              **(c)**Equity
                compensation plans
              approved
                by security holders
            5,000
            $30.00
            55,000Equity
                compensation plans not
              approved
                by security holders
            7,622,642
            $ 
                0.64
            2,557,358**Total**





****  Our
      board
      adopted a stock option plan in 1998 which was approved by stockholders. The
      plan
      reserved 3,000,000 shares of old common stock for issuance upon the granting
      of
      incentive and non-qualified stock option until 2008 with terms up to 10 years
      from the dated of grant. As a result of a reverse stock split the number of
      shares available for grant was reduced to 60,000.





In
      2004,
      our board approved our 2004 Stock Option and Restricted Stock Plan (the “2004
      Plan”) and set aside 6,000,000 shares for grant pursuant to incentive and
      non-qualified stock options, and restricted stock awards. The 2004 Plan was
      amended by the board in June 2006, to increase the number of shares subject
      to
      options that can be granted to our officers, directors, employees and
      consultants to 10,000,000. The 2004 Plan has not been approved by our
      stockholders and accordingly, no “incentive stock options” as defined in the
      Internal Revenue Code can be granted until such approval is obtained. The 2004
      plan is currently administered by our board of directors. There are options
      to
      purchase 744,642 shares outstanding under the 2004 Plan, as
      amended.




28




In
      March
      2006, our board approved the issuance of 180,000 warrants to purchase shares
      of
      our common stock for $0.85 per share to a investor relations consultant. The
      issuance of the warrants has not been approved by our stockholders.





ITEM
              6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATIONS




Readers
      are urged to carefully review and consider the various disclosures made by
      us in
      this Form 10-KSB for the period ended May 31, 2006, and our other filings with
      the U.S. Securities and Exchange Commission. These reports and filings attempt
      to advise interested parties of the risks and factors that may affect our
      business, financial condition and results of operations and prospects. The
      forward-looking statements made in this Form 10-KSB speak only as of the date
      hereof and we disclaim any obligation to provide updates, revisions or
      amendments to any forward-looking statements to reflect changes in our
      expectations or future events.





**Plan
      of Operation**





We
      are a
      semiconductor company engaged in research and development activities focused
      on
      the segment of the industry that provides the technology and solutions enabling
      broadband communications over standard electricity lines. Arkados is member
      of
      an alliance of several companies referred to as the HomePlug Powerline Alliance,
      “HomePlug.” HomePlug’s mission is to enable and promote rapid availability,
      adoption and implementation of cost effective, interoperable and standards-based
      home powerline networks and products. Arkados is also a member of newly created
      IEEE P1901 group that is focused on the standardization of the powerline
      communication technology.





We
      have
      not had significant revenue from operations since inception and as of May 31,
      2006 were still a development stage company. Furthermore, we have financed
      operating losses since September 2004 with the proceeds primarily from related
      party lending from our major stockholder and affiliated lenders, as well as
      other stockholders and lenders, and from a capital raise to qualified investors
      through a retail brokerage firm. From December 2005 to May 31, 2006, we sold
      an
      aggregate $3,375,884.30 of 6% secured convertible debentures due December 28,
      2008 of which $2,375,884.30 was purchased by institutional investors and the
      balance of $500,000 by a limited liability company owned equally by our
      Chairman’s wife and another director. In addition, we paid down a substantial
      portion of outstanding short term debt and other liability and have issued
      approximately 600,000 shares of our common stock in satisfaction of
      approximately $406,000 of short term liabilities. During the period from June
      1,
      2006 to September 2006, we raised and additional $1,500,000 of cash and settled
      $773,400 of related party debt by issuing addition 6% secured debentures.
      Despite these milestones in improving our financial position, our business
      plan
      to aggressively market our chips remains constrained by our limited capital
      resources. Operating under these constraints, during the year ended May 31,
      2006:





·
            our
                focus began to shift to sales and marketing and customer acquisition
                mode,
                after developing and demonstrating reference designs and prototypes
                of
                end-user products that utilized our A-1000 chip, the first in our
                family
                of ArkTICÔsolutions and demonstrated its capabilities and competitive advantages.




·
            We
                demonstrated such prototypes and reference designs including at the
                Consumer Electronic
                Show (CES) held in Las Vegas on January 5 - 8,
                2006.


29
  We
        are
        currently demonstrating our chip and reference design products to individual
        potential customers, including both OEM’s (Original Equipment Manufacturers)and
        ODM’s (Original Design Manufacturers. Such potential customers, if they
        ultimately agree to design our chips into their end user products (as is
        the
        case with OEM’s) or in the products of their own OEM customers (as is the case
        with ODM’s), could be responsible for the introduction of multiple end user
        products into the market, based on the timetables required for such product
        introductions. Such an event could in turn produce multiple revenue streams,
        including revenues streams from each potential OEM customer that uses our
        chips
        in their end user products. In the case of each potential ODM customer that
        uses
        our chips in the designs of the multiple OEM customers served by each ODM,
        there
        could be multiple revenue streams attributable to each ODM that chooses to
        work
        with our chips. In both case, however, such revenue streams will affect future
        quarters, based on the timetable associated with the deployment of end user
        products by such OEM and ODM customers. Thus far, one such ODM has publicly
        announced their offering of a product incorporating our AI-1100
        SoC.





As
      an
      example of such initial marketing and sales activity, we have been working
      with
      potential ODM and OEM customers during the current quarter, and were able to
      have our own and potential ODM product concept prototypes of possible product
      implementations demonstrated in a number of venues, including at our Hospitality
      Suite, the HomePlug Booth, and at the booth of one of its potential ODM
      customers, during the 2006 Consumer Electronic Show (CES) held in Las Vegas
      on
      January 5 - 8, 2006. We met with a number of potential ODM/OEM customers for
      the
      purpose of generating interest in the use of the AI-1100 SoCs and exploring
      new
      product opportunities that can be enabled by the ArkTIC family of products.
      This
      specific activity at CES was undertaken without contractual agreements or firm
      revenue commitments in the form of orders received by us, and there is no
      guarantee that such revenues or orders will be generated as the results of
      these
      initial engagements.





We
      require additional funding for the expansion of our research and development
      efforts, expansion of our management team and sales and marketing organization,
      and to fund consulting and manufacturing work needed in order for our chip
      to be
      ready and available for mass production. We also plan to develop various
      end-user product prototypes and reference designs to support our marketing
      efforts.





We
      will
      contract with third parties for all of our wafer fabrication and assembly,
      as
      well as for a portion of our design and testing. This “fabless” manufacturing
      strategy is designed to allow us to concentrate on our design strengths,
      minimize fixed costs and capital expenditures, access advanced manufacturing
      facilities, and provide flexibility on sourcing multiple leading-edge
      technologies through strategic alliances. We expect to qualify each product,
      participate in process and package development, define and control the
      manufacturing process at our suppliers where possible and practicable, develop
      or participate in the development of test programs, and perform production
      testing of products in accordance with our quality management system. If
      possible, we plan to use multiple foundries, assembly houses, and test
      houses.





If
      we are
      unable to raise funds to finance our working capital needs, we will not have
      the
      capital necessary for ongoing operations and for making our chip ready for
      mass
      production and we could lose professional staff necessary to develop our
      products and the value of our technology could be impaired. In addition, the
      lack of adequate funding could jeopardize our development and delivery schedule
      of our planned products. Such delays could in turn jeopardize relationships
      with
      our current customers, strategic partners and prospective
      suppliers.




30





**Critical
      Accounting Policies**





Financial
      Reporting Release No. 60 requires all companies to include a discussion of
      critical accounting policies or methods used in the preparation of financial
      statements. Our accounting policies are described in Note 2 of the notes to
      our
      consolidated financial statements included in this report. Our consolidated
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States of America, which requires management
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and 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.
      The following is a brief discussion of the more significant accounting policies
      and methods used by us. In addition, Financial Reporting Release No. 67 was
      recently released by the SEC to require all companies to include a discussion
      to
      address, among other things, liquidity, off-balance sheet arrangements,
      contractual obligations and commercial commitments.





Basis
      of Presentation





Our
      consolidated financial statements have been prepared assuming we will continue
      as a going concern despite substantial doubt as to our ability to do so.
      Management anticipates losses in the foreseeable future and plans to finance
      losses by raising additional capital. If we are unable to continue as a going
      concern, adjustments would have to be made to the carrying value of
      assets.





Revenue
      Recognition





We
      recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101,
      Revenue Recognition in Financial Statements, as amended (“SAB 101”). SAB 101
      requires that four basic criteria must be met before revenue can be recognized:
      (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
      or
      services rendered; (3) the fee is fixed or determinable; and (4) collectibility
      is reasonably assured. Under the provisions of SAB 101, we recognize revenue
      when products are shipped, and the collection of the resulting receivable is
      probable. If revenues are from a long term arrangement, revenue are recognized
      when pre-determined milestones, which generally are related to substantial
      scientific or technical achievement, are accomplished.





Accounting
      for Stock Based Compensation




The
        computation of the expense associated with stock-based compensation requires
        the
        use of a valuation model. SFAS 123(R) is a new and very complex accounting
        standard, the application of which requires significant judgment and the
        use of
        estimates, particularly surrounding Black-Scholes assumptions such as stock
        price volatility, expected option lives, and expected option forfeiture rates,
        to value equity-based compensation. We currently use a Black-Scholes option
        pricing model to calculate the fair value of its stock options. We primarily
        use
        historical data to determine the assumptions to be used in the Black-Scholes
        model and have no reason to believe that future data is likely to differ
        materially from historical data. However, changes in the assumptions to reflect
        future stock price volatility and future stock award exercise experience
        could
        result in a change in the assumptions used to value awards in the future
        and may
        result in a material change to the fair value calculation of stock-based
        awards.
        SFAS 123(R) requires the recognition of the fair value of stock compensation
        in
        net income. Although every effort is made to ensure the accuracy of our
        estimates and assumptions, significant unanticipated changes in those estimates,
        interpretations and assumptions may result in recording stock option expense
        that may materially impact our financial statements for each respective
        reporting period.





**The
      Year ended May 31, 2005**





Because
      we currently do not have nor have we ever had since inception any business
      operations as a development stage company, we did not have any recurring
      revenues for the 2005 Fiscal Year.





During
      the year ended May 31, 2005, we had revenues of $832,910 which were realized
      as
      the result of achieving certain benchmarks in a long term arrangement for
      product development and supply with one client. We recorded $599,620 of labor,
      material and supplies, and outside fabrication cost as Cost of




31




Goods
      Sold relying on estimates determined by management. Total operating expenses
      for
      the twelve month period were $6,878,000. The most significant expenses were
      personnel, professional fees and related expenses. Of the total, $4.85 million
      was related to the issuance of stock and stock options for services rendered
      by
      both our employees and outside consultants.




**The
      Year ended May 31, 2006**





Because
      we currently do not have nor have we ever had since inception any business
      operations as a development stage company, we did not have any recurring
      revenues for the 2005 Fiscal Year.





During
      the year ended May 31, 2006, we had revenues of $112,000 which were realized
      as
      the result of achieving certain benchmarks in a long term arrangement for
      services and products with one client compared to $832,910 realized from
      activities with the same client during the prior year We estimated gross margin
      from the receivable based upon cost estimates we prepared for the provision
      of
      all of the services and products in the arrangement. We recorded $78,000 of
      labor, material and supplies, and outside fabrication cost as Cost of Goods
      Sold
      relying on these estimates, compared to $599,620 during the prior year. Total
      operating expenses for the year ended May 31, 2006 were $3.592 million compared
      to $6.878 million in the same period of fiscal year 2005. In both periods,
      the
      most significant expenses were personnel, professional fees and related
      expenses. Research
      and development expenses during the year were $377,979 however, a substantial
      portion of our administrative expenses relate to product development.Of
      the total in fiscal year 2006, approximately $856,000 was related to the
      issuance of stock and stock options for services rendered by both our employees
      and outside consultants. In the prior year period, this amount was $4.85
      million. Given our reliance on outside sources of capital, we expect significant
      additional charges relating to stock compensation.





**Liquidity
      and Capital Resources**





Our
      principal source of operating capital has been provided in the form of equity
      investments and, the private placement of debt securities coupled with warrants
      and related party loans. We do not have any significant sources of revenue
      from
      our operations. No assurance can be given that we can engage in any public
      or
      private sales of our equity or debt securities to raise working capital. We
      have
      depended, in part, upon loans from our present stockholders or management and
      there can be no assurances that our present stockholders or management will
      make
      any additional loans to us.





During
      the years ended May 31, 2006, we were able to raise gross proceeds of $1,066,500
      from the sale of convertible notes and warrants to accredited investors,
      $3,375,884.30 from the sale of secured convertible debentures and warrants
      to
      institutional investors and a limited partnership that is a related party,
      and
      an additional $412,700 from borrowing from related parties. During the same
      period, we repaid $750,000 of outstanding convertible debt, an aggregate of
      $225,000 of related party debt, and $874,000 of liabilities we agreed to pay
      at
      the time we completed the acquisition Arkados by merger in May 2004. The net
      cash provided from these financing activities exceeded the amount of cash
      consumed by operations during the period by approximately $530,000. During
      the
      last quarter we were able to negotiate with the various holders of long and
      short term debt the conversion of a portion of our debt into shares our common
      stock. The total debt converted was $405,000 in exchange for the issuance of
      609,786 shares of our stock. There can be no assurance that our efforts to
      convert our outstanding debt or to raise additional capital will be successful,
      or even if successful will fund our planned operations or capital
      commitments.




May
      31,
      2006, we had cash of approximately $10,000 and negative working capital of
      $2,725,783 compared to cash of $10,000 and negative working capital of
      $3,807,000 at May 31, 2005. The improvement resulted from the sale of the 6%
      two
      year convertible notes and the 6% three year secured debentures during the
      year
      as well as the payment of approximately $874,000 of federal and state tax




32




liabilities
      assumed in a merger in fiscal 2004. Subsequent to May 31, 2006, we sold an
      additional $2,273,470 of 6% secured convertible debentures due December 28,
      2006. The cash proceeds of such sale were $1.5 million and $773,470 of the
      notes
      were issued in satisfaction of related party debt.





Our
      present material commitments are the compensation of its employees, including
      our executive officers, and professional and administrative fees and expenses
      associated with the preparation of our filings with the Securities and Exchange
      Commission and other regulatory requirements.





**Commitments**





We
      do not
      have any commitments which are required to be disclosed in tabular form as
      of
      May 31, 2006.





**Off
      Balance Sheet Arrangements**





We
      do not
      have any off balance sheet arrangements.





ITEM
              7.
            FINANCIAL
                STATEMENTS.




Our
      financial statements are filed under this Item 7, beginning on page F-1 of
      this
      report.





33


**Arkados
      Group, Inc. and Subsidiaries**


**(formerly
      known as CDKNET.COM, Inc.)**


**Development
      Stage Enterprise**





**CONTENTS**


PageREPORT
                  OF INDEPENDENT REGISTERED PUBLICACCOUNTING
                  FIRM
              F
                  -
                  1CONSOLIDATED
                  FINANCIAL STATEMENTSConsolidated
                  Balance Sheet
              F
                  -
                  2Consolidated
                  Statement of Operations
              F
                  -
                  3Consolidated
                  Statement of Changes in Stockholders’ Deficiency
              F
                  -
                  4Consolidated
                  Statement of Cash Flows
              F
                  -
                  5NOTES
                  TO THE CONSOLIDATED FINANCIAL STATEMENTS
              F
                  -
                  6 to F - 24





34


**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Stockholders


Arkados
      Group, Inc. and Subsidiaries


(formerly
      known as CDKNET.COM, Inc.)





We
      have
      audited the accompanying consolidated balance sheet of Arkados Group, Inc.
      and
      subsidiaries (formerly known as CDKNET.COM, Inc.) (A Development Stage
      Enterprise) as of May 31, 2006, and the related consolidated statements of
      operations, stockholders’ deficit, and cash flows for each of the years ended
      May 31, 2006 and 2005 and for the period March 24, 2004 (inception) to May
      31,
      2006. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audit. The financial statements for the period March
      24,
      2004 (inception) to May 31, 2004 reflect total revenues and a net loss of $0
      and
      $693,833, respectively of the cumulative totals. The other auditors’ report has
      been furnished to us in our opinion, insofar as it relates to amounts included
      for such period, is based solely on the report of such other
      auditors.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating principles
      used
      and significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of the Company as of
      May
      31, 2006, and the results of its operations and cash flows for each of the
      years
      ended May 31, 2006 and 2005 and for the period March 24, 2004 (inception) to
      May
      31, 2006 in conformity with generally accepted accounting principles in the
      United States.





The
      accompanying financial statements have been prepared assuming that Arkados
      Group, Inc. will continue as a going concern. As more fully described in Note
      2,
      the Company has incurred recurring operating losses and will have to obtain
      additional capital to sustain operations. These conditions raise substantial
      doubt about the Company’s ability to continue as a going concern. Management’s
      plans in regard to these matters are also described in Note 2. The financial
      statements do not include any adjustments to reflect the possible effects on
      the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that may result from the outcome of this uncertainty.




By:
            /s/*Sherb
                & Co., LLP*SHERB
&
CO,
              LLPCertified
              Public
              Accountants


New
      York,
      New York


October
      6, 2006


F-1




ARKADOS
        GROUP, INC. and Subsidiaries
 (
        formerly known as CDKNET.COM, INC.)
 Consolidated
        Balance Sheet
 (A
        Development Stage Enterprise)
  May
                  31, 2006AssetsCurrent
                  Assets:Cash
              
              $
              —Accounts
                  receivable, net
              
              
              9,398Total
                  Current Assets
              
              
              9,398Deferred
                  financing costs
              
              
              427,140Equipment,
                  net
              
              
              2,147Intangible
                  assets, net
              
              
              129,077Other
                  assets
              
              
              27,225$
              594,987Liabilities
                  and Stockholders’
                  DeficiencyCurrent
                  Liabilities:Accrued
                  expense and other liabilities
              
              $
              495,873Accrued
                  expenses - related party
              
              
              360,000Payroll
                  taxes and related penalties and interest payable
              
              
              959,822Related
                  party payables
              
              
              446,406Total
                  Current Liabilties
              
              
              2,262,101Convertible
                  Debentures, including related debt
              
              
              4,255,789Commitments
                  and Contingencies
              
              
              —Stockholders’
                  DeficiencyConvertible
                  Preferred Stock - $.0001 par value;5,000,000
                  shares authorized, zero shares outstanding
              
              
              —Common
                  stock, $.0001 par value, 100,000,000 sharesauthorized,
                  24,353,053 issued and outstanding
              
              
              2,436Additional
                  Paid in capital
              
              
              14,929,333Treasury
                  Stock
              
              
              (16,000
              )Unearned
                  Compensation
              
              
              (841,191
              )Accumulated
                  Deficit
              
              
              (19,997,481
              )Total
                  Stockholders’ deficiency
              
              
              (5,922,903
              )$
              594,987
  See
          notes
          to consolidated financial statements.
  F-2
 ARKADOS
          GROUP, INC. and Subsidiaries
 (
          formerly known as CDKNET.COM, INC.)
 Consolidated
          Statement of Operations
 (A
          Development Stage Enterprise)
  CumulativeDuring
                    theDevelopmentYear
                    Ended
                
                Year
                    Ended
                
                Stage
                    (MarchMay
                    31,
                
                May
                    31,
                
                24,
                    2004 to2005
                
                2006
                
                May
                    31, 2006)Net
                    Sales
                
                $
                832,910
                
                $
                112,094
                
                $
                945,004Cost
                    of Goods Sold
                
                
                599,620
                
                
                79,980
                
                
                679,600Gross
                    Profit
                
                
                233,290
                
                
                32,114
                
                
                265,404Research
                    and Development Expenses
                
                
                436,224
                
                
                377,979
                
                
                814,203General
                    and Administrative Expenses
                
                
                6,442,164
                
                
                3,213,679
                
                
                10,349,676Net
                    Loss From Operations
                
                
                (6,645,098
                )
                
                (3,559,544
                )
                
                (10,898,475
                )Other
                    Income (Expenses):Interest
                    Income (Expense)
                
                
                (356,267
                )
                
                (465,472
                )
                
                (821,739
                )Net
                    Loss Before Income Taxes
                
                
                (7,001,365
                )
                
                (4,025,016
                )
                
                (11,720,214
                )Provision
                    for Income Taxes
                
                
                —Net
                    Loss
                
                $
                (7,001,365
                )
                $
                (4,025,016
                )
                $
                (11,720,214
                )Net
                    loss per share - basic and diluted
                
                $
                (0.30
                )
                $
                (0.17
                )Weighted
                    Average of Common SharesOutstanding
                    - basic and diluted
                
                
                23,174,359
                
                
                23,777,360
  See
            notes
            to consolidated financial statements.
  F-3
 ARKADOS
            GROUP, INC. and Subsidiaries
 (
            formerly known as CDKNET.COM, INC.)
 Consolidated
            Statement of Stockholders’ Deficiency
 (A
            Development Stage Enterprise)
 Inception
            March 24, 2004 to May 31, 2004 and the Years Ended May 31, 2005 and
            2006
  Additional
                  
                  
                  
                  
                  
                  
                  
                  TotalPreferred
                      Stock
                  
                  Common
                      Stock
                  
                  Paid
                      in
                  
                  Accumulated
                  
                  Treasury
                  
                  Unearned
                  
                  Stockholders’Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Capital
                  
                  Deficit
                  
                  Stock
                  
                  Compensation
                  
                  DeficiencyBalance
                      as of March 24, 2004post
                      foreclosure sale
                  
                  
                  
                  
                  $
                  —
                  
                  
                  5,569
                  
                  $
                  5,569
                  
                  $
                  1,988,185
                  
                  $
                  (8,277,267
                  )
                  $
                  —
                  
                  $
                  —
                  
                  $
                  (6,283,513
                  )Effect
                      of Reorganization andMerger
                      - May 24, 2004
                  
                  
                  
                  
                  
                  
                  
                  
                  21,473,364
                  
                  
                  (3,422
                  )
                  
                  4,105,180
                  
                  
                  
                  
                  
                  (16,000
                  )
                  
                  
                  
                  
                  4,085,758Sale
                      of shares pursuant to PPM
                  
                  
                  
                  
                  
                  
                  
                  
                  841,666
                  
                  
                  84
                  
                  
                  950,116
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  950,200Issuance
                      of shares forsettlement
                      of debts
                  
                  
                  
                  
                  
                  
                  
                  
                  181,068
                  
                  
                  18
                  
                  
                  168,185
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  168,203Issuance
                      of options for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,086,164
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,086,164
                  )
                  
                  —Amortization
                      of unearnedcompensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  359,537
                  
                  
                  359,537Net
                      loss (March 24, 2004 toMay
                      31, 2004)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (693,833
                  )
                  
                  
                  
                  
                  
                  
                  
                  (693,833
                  )Balance
                      as of May 31, 2004
                  
                  
                  —
                  
                  
                  —
                  
                  
                  22,501,667
                  
                  
                  2,250
                  
                  
                  11,297,829
                  
                  
                  (8,971,100
                  )
                  
                  (16,000
                  )
                  
                  (3,726,627
                  )
                  
                  (1,413,648
                  )Shares
                      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  575,000
                  
                  
                  58
                  
                  
                  724,753
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  724,811Debt
                      converted to equity
                  
                  
                  
                  
                  
                  
                  
                  
                  125,000
                  
                  
                  13
                  
                  
                  75,483
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  75,496Issuance
                      of options for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  900,461
                  
                  
                  
                  
                  
                  
                  
                  
                  (702,292
                  )
                  
                  198,169Valuation
                      of equity rights andbeneficial
                      conversionfeatures
                      of debt raise
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  234,353
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  234,353Amortization
                      of unearnedcompensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,617,681
                  
                  
                  3,617,681Net
                      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,001,365
                  )
                  
                  
                  
                  
                  
                  
                  
                  (7,001,365
                  )Balance
                      as of May 31, 2005
                  
                  
                  —
                  
                  
                  —
                  
                  
                  23,201,667
                  
                  
                  2,321
                  
                  
                  13,232,879
                  
                  
                  (15,972,465
                  )
                  
                  (16,000
                  )
                  
                  (811,238
                  )
                  
                  (3,564,503
                  )Shares
                      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  75,000
                  
                  
                  8
                  
                  
                  22,492
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  22,500Debt
                      converted to equity
                  
                  
                  
                  
                  
                  
                  
                  
                  609,786
                  
                  
                  61
                  
                  
                  405,683
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  405,744Shares
                      issued for debtaccomodations
                      and penalties
                  
                  
                  
                  
                  
                  
                  
                  
                  466,600
                  
                  
                  47
                  
                  
                  267,253
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  267,300Options
                      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  596,471
                  
                  
                  
                  
                  
                  
                  
                  
                  (527,301
                  )
                  
                  69,170Valuation
                      of equity rights andbeneficial
                      conversionfeatures
                      of debt raise
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  404,555
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  404,555Amortization
                      of unearnedcompensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  497,347
                  
                  
                  497,347Net
                      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,025,016
                  )
                  
                  
                  
                  
                  
                  
                  
                  (4,025,016
                  )Balance
                      as of May 31, 2006
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  24,353,053
                  
                  $
                  2,437
                  
                  $
                  14,929,333
                  
                  $
                  (19,997,481
                  )
                  $
                  (16,000
                  )
                  $
                  (841,192
                  )
                  $
                  (5,922,903
                  )
  See
              notes
              to consolidated financial statements.
  F-4
 ARKADOS
              GROUP, INC. and Subsidiaries
 (
              formerly known as CDKNET.COM, INC.)
 Consolidated
              Statement of Operations
 (A
              Development Stage Enterprise)
  CumulativeDuring
                        theDevelopmentYear
                        Ended
                    
                    Year
                        Ended
                    
                    Stage
                        (MarchMay
                        31,
                    
                    May
                        31,
                    
                    24,
                        2004 to2005
                    
                    2006
                    
                    May
                        31, 2006)Cash
                        Flows From Operating ActivitiesNet
                        Loss
                    
                    $
                    (7,001,365
                    )
                    $
                    (4,025,016
                    )
                    $
                    (11,720,214
                    )Adjustments
                        to reconcile net loss to net cash providedby
                        (used) in operating activities:Depreciation
                        and Amortization
                    
                    
                    110,579
                    
                    
                    103,428
                    
                    
                    235,565Common
                        stock and warrants issued for services
                    
                    
                    4,540,661
                    
                    
                    856,317
                    
                    
                    5,756,515Warrants
                        and Beneficial Conversion Rights with Debt
                    
                    
                    234,353
                    
                    
                    404,555
                    
                    
                    638,908Accounts
                        Receivabe
                    
                    
                    (24,420
                    )
                    
                    15,022
                    
                    
                    (9,398
                    )Prepaid
                        and Deferred Expenses
                    
                    
                    (8,778
                    )
                    
                    (235,828
                    )
                    
                    (414,580
                    )Other
                        assets
                    
                    
                    (178,306
                    )
                    
                    (27,225
                    )
                    
                    (27,225
                    )Accounts
                        Payable and accrued expenses
                    
                    
                    (42,595
                    )
                    
                    (822,950
                    )
                    
                    (680,676
                    )Net
                        Cash Provided by (Used) in Operating Activities
                    
                    
                    (2,369,871
                    )
                    
                    (3,731,697
                    )
                    
                    (6,221,105
                    )Cash
                        Flows from Investing ActivitiesPurchases
                        of capital expenditures and Patents
                    
                    
                    (101,863
                    )
                    
                    (1,175
                    )
                    
                    (103,038
                    )Net
                        Cash Used in Investing Activities
                    
                    
                    (101,863
                    )
                    
                    (1,175
                    )
                    
                    (103,038
                    )Cash
                        Provided by Financing ActivitiesRelated
                        party payables
                    
                    
                    668,021
                    
                    
                    731,005
                    
                    
                    1,399,026Debt
                        discount
                    
                    
                    —
                    
                    
                    (153,322
                    )
                    
                    (153,322
                    )Contribution
                        of capital
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,232,646Repayment
                        of debt
                    
                    
                    
                    
                    
                    (344,256
                    )
                    
                    (344,256
                    )Issuance
                        of Debentures
                    
                    
                    750,000
                    
                    
                    3,942,384
                    
                    
                    4,692,384Repayment
                        of related party payables
                    
                    
                    —
                    
                    
                    (452,621
                    )
                    
                    (502,621
                    )Net
                        Cash Provided by Financing Activities
                    
                    
                    1,418,021
                    
                    
                    3,723,190
                    
                    
                    6,323,857Net
                        Decrease in Cash
                    
                    
                    (1,053,713
                    )
                    
                    (9,682
                    )
                    
                    (286
                    )Cash,
                        beginning of the period
                    
                    
                    1,063,394
                    
                    
                    9,681
                    
                    
                    285Cash,
                        end of the period
                    
                    $
                    9,681
                    
                    $
                    —
                    
                    $
                    —Supplemental
                        disclosures of cash flow information:Cash
                        paid for interest during the year
                    
                    $
                    —
                    
                    $
                    35,352Cash
                        paid for taxes during the year
                    
                    
                    —
                    
                    
                    —Non
                        cash financing activities:Common
                        stock and warrants issued for services
                    
                    $
                    1,625,214
                    
                    $
                    92,210Shares
                        and warrants issued with debt andbeneficial
                        conversion feature rights
                    
                    
                    234,353
                    
                    
                    671,855Conversion
                        of debt for equity
                    
                    $
                    75,496
                    
                    $
                    405,744
  See
                notes
                to consolidated financial statements.


F-5


Arkados
      Group, Inc. & Subsidiaries


(A
      Development Stage Enterprise)


NOTES
      TO
      FINANCIAL STATEMENTS


YEARS
      ENDED MAY 31, 2006 AND 2005





1.
              DESCRIPTION
                  OF BUSINESS





Arkados
      Group, Inc. (the “Company”) (formerly known as CDKNET.COM, Inc.), pursuant to an
“Agreement and Plan of Merger”, (“the Merger Agreement”) dated May 7, 2004 and
      consummated on May 24, 2004, merged a wholly owned subsidiary, CDK Merger Corp.,
      with Miletos, Inc. (the “Merger”).
      CDK Merger
      Corp. was renamed “Arkados, Inc.” On August 30, 2006 the Company changed its
      name from CDKNET.COM, Inc.to Arkados Group, Inc. All references to
      CDKENT.COM, Inc. have been changed accordingly. Since Arkados Group, Inc. and
      subsidiaries prior to May 7, 2004 had no meaningful operations, this merger
      has
      been recorded as a reorganization of Arkados, Inc. via a reverse merger with
      Arkados Group, Inc. Currently the Company is a development stage enterprise,
      which is a fabless semiconductor manufacturer that designs, develops, markets,
      and sells technology and solutions enabling broadband communications over
      standard electricity lines. The Company is a member of an alliance of several
      companies referred to as the HomePlug Powerline Alliance, “HomePlug” for
      developing the standard of such technologies.





Miletos,
      Inc. was a newly established entity, which acquired the assets and business
      of
      Enikia, LLC in a public foreclosure sale on March 23, 2004 in exchange for
      the
      forgiveness of $4,000,000 of secured debt and the assumption of certain
      outstanding liabilities. The assets and certain liabilities acquired at the
      foreclosure sale have been recorded at historical cost basis. The new entity,
      Miletos, Inc. was predominately owned by a controlled group, which was the
      same
      controlled group of Enikia, LLC and the same group became majority holders.





The
      accompanying financials have been presented on a development stage basis using
      March 24, 2004 as the date of inception.





Pursuant
      to the Merger Agreement, the consideration for the merger consisted of
      16,340,577 shares of the Company’s restricted common stock (250,000 of such
      common shares are contingent shares and will be returned for cancellation unless
      called upon as a result of a breach of a warranty or representation) and
      3,634,642 stock options at prices ranging from $.01 to $1.20 per share. In
      addition $950,200 was raised through the sale of equity for working capital
      of
      the Company.





2.
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES





a.
            Basis
                of Presentation-
                The accompanying consolidated financial statements have been prepared
                assuming that the Company will continue as a going concern. The Company
                has incurred net losses in excess of $11 million since inception
                including
                a net loss in excess of $4 million for the recent year ended May
                31, 2006.
                Additionally, the Company had a net working capital deficiency and
                shareholders’ deficiencies at May 31, 2005 and 2006, and negative cash
                flow from operations since inception. These conditions raise substantial
                doubt about the Company’s ability to continue as a going concern.
                Management expects to incur additional losses in the foreseeable
                future
                and recognizes the need to raise capital to remain viable. The
                accompanying consolidated financial statements do not include any
                adjustments that might be necessary should the Company be unable
                to
                continue as a going concern.




F-6




b.
              Principles
                  of consolidation-
                  The consolidated financial statements include the accounts of Arkados
                  Group, Inc. (the “Parent”), and it’s wholly owned subsidiaries.
                  Intercompany accounts and transactions have been eliminated in
                  consolidation.




c.
              Cash
                  and cash equivalents-
                  The Company considers investments in highly liquid instruments
                  with a
                  maturity of three months or less to be cash
                  equivalents.





d.
              Allowance
                  for doubtful accounts-
                  The Company records a bad debt expense / allowance based on managements
                  estimate of uncollectible accounts. The Company has not recorded
                  any bad
                  debt expense in each of the years ended May 31, 2005 and
                  2006.





e.
              Equipment-
                  Equipment is recorded at cost. Depreciation is provided on the
                  straight-line method based upon the estimated useful lives of the
                  respective assets. Equipment is being depreciated over a period
                  of five
                  years. Maintenance, repairs and minor renewals are charged to operations
                  as incurred, whereas the cost of significant betterments is capitalized.
                  Upon the sale or retirement of property and equipment, the related
                  costs
                  and accumulated depreciation are eliminated from the accounts and
                  gains or
                  losses are reflected in
                  operations.





f.
              Impairment
                  of Long-Lived Assets-
                  The Company reviews long-lived assets, certain identifiable assets
                  and
                  goodwill related to those assets on a quarterly basis for impairment
                  whenever circumstances and situations change such that there is
                  an
                  indication that the carrying amounts may not be recovered. To the
                  extent
                  there has been any impairment such impairment has been record in
                  the
                  statement of operations.





g.
              Fair
                  Value of Financial Instruments-
                  The carrying value of cash, accounts receivable, other receivables,
                  accounts payable and accrued expenses approximate their fair values
                  based
                  on the short-term maturity of these instruments. The carrying amounts
                  of
                  debt were also estimated to approximate fair value. The Company
                  can not
                  estimate the fair value of the remaining outstanding payroll taxes,
                  penalties and interest recorded in connection with the
                  merger.





h.
              Revenue
                  Recognition-
                  The Company records revenues pursuant to one long term development
                  contract. The revenues are earned and recorded are based on pre-determined
                  milestones. When revenues within a pre-determined milestone has
                  been
                  partially earned, the Company records such progress billings as
“Revenues
                  earned not yet billed”. Such revenues are billable under the terms of the
                  arrangement once the milestone been fully completed. The Company
                  also
                  monitors their estimated costs to complete such long term contract
                  to the
                  revenues to be earned to ensure that if there is an estimated loss
                  to
                  record to complete their obligation to fulfill the terms of such
                  development contract, such loss existed. As of May 31, 2006, there
                  were no
                  long term contracts for which revenues were yet to be earned outstanding.





i.
              Advertising
                  Costs-
                  All advertising costs, are expensed as incurred. The Company has
                  not had
                  any advertising costs in each of the last two
                  years.





j.
              Loss
                  Per Share-
                  Basic net loss per common share is computed by dividing net loss
                  by the
                  weighted average number of shares of common stock outstanding.
                  For the
                  years ended May 31, 2006 and 2005, diluted loss per share is the
                  same as
                  basic loss per share since the inclusion of approximately 11.1
                  million
                  stock options and warrants and as well as
                  5.4


F-7
  million
                    shares of common stock issuable upon conversion of convertible
                    indebtedness would be antidilutive.


k.
            Stock
                Options-
                Previously we accounted for our stock-based compensation plans under
                Accounting Principles Board Opinion 25, (APB 25) Accounting for Stock
                Issued to Employees and the related interpretation, for which no
                compensation cost is recognized as of the grant when the estimated
                fair
                value of stock options issued with an exercise price equal to or
                greater
                than the fair value of the common stock on the date of grant up to
                May 31,
                2005. Statement of Financial Accounting Standards No. 123 (SFAS 123)
                Accounting for Stock-Based Compensation, as amended by Statement
                of
                Financial Accounting Standards No. 148 (SFAS 148) Accounting for
                Stock-Based Compensation - Transition and Disclosure, requires that
                companies, which do not elect to account for stock-based compensation
                as
                prescribed by this statement, disclose the pro-forma effects on earnings
                and earnings per share as if SFAS 123 has been adopted.





SFAS
      123-R eliminates the alternative to use the intrinsic value methods of
      accounting that was provided in SFAS 123, which generally resulted in no
      compensation expense recorded in the financial statements related to the
      issuance of stock options. SFAS 123-R requires that the cost resulting from
      all
      share-based payment transactions be recognized in the financial statements.
      SFAS
      123-R establishes fair value as the measurement objective in accounting for
      share-based payment transactions with employees.





On
      June
      1, 2005 (the first day of our 2006 fiscal year), the Company adopted SFAS 123-R
      using modified prospective application, as permitted under SFAS 123-R.
      Accordingly, prior period amounts have not been restated. Under the application,
      the Company is required to record compensation expense for all awards granted
      after the date of adoption and for the unvested portion of previously granted
      awards that remain outstanding at the date of adoption. Per the provisions
      of
      SFAS 123-R, the Company has adopted the policy to recognize compensation expense
      on a straight-line attribution method.





If
      we
      applied the recognition provisions of SFAS 123R using the Black-Scholes option
      pricing model, the resulting pro-forma net income (loss) available to common
      shareholders, and pro-forma net income (loss) available to common shareholders
      per share would be as follows:


F-8





For
                the year ended
              May
                31, 2005Net
                loss available to common
              shareholders,
                as reported
            
            $
            (7,001,365
            )Add:
                Stock-based compensation
              expense
                included in the reported
              net
                income, net of related tax
              effectsDeduct:
                Stock-based
              compensation,
                net of tax
            
            
            (605,059
            )Net
                loss available to common
              shareholders,
                pro-forma
            
            $
            (7,606,424
            )Basic
                earnings per share:As
                reported -
            
            $
            (.30
            )Pro-forma
                -
            
            $
            (.33
            )





The
      above
      stock-based employee compensation expense has been determined utilizing a fair
      value method, the Black-Scholes option-pricing model.





In
      accordance with SFAS 123R, the fair value of each option grant has been
      estimated as of the date of the grant using the Black-Scholes option pricing
      model with the following weighted average assumptions:





The
      Company has recorded compensation expense in the amount of $856,317 for the
      year
      ended May 31, 2006 attributed to the issuance and vesting of stock options
      and
      warrants for services.





For
                Years Ended May 31,2006
            2005Risk
                free interest rate
            5.00%
            5.125%Expected
                life
            4
                years
            4
                yearsDividend
                rate
            0.00%
            0.00%Expected
                volatility
            43%
            64.74%








l.
            Use
                of Estimates-
                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
                and
                disclosure of contingent assets and liabilities at the date of the
                financial statements and revenues and expenses during the reporting
                period. Actual results could differ from those
                estimates.





m.
            Comprehensive
                Income-
                SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for
                reporting and displaying comprehensive income, comprising net income
                and
                other non-owner changes in equity, in the financial statements. For
                all
                periods presented, comprehensive income was the same as net
                income.





F-9





n.
            Recent
                Accounting Pronouncements-





FASB
      153
      - Exchanges of Nonmonetary Assets





In
      December 2004, the FASB issued FASB Statement No. 153. This Statement addresses
      the measurement of exchanges of nonmonetary asstes. The guidance in APB Opinion
      No. 29, Accounting for Nonmonetary Transactions, is based on the principle
      that
      exchanges of nonmonetary assets should be measured based on the fair value
      of
      the assets exchanged. The guidance in that Opinion, however, included certain
      exceptions to that principle. This Statement amends Opinion 29 to eliminate
      the
      exception for nonmonetary exchanges of similiar productive assets and replaces
      it with a general exception for exchanges of nonmonetary assets that do not
      have
      commercial substance. A nonmonetary exchange has commercial substance if the
      future cash flows of the entity are expected to change significantly as a result
      of the exchange. This Statement is effective for financial statements for fiscal
      years beginning after June 15, 2005. Earlier application is permitted for
      nonmonetary asset exchanges incurred during fiscal years beginning after the
      date of this Statement is issued. Management believes this Statement will have
      no impact on the financial statements of the Company once adopted.





FASB
      123
      (revised 2004) - Share-Based Payments





In
      December 2004, the FASB issued a revision to FASB Statement No. 123R, Accounting
      for Stock Based Compensation. This Statement supercedes APB Opinion No. 25,
      Accounting for Stock Issued to Employees, and its related implementation
      guidance. This Statement establishes standards for the accounting for
      transactions in which an entity exchanges its equity instruments for goods
      or
      services. It also addresses transactions in which an entity incurs liabilities
      in exchange for goods or services that are based on the fair value of the
      entity’s equity instruments or that may be settled by the issuance of those
      equity instruments. This Statement focuses primarily on accounting for
      transactions in which an entity obtains employee services in share-based payment
      transactions. This Statement does not change the accounting guidance for
      share-based payment transactions with parties other than employees provided
      in
      Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
      in
      Conjunction with Selling, Goods or Services.” This Statement does not address
      the accounting for employee share ownership plans, which are subject to AICPA
      Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership
      Plans.





A
      nonpublic entity will measure the cost of employee services received in exchange
      for an award of equity instruments based on the grant-date fair value of those
      instruments, except in certain circumstances.





A
      public
      entity will initially measure the cost of employee services received in exchange
      for an award of liability instruments based on its current fair value; the
      fair
      value of that award will be re-measured subsequently at each reporting date
      through the settlement date. Changes in fair value during the requisite service
      period will be recognized as compensation cost over that period. A nonpublic
      entity may elect to measure its liability awards at their intrinsic value
      through the date of settlement.




F-10





The
      grant-date fair value of employee share options and similar instruments will
      be
      estimated using the option-pricing models adjusted for the unique
      characteristics of those instruments (unless observable market prices for the
      same or similar instruments are available).





Excess
      tax benefits, as defined by this Statement, will be recognized as an addition
      to
      paid-in-capital. Cash retained as a result of those excess tax benefits will
      be
      presented in the statement of cash flows as financing cash inflows. The
      write-off of deferred tax assets relating to unrealized tax benefits associated
      with recognized compensation cost will be recognized as income tax expense
      unless there are excess tax benefits from previous awards remaining in paid-in
      capital to which it can be offset.





The
      notes
      to the financial statements of both public and nonpublic entities will disclose
      information to assist users of financial information to understand the nature
      of
      share-based payment transactions and the effects of those transactions on the
      financial statements.





The
      effective date for public entities that do not file as small business issuers
      will be as of the beginning of the annual reporting period that begins after
      June 15, 2005. For public entities that file as small business issuers and
      nonpublic entities the effective date will be as of the beginning of the first
      annual reporting period that begins after December 15, 2005. Management intends
      to comply with this Statement at the scheduled effective date for the relevant
      financial statements of the Company. Management believes the effects of adopting
      this revision to FASB 123R, will approximate recording those amounts currently
      reported as compensation herein on a pro-forma basis as allowed under FASB
      123R.




FASB
      154
      - Accounting Changes and Error Corrections





In
      May
      2005, the FASB issued FASB Statement No. 154, which replaces APB Opinion No.20
      and FASB No. 3. This Statement provides guidance on the reporting of accounting
      changes and error corrections. It established, unless impracticable
      retrospective application as the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements to
      a
      newly adopted accounting principle. The Statement also provides guidance when
      the retrospective application for reporting of a change in accounting principle
      is impracticable. The reporting of a correction of an error by restating
      previously issued financial statements is also addressed by this Statement.
      This
      Statement is effective for financial statements for fiscal years beginning
      after
      December 15, 2005. Earlier application is permitted for accounting changes
      and
      corrections of errors made in fiscal years beginning after the date of this
      Statement is issued. Management believes this Statement will have no impact
      on
      the financial statements of the Company once adopted.





FIN
      47 -
      Accounting for Conditional Asset Retirement Obligations





In
      March
      2005, the Financial Accounting Standards Board (“FASB”) issued interpretation
      No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN No.
      47”). FIN No. 47 clarifies that the term conditional obligation as used in FASB
      Statement No. 143, “Accounting for Assets Retirement Obligations”, refers to a
      legal obligation to perform an asset retirement activity in which the timing
      and/or method of settlement are conditional on a future event that may or may
      not be within the control of the entity. FIN No. 47 requires that the
      uncertainty about the timing and/or method of settlement of a conditional asset
      retirement obligation be factored into the measurement of the liability when
      sufficient




F-11




information
      exists. FIN No. 47 also clarifies when an entity would have sufficient
      information to reasonably estimate the fair value of an asset retirement
      obligation. FIN No. 47 is effective for fiscal years ending after December
      15,
      2005. Management believes this Statement will have no impact on the financial
      statements of the Company once adopted .





FASB
      155
      - Accounting for Certain Hybrid Financial Instruments





In
      February 2006, the FASB issued FASB Statement No. 155, which is an amendment
      of
      FASB Statements No. 133 and 140. This Statement; a) permits fair value
      remeasurement for any hybrid financial instrument that contains an embedded
      derivative that otherwise would require bifurcation, b) clarifies which
      interest-only strip and principal-only strip are not subject to the requirements
      of Statement 133, c) establishes a requirement to evaluate interests in
      securitized financial assets to identify interests that are freestanding
      derivatives or that are hybrid financial instruments that contain an embedded
      derivative requiring bifurcation, d) clarifies that concentrations of credit
      risk in the form of subordination are not embedded derivatives, e) amends
      Statement 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial instrument. This
      Statement is effective for financial statements for fiscal years beginning
      after
      September 15, 2006. Earlier adoption of this Statement is permitted as of the
      beginning of an entity’s fiscal year, provided the entity has not yet issued any
      financial statements for that fiscal year. Management believes this Statement
      will have no impact on the financial statements of the Company once
      adopted.





FASB
      156
      - Accounting for Servicing of Financial Assets





In
      March
      2006, the FASB issued FASB Statement No. 156, which amends FASB Statement No.
      140. This Statement establishes, among other things, the accounting for all
      separately recognized servicing assets and servicing liabilities. This Statement
      amends Statement 140 to require that all separately recognized servicing assets
      and servicing liabilities be initially measured at fair value, if practicable.
      This Statement permits, but does not require, the subsequent measurement of
      separately recognized servicing assets and servicing liabilities at fair value.
      An entity that uses derivative instruments to mitigate the risks inherent in
      servicing assets and servicing liabilities is required to account for those
      derivative instruments at fair value. Under this Statement, an entity can elect
      subsequent fair value measurement to account for its separately recognized
      servicing assets and servicing liabilities. By electing that option, an entity
      may simplify its accounting because this Statement permits income statement
      recognition of the potential offsetting changes in fair value of those servicing
      assets and servicing liabilities and derivative instruments in the same
      accounting period. This Statement is effective for financial statements for
      fiscal years beginning after September 15, 2006. Earlier adoption of this
      Statement is permitted as of the beginning of an entity’s fiscal year, provided
      the entity has not yet issued any financial statements for that fiscal year.
      Management believes this Statement will have no impact on the financial
      statements of the Company once adopted.


F-12








3.
              CONCENTRATION
                  OF CREDIT RISK





The
      Company’s accounts receivable were concentrated 100% with one customer.





The
      Company, periodically may have cash in excess of $100,000, the Federal Deposit
      Insurance Corp. “FDIC” insurable limit. As of May 31, 2006 there were no funds
      in any uninsured bank account.





4.
            EQUIPMENT





At
      May
      31, 2006 equipment consists of the following:





Equipment
            
            $
            6,869Total
            
            
            6,86Less:
                Accumulated depreciation
            
            
            (4,723
            )Net
            
            $
            2,146





Depreciation
                expense for the years ended May 31, 2006 and 2005 was $4,000 and
                $3,000,
                respectively.





5.
            INTANGIBLE
                ASSETS - PATENTS





The
                Company owns 45 patents and patents pending, which are currently,
                being
                used in the development of the Company’s products. As of May 31, 2006, the
                Company had recorded $462,102 of gross patents costs and $333,025
                of
                accumulated amortization. The annual amortization of such intangible
                assets approximates $106,000 per year for the next year, until they
                are
                fully amortized.





6.
            PAYROLL
                TAX LIABILITIES





Enikia
                was in arrears for several years in its payment of federal and state
                payroll taxes. Pursuant to the Merger Agreement, the Parent assumed
                up to
                $1.2 million of the delinquent payroll taxes due and outstanding
                with the
                remaining difference an assumed liability of the major shareholder
                of the
                Company. During the year ended May 31, 2006, the Company made payments
                to
                both Federal and State of NJ taxing authorities in the amount of
                $874,000.
                The payments represented payroll taxes withheld by Miletos from its
                employees but not remitted to the taxing authorities. Currently,
                there is
                $960,000 still recorded on the Company’s books as due and outstanding to
                both the federal and state tax authorities for delinquent payroll
                taxes,
                penalties and interest. The Company does not believe that it has
                a legal
                obligation to pay anything more to any taxing authority, but until
                such
                clearance is received from the appropriate agencies, the Company
                has
                elected to keep the liability on its
                books.





7.
            ACCRUED
                EXPENSES AND OTHER LIABILITIES





As
                of May 31, 2006, accrued expenses and other liabilities consist of
                the
                following approximate amounts:





F-13





Accrued
                compensation
            
            $
            157,000Accrued
                consulting - Typaldos related party
            
            
            360,000Accrued
                interest payable
            
            
            140,000Accrued
                professional fees
            
            
            28,000Accrued
                technical and engineering fees
            
            
            62,000Liabilities
                assumed per merger agreement
            
            
            109,000$
            856,000




8.
            CONVERTIBLE
                DEBENTURES AND RELATED PARTY
                PAYABLES








2004
      6% Convertible Notes - During
      the period from October to November 2005, the Company borrowed $500,000 from
      certain of its existing stockholders for working capital needs and such
      obligation is represented by notes. The notes, recorded as Related Party
      Payables, bore interest at 6% per annum and contained certain conversion
      features which would have been triggered if the Company had sold equity at
      or
      above $1.25 per share. No expense was recorded for the beneficial conversion
      feature, since conversion price was always at or above market. The notes’
maturity was initially October 15, 2005, which was extended from time to time
      by
      the holders. In February 2006, them Company and holders of $175,000 of the
      outstanding principal of the notes agreed to discharge the Company’s obligations
      for 160,765 shares of common stock and the payment of $81,018. The remaining
      $325,000 of principal outstanding is due October 15, 2006 and is held by an
      affiliate of the Company’s Chairman of the Board.





10%
      Convertible Notes - During
      the period from March 18, 2005 to May 12, 2005, the Company issued $750,000
      of
      10% convertible extendable notes initially due June 8, 2005 (the “10% Notes”).
      The due date of the 10% Notes was extended at the Company’s option to September
      8, 2005 by the Company’s payment of an extension fee aggregating $20,000 for the
      entire issue and paying interest due on the 10% Notes to June 8, 2005. The
      Company paid $37,500 of principal with related interest on September 18, 2005
      in
      full payment of two of the outstanding notes and obtained the extension of
      the
      $712,500 then remaining notes by paying an additional sum of $20,000 and issuing
      85,000 shares of common stock to the remaining holders of the 10% Notes. An
      expense of $76,500 was recorded related to the issuance of the 85,000 shares
      of
      common stock, using a share price of $.90. The Company paid $22,167 of principal
      pursuant to a mandatory prepayment provision in September, 2005. Principal
      and
      accrued interest on the 10% Notes are convertible at the holders’ option into
      shares of the Company’s common stock only after an event of default, as defined
      in the Notes at the lower of $0.67 or the average closing bid price of the
      Company’s common stock on the ten trading days preceding conversion. The
      conversion right is limited in that it may not be exercised by a holder to
      the
      extent it would result in such holder becoming the beneficial owner of more
      than
      4.99% of the Company’s common stock. The 10% Notes were issued with 825,000 of
      three year common stock warrant exercisable for $0.67 per share in the basis
      of
      one warrant for each $1 of principal.





On
      December 20, 2005, the Company paid $261,398 in satisfaction of a portion of
      the
      10% Notes, of which $254,333 was principal and $7,064 was interest. The Company
      previously reported that it did not make principal and interest payments
      totaling $707,591 due on December




F-14




8,
      2005
      to holders of the Notes and the grace period for such payment expired December
      19, 2005. Holders of remaining $436,000 principal of the Notes agreed to extend
      the Maturity Date of the Notes to January 15, 2006 and waived all prior
      defaults. The remaining principal balance and interest was satisfied pursuant
      to
      agreements with the remaining holders of the 10% Notes on February 1, 2006
      by
      the Company’s payment of $268,824 and the issuance of 293,116 shares of common
      stock.





$200,000
      Short Term Borrowing -
      Beginning on June 10, 2005 and ending June 15, 2005, the Company borrowed an
      aggregate of $200,000 from two lenders that are not affiliates of the Company.
      During the quarter ended August 31, 2005 $100,000 of these notes were repaid
      and
      during the quarter ended November 30, 2005 the remaining $100,000 plus accrued
      interest on the notes was repaid.





2005
      6% Convertible Notes - During
      the quarters ended August 31, 2005 and November 30, 2005, the Company
      raised $912,500 and $154,000, respectively,  of
      gross
      proceeds from the private placement of an aggregate of 10.665 units (the
“Units”) each consisting of $100,000 principal amount 6% convertible
      subordinated promissory notes (the “6% Notes”) and 14,286 detached warrants (the
“Warrants”) to purchase a like number of shares of the Company’s common stock,
      for $0.35 per share. The
      Company issued an aggregate of 152,359 Warrants to the purchasers of the Units,
      which have been valued at $74,802 and will be amortized as interest expense
      over
      the term of the 6% Notes. In addition, the Company issued 238,213 common stock
      warrants exercisable at $0.65 as part compensation to the placement agent,
      which
      have been valued at $111,668 and will be amortized as interest expense along
      with other expenses of the offering. Both the $0.35 and $0.65 Warrants have
      a
“net exercise” provision that permits the holder to convert the Warrants into
      shares of the Company’s common stock. The 6% Notes (1) are due July 7, 2007 with
      interest at the annual rate of 6% from the date of original issuance (increasing
      to 12% per annum from an event of default as defined in the 6% Notes); (2)
      are
      unsecured obligations of the Company and subordinated to senior secured loans
      to
      the Company (if any) from banks, finance companies and similar institutions
      that
      extend credit in the regular cause of such institution’s business; (3) are
      convertible, subject to certain conditions and at two different price levels
      ($1.125 and $1.575 for a period of twenty trading days following the bid price
      of common stock closing above $1.50 and $2.50, respectively, for a period of
      five consecutive trading days), into shares of common stock; and (4) may be
      redeemed by the Company in certain limited circumstances described below prior
      to maturity. Since the beneficial conversion feature of the 6% Notes is (at
      the
      lowest price) at a price greater than the market price of the stock upon
      issuance of the 6% Notes, no value has been estimated or recorded for the
      beneficial conversion feature.





Related
      Party Borrowings -
      Through December 19, 2005, the Company borrowed $253,075 from three directors
      and one stockholder. These advances were due on demand with interest at the
      annual rate of 6% and $225,000 was paid on January 10, 2006. See subsequent
      event for conversion of the remaining balance into shares of the Company’s
      common stock with the holders.





6%
      Secured Debentures - On
      December 19, 2005, the Company borrowed $267,900 from one of the accredited
      investors that ultimately purchased 6% secured convertible debentures (the
“6%
      Secured Debentures”) in the December 28, 2005 financing. The loan was made on an
      unsecured basis, was due on demand and was forgiven in exchange for $267,900
      of
      the $2.0 million principal amount of the 6% Secured Debentures and related
      warrants. On December 28, 2005,




F-15




the
      Company issued $2.0 million aggregate principal amount and authorized $3.5
      million 6% Secured Debentures to three institutional investors. The 6% Secured
      Debentures have a term of three years and mature on December 28, 2008, pay
      interest at the rate of 6% per annum, payable semi-annually on January 1 and
      July 1 of each year beginning July 1, 2006, and are secured by a grant of a
      security interest into substantially all of the Company’s assets. The Company
      may elect to pay interest on the 6% Secured Debentures in cash or in shares
      of
      common stock, subject to certain conditions related to the market for such
      shares stock and the registration of the shares issuable upon conversion of
      the
      6% Secured Debentures under the Securities Act of 1933, as amended (the
“Securities Act”).





The
      6%
      Secured Debentures are convertible at any time at the option of the holder
      into
      shares of the Company’s common stock at a price of $0.85 per share, subject to
      adjustment as set forth therein. If, after the effective date of the
      registration statement we agreed to file under the Securities Act (the
“Registration”), the closing price for the Company’s common stock exceeds $1.70
      for any 20 consecutive trading days, The Company may, within one trading day
      after the end of such period, require the holders of the 6% Secured Debentures
      to immediately convert all or part of the then outstanding principal amount
      of
      their 6% Secured Debentures. The terms of the conversion rights also contain
      certain dilution provisions.





On
      December 28, 2005, pursuant to the purchase agreements with the purchasers
      of
      the 6% Secured Debentures, the Company issued warrants to purchase an aggregate
      of 941,176 shares of common stock for $1.00 per share, on or prior to December
      28, 2010 and short term warrants to purchase up to an aggregate of 941,176
      additional shares of common stock for $0.85 per share, each subject to
      anti-dilution adjustments, including a “full ratchet down” to the purchasers of
      the 6% Secured Debentures. The short term warrants are exercisable at any time
      prior to the earlier of December 28, 2007 and twelve months after the effective
      date of the Registration Statement. If no effective registration statement
      is
      obtained after one year then such warrants have a cashless exercise option
      feature.





Upon
      the
      occurrence of certain events of default defined in the 6% Secured Debentures,
      including events of default under the transaction documents related to the
      financing, the full principal amount of the 6% Secured Debentures, together
      with
      interest and other amounts owing, become immediately due and payable, the
      principal obligation increases to 130% of the principal balance and the interest
      rate increases to 18%.





The
      transaction documents relating to the 6% Secured Debentures issued in December
      2005 contained a covenant that the Company would obtain the conversion of an
      aggregate of $746,600 principal and related interest into shares of the
      Company’s Common Stock at or above $0.67 per share on or before January 15,
      2006. On February 1, 2006, as part of the sale of an additional $375,884 of
      the
      6% Secured Debentures described above, the Company and the holders of all
      outstanding 6% Debentures agreed to modify the covenant to permit the Company
      to
      issue 604,956 shares of common stock and pay $405,744 in full satisfaction
      of
      such outstanding principal and interest concurrently with the additional
      investment and waived prior defaults. Two of the parties that agreed to accept
      shares of common stock in lieu of repayment were directors of the Company,
      of
      which one received 75,078 shares in satisfaction of $50,303 of principal and
      interest and the other received 76,969 shares in lieu of $51,989 of principal
      and interest.





F-16





On
      February 1, 2006, and February 24, 2006 the Company issued $375,884 and
      $500,000, respectively, of additional principal of 6% Secured Debentures on
      substantially the same terms as those debentures issued on December 28, 2005.
      As
      a result, an aggregate of $2,875,884 of these debentures were outstanding as
      of
      February 28, 2006. On February 1, 2006 and February 24, 2006 the Company issued
      176,887 and 235,294 additional short and long term warrants, respectively,
      to
      the purchasers of the additional 6% Secured Debentures. As a result, there
      were
      1,353,357 short and 1,353,357 long term warrants outstanding as of May 31,
      2006.





On
      March
      31, 2006, the Company issued $500,000 additional principal of the 6% Secured
      Debentures to a limited liability company owned equally by the wife of our
      chairman and another director on substantially the same terms as the 6% Secured
      Debentures issued on December 28, 2005. After giving effect to this additional
      issuance, there is $3,375,884 principal amount of the 6% Secured Debentures
      outstanding, as well as 1,588,651 of the five year and 1,588,651 of the short
      term warrants outstanding.





A
      debt
      discount was recorded of $47,504 and $161,640, respectively for such short
      and
      long term warrants issued with these 6% Secured Debentures. The amortization
      recorded attributed to the debt discounts amounted to $22,547 and has been
      recorded as interest expense for the year ended May 31, 2006.





The
      maturities of debt, including related party debt and excluding the debt discount
      of $186,597, are as follows:





Year
                ended May 31, 2007
            
            $
            446,4062008
            
            
            1,066,5002009
            
            
            3,375,884





Other
      Obligations - As a
      consequence of the Company raising a aggregate of $3 million of financing since
      June 2004, pursuant to the Company’s May 2004 employment agreement with its
      chief executive officer, $91,875 of deferred salary payments for the period
      from
      May 2004 to January 2006 representing 24.5% of his agreed salary for such period
      and a bonus of $65,333 was due December 29, 2005 and has not yet been
      paid.




9.
            INCOME
                TAXES





At
      May
      31, 2006, the Company has available unused net operating loss carryovers
      approximately $16,500,000 ** that
      may
      be applied against future taxable income and expire at various dates through
      2026. The Company has a deferred tax asset arising from such net operating
      loss
      deductions and has recorded a valuation allowance for the full amount of such
      deferred tax asset since the likelihood of realization of the tax benefits
      cannot be determined.


F-17





2006Deferred
                tax asset:Net
                operating loss carryforward
            
            $
            5,800,000Valuation
                allowance
            
            
            (5,800,000
            )Net
                deferred tax asset
            
            $
            —





A
      reconciliation of the statutory federal income tax benefit to actual tax benefit
      is as follows:




YearEnded
              May
                31, 2005
            YearEnded
              May
                31, 2006Statutory
                federal income tax benefit
            35%
            35%Permanent
                timing differences -
              equity
                rights
            (25%)
            (13%)Income
                tax benefit not utilized
            (10%)
            (22%)Actual
                tax benefit
            —
            —





The
      Company has had greater than 50% change in ownership of certain stock holdings
      by shareholders of the Company pursuant to Section 382 of the Internal Revenue
      Code, the net operating losses may be limited as to its utilization on an annual
      basis. Currently no such evaluation has been performed.





10.
            SHAREHOLDERS’
                DEFICIENCY





a.
              On
                  May 7, 2004, CDKNET.com, Inc and Miletos entered into an “Agreement and
                  Plan of Merger” (“the Merger Agreement”). On May 24, 2004, the merger was
                  consummated between a wholly owned subsidiary of CDKNET.com, Inc
                  (CDK
                  Merger Corp) and Miletos, Inc. The successor subsidiary was renamed
                  Arkados, Inc. Because CDKNET.com, Inc and its subsidiaries had
                  no
                  meaningful operations prior to May 7, 2004 and equity ownership
                  in
                  CDKNET.com, Inc. in an amount greater than 50% was issued to the
                  shareholders of Miletos, Inc., this transaction has been recorded
                  as a
                  reorganization of Arkados, Inc. via a reverse merger with CDKNET.com,
                  Inc.





b.
              In
                  May 2004, prior to the consummation of the aforementioned reverse
                  merger,
                  the Company; (a) issued 200,000 common shares for services rendered
                  by
                  several individuals valued at $1.50 a share and were expensed prior
                  to the
                  consummation of the aforementioned reverse merger, (b) converted
                  $150,834
                  of indebtedness owed to a law firm affiliated with the former CEO
                  for
                  150,000 shares of common stock, (c) converted $165,000 of convertible
                  debentures and related accrued of $51,539 for 549,866 shares of
                  common
                  stock.





c.
              Pursuant
                  to the Merger Agreement, as amended, the consideration for the
                  merger
                  consisted of 16,340,577 shares of the Company’s restricted common stock
                  (250,000 of such common shares are contingent shares and will be
                  returned
                  for cancellation unless called upon as
                  a


F-18
 result
                    of a breach of warranty), 39,401 shares of common stock to the
                    former
                    employees of Enikia, 100,000 shares were issued to the major
                    shareholder
                    to assume the satisfaction of certain outstanding 401K liabilities
                    due to
                    the employees of the predecessor entity, 2,484,644 stock options
                    exercisable at $.01 per share, 1,149,998 stock options exercisable
                    at
                    $1.20 per share. In addition $950,200 was raised through the
                    sale of
                    791,833 shares of common stock of the Company, 41,667 shares
                    of common
                    stock were issued to satisfy $50,000 of indebtedness, and 49,833
                    shares of
                    common stock for $59,800 of services rendered related to the
                    equity raise.
                    The $59,800 of services rendered was recorded as a cost of raising
                    such
                    equity.


d.
              The
                  883,334 shares issued, pursuant to the terms of the Purchase Agreement
                  relating to the aforementioned equity raise, have certain registration
                  rights. In addition such shareholders are entitled to liquidated damages,
                  if a registration statement, registering such shares, is not filed
                  within
                  90 days of June 1, 2004 or if the registration statement is not
                  declared
                  effective until 120 days after June 1, 2004, or 180 days if such
                  registration statement is subject to review by the Securities and
                  Exchange
                  Commission. Such liquidated damages are calculated monthly based
                  on the
                  delayed days of such registration not being effective. Such calculation
                  is
                  2% per month of the purchase price paid by such shareholders for
                  the
                  883,333 shares purchased limited to an aggregate of 18% of the
                  aggregate
                  purchase price paid for the 883,333 shares purchased. The Company
                  accrued
                  $190,800 in penalties for the failure to register such shares
                  issued.




e.
              The
                  major shareholder of the Company allocated 2,345,410 shares of
                  his shares
                  in the Company to satisfy assumed obligations of Enikia for services
                  previously rendered to the predecessor entities. Pursuant to Topic
                  5T of
                  the Staff Accounting Bulletins, such contribution of the common
                  shares of
                  the Company have been recorded as a contribution by the shareholder
                  to the
                  Company in satisfaction of such liabilities recorded of $1,288,185.
                  The
                  major shareholder continues to negotiate for the allocation of
                  additional
                  shares to satisfy a separate assumed liability for services previously
                  rendered to Enikia for capital transaction services. The recorded
                  estimated value of such services yet to be negotiated is
                  $700,000.





f.
              During
                  fiscal 2005, the Company issued 575,000 shares of common stock
                  net of
                  another 1,050,000, which was returned for non performance. These
                  shares
                  were valued at the fair market value of such stock upon issuance
                  at prices
                  ranging from $.50 to $2.15 per share. The aggregate compensation
                  expense
                  recorded in this fiscal year for these shares issued was
                  $724,811





g.
              During
                  fiscal 2005, the Company issued 610,000 options at an exercise
                  price of
                  $1.20 per share which was above fair market value to its employees
                  and
                  directors and 1,725,000 options to third parties for services rendered
                  at
                  exercise prices ranging from $.01 to $1.20 per share. No compensation
                  has
                  been recorded for the options issued to employees and directors.
                  The
                  options to third parties have been valued at $900,461, which $582,292
                  has
                  yet to be expensed due to the term of such services being
                  performed.





h.
              The
                  Company recorded $234,143 of interest expense related to the valuation
                  of
                  the detachable warrants and the beneficial conversion feature of
                  $750,000
                  in debt raised from March to May 2005. This debt matured on June
                  8, 2005,
                  hence predominately all of such interest expense was recorded in
                  fiscal
                  2005.




F-19




i.
              In
                  August 2004, a vendor converted $75,496 of payables for 125,000
                  shares of
                  common stock.





j.
              During
                  nine months ended February 28, 2006, the Company issued 750,000
                  stock
                  options with an exercise price of $.45 per share to management
                  and its
                  employees, which vest over four years. Another 100,000 fully vested
                  stock
                  options with a exercise price of $.45 were issued to a consultant,
                  an
                  expense of $52,420 was recorded for these stock options.





k.
              On
                  March 20, 3006, the Company issued warrants to purchase up to 180,000
                  shares of our common stock for $0.85 per share to Emerging Capital
                  Markets
                  LLC as part compensation for investor relations consulting services
                  for a
                  three month period. The warrants vest in equal thirds on the first
                  day of
                  April, May and June 2006, provided there is no material breach
                  of the
                  related consulting agreement. Such investor relations consulting
                  services
                  agreement also provides for cash compensation in the amount of
                  $20,000 per
                  month for three months. This investor relations consulting agreement
                  also
                  provides for the requirement to obtain approval form this individual
                  for
                  any potential reverse stock splits greater than 1 for 5 and has
                  the option
                  to renew such agreement for another three months on the same
                  terms





11.
            STOCK-BASED
                COMPENSATION





The
      Company accounted for its stock option plans under APB No. 25, “Accounting for
      Sock Issued to Employees,” (“APB 25”), under which no compensation cost is
      recognized through May 31, 2005 and provided pro-forma disclosure only as
      provided for under SFAS No. 123 and 148.





Effective
      June 1, 2005, the Company adopted SFAS no. 123R “Accounting for Stock-Based
      Compensation” (“SFAS 123”).





Compensation
      based stock option and warrant activity for warrants and qualified and
      unqualified stock options are summarized as follows:





Shares
            
            Weighted
              Average
              Exercise
                PriceOutstanding
                at May 31, 2004
            
            
            3,894,142
            
            $
            .79Granted
            
            
            2,330,000
            
            
            1.39Exercised
            
            
            
            
            
            —Expired
                or cancelled
            
            
            (131,500
            )
            
            57.19Outstanding
                at May 31, 2005
            
            
            6,092,642
            
            $
            .75Granted
            
            
            1,125,000
            
            
            .52ExercisedExpired
                or cancelled
            
            
            (330,990
            )
            
            2.40Outstanding
                at May 31, 2006
            
            
            6,886,652
            
            $
            .64





Information,
      at date of issuance, regarding stock option grants during the year ended May
      31,
      2006.




F-20





Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Fair
              ValueYear
                ended May 31, 2006Exercise
                price exceeds market price
            
            
            
            
            $
            —
            
            $
            —Exercise
                price equals market price
            
            
            1,100,000
            
            
            .54
            
            
            .44Exercise
                price is less than market price
            
            
            25,000
            
            $
            .01
            
            $
            .67





The
      following table summarizes information about warrants and options outstanding
      and exercisable at May 31, 2006:





Outstanding
                and exercisableNumber
              Outstanding
            
            Weighted-
              average
              remaining
                life
              in
                years
            
            Weighted-
              Average
              Exercise
              Price
            
            Number
              ExercisableRange
                of exercise prices:$.01
                to $1.00
            
            
            4,649,868
            
            
            6.04
            
            $
            .34
            
            
            3,584,644$1.01
                - $5.00
            
            
            2,231,784
            
            
            7.17
            
            
            1.20
            
            
            1,540,422$5.01
                - $40.00
            
            
            5,000
            
            
            1.96
            
            
            30.00
            
            
            5,0006,886,652
            
            
            
            
            
            
            
            
            5,130,066





The
      compensation expense attributed to the issuance of the options and warrants
      will
      be recognized as they vest / earned. These stock options and warrants are
      exercisable for three to ten years from the grant date.





The
      employee stock option plan stock options are exercisable for ten years from
      the
      grant date and vest over various terms from the grant date to three years.





The
      issuance of warrants attributed to debt issuances are summarized as
      follows:





Shares
            
            Weighted
              Average
              Exercise
                PriceOutstanding
                at May 31, 2004
            
            
            —
            
            $
            —Granted
            
            
            825,000
            
            
            .67Exercised
            
            
            —
            
            
            —Expired
                or cancelled
            
            
            —
            
            
            —Outstanding
                at May 31, 2005
            
            
            825,000
            
            $
            .67Granted
            
            
            3,567,874
            
            
            .88Exercised
            
            
            —
            
            
            —Expired
                or cancelled
            
            
            —
            
            
            —Outstanding
                at May 31, 2006
            
            
            4,392,874
            
            $
            .84






F-21





Information,
      at date of issuance, regarding warrant grants during the year ended May 31,
      2006.





Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Fair
              ValueYear
                ended May 31, 2006Exercise
                price exceeds market price
            
            
            152,359
            
            $
            .35
            
            $
            .49Exercise
                price equals market price
            
            
            1,826,864
            
            
            .82
            
            
            .09Exercise
                price is less than market price
            
            
            1,588,651
            
            $
            1.00
            
            $
            .10





The
      following table summarizes information about warrants and exercisable at May
      31,
      2006:





Outstanding
                and exercisableNumber
              Outstanding
            
            Weighted-
              average
              remaining
                life
              in
                years
            
            Weighted-
              Average
              Exercise
              Price
            
            Number
              ExercisableRange
                of exercise prices:$.01
                to $.35
            
            
            152,359
            
            
            4.25
            
            $
            .35
            
            
            152,359$.36
                - $.99
            
            
            2,651,864
            
            
            2.00
            
            
            .82
            
            
            2,651,864$1.00
            
            
            1,588,651
            
            
            4.75
            
            
            1.00
            
            
            1,588,6514,392,874
            
            
            
            
            
            
            
            
            4,392,874





Interest
      expense attributed to the aforementioned warrants is being amortized over the
      ratable term of each respective debt arrangement. See loans payable
      above.





12.
            COMMITMENTS
                AND CONTINGENCY





a.
              The
                  Company leases office space pursuant to a lease that began on May
                  8, 2006
                  and which expires on June 30, 2009. The annual base rent is approximately
                  $101,000. There are no other material rental or lease commitment
                  arrangements as of May 31, 2006.





Total
      rental expenses for the years ended May 31, 2006 and 2005 was approximately
      $41,000 and $40,000, respectively.





b.
            The
                Company and its’ subsidiary, Arkados, have entered into employment
                agreements with all of the employees of Arkados and the CEO of the
                Company. The general terms of the combined employment agreements
                are; (a)
                each employment agreement provides for a base salary up to $225,000
                depending on the employment position of such employee, (b) the employment
                agreements provide for a weekly salary deferral of 10% to 24.5% until
                additional capital or financing is obtained, the weekly deferral
                will be
                paid within seven business days of obtaining funding of at least
                $3
                million, if such deferral has not been paid by May 24, 2005 then
                such
                deferral will be paid pro-rata based on the monies raised to May
                24, 2005,
                with the balance being waived in full, (c) an aggregate of $188,384
                has
                been paid as signing bonuses, (d) each employee will receive standard
                employment benefits comparable to


F-22
  those
                  previously provided, (e) the Company will issue 39,401 shares of
                  common
                  stock, as amended, as a partial settlement of the unfunded 401K
                  account as
                  of May 24, 2005, which has been recorded as an outstanding liability
                  of
                  Miletos prior to the Plan, (f) an aggregate of 184,646 “nonqualified”
                  options have been issued at an exercise price of $.01 for a term
                  of ten
                  years, exercisable immediately, which such recorded value was $275,123
                  with $241,168 being expensed as a result of such options being
                  issued, an
                  aggregate of 2,299,988 “nonqualified” options have been issued at an
                  exercise price of $.01 for a term of ten years and 1,149,988
                  “nonqualified” options have been issued at fair market value or $3,794,996
                  for a term of one to three years and will be expensed as ratably
                  over the
                  term after considering the vesting terms, (h) release Enikia, Miletos
                  and
                  Andreas Typaldos or any other third parties of any claims or agreements
                  whether written or oral as a condition of receiving the above.


c.
                On
                    May 27, 2005, the Company extended its May 21, 2004, one year
                    employment
                    agreement “Employment Agreement” with its CFO for another year. Material
                    terms of the Employment Agreement are as follows; the Company
                    and the CFO
                    may terminate the Employment Agreement with 30 days prior written
                    notice,
                    the CFO is to receive $5,000 per month as cash compensation,
                    25,000 shares
                    as a signing bonus, which was valued at $37,500 and expensed
                    prior to the
                    effective date of the reverse merger May 24, 2004 and 100,000
                    fully vested
                    stock options exercisable at $1.00 each. Currently the CFO is
                    paid on a
                    month to month basis.


d.
            The
                Company may be subject to future lawsuits relating to unresolved
                claims
                against Enikia LLC as a result of the contribution of debt owed to
                a
                control group of Enikia being contributed to Miletos, Inc. and Miletos
                purchasing the assets of Enikia at a public foreclosure sale in partial
                satisfaction of the $11,116,803 obligation of Enikia to such control
                group. Some of these claims have alleged fraud, several claims have
                been
                settled and others continue to be unresolved. The Company maintains
                that
                such claims are without basis because of the statutory provision
                of New
                Jersey law governing creditors rights following a public foreclosure
                sale
                and in that it had no privatey of contract with the claimants.





13.
            SUBSEQUENT
                EVENTS





a.
              The
                  Company received an advance of $500,000 from one of the holders
                  of our 6%
                  Secured Debentures on June 1, 2006. The advance was due on demand
                  and
                  forgiven in exchange for $500,000 principal amount of 6% Secured
                  Debentures and related warrants on June 30,
                  2006.





b.
              The
                  Company issued $1,773,471 aggregate principal amount of 6% Secured
                  Debentures on June 30, 2006. The consideration received by the
                  Company for
                  the Secured Debentures consisted of $500,000 cash, forgiveness
                  of
                  repayment of the $500,000 advance received June 1, 2006, forgiveness
                  of
                  $773,470 related party debt due to Andreas Typaldos, the Company’s
                  Chairman and principal shareholder and a limited partnership controlled
                  by
                  his wife. The debentures have a term of three years and mature
                  on December
                  28, 2008. The 6% Secured Debentures pay interest at the rate of
                  6% per
                  annum, payable semi-annually on January 1 and July 1 of each year
                  beginning January 1, 2007. These debentures are on substantially
                  the same
                  terms as, and rank pari passu to, an aggregate of $3,875,884 of
                  6% Secured
                  Debentures outstanding as of May 31, 2006. The Company issued 834,575
                  short term and 834,574 long term warrants to the purchasers of
                  the 6%
                  Secured Debentures and entered into a security agreement granting
                  the
                  purchasers a security interest in its assets to secure the Company’s
                  obligations under the debentures. Obligations under the debentures
                  are
                  guaranteed by the Company’s wholly-owned operating subsidiary. The debt
                  discount for such short and long term warrants issued with these


F-23
  6%
                    Secured Debentures and the related amortization attributed to
                    the debt
                    discount amounts will be reflected as interest expense for three
                    month
                    period ending August 31,
                    2006.


c.
              On
                  June 30, 2006, the Company signed a letter amendment to the consulting
                  agreement with Andreas Typaldos dated May 21, 2004. The amendment
                  removes
                  the condition that the Company raise $1,000,000 of equity financing
                  before
                  paying consulting fees that accrued at the rate of $15,000 per
                  month
                  commencing June 1, 2006 as an inducement for Mr. Typaldos forgiving
                  the
                  $360,00 of accrued and unpaid fees in exchange for the $360,000
                  principal
                  amount of 6% Secured Debentures and related
                  warrants.





d.
              On
                  August 18, 2006, the Company entered into a amendment agreement
                  with the
                  holders of $3,875,884.38 principal amount of 6% Secured Debentures
                  outstanding as of May 31, 2006, including a New York limited liability
                  company owned by the wife of our Chairman, and one of our directors.
                  The
                  Amendment agreement makes material changes to the securities purchase
                  agreements, warrants, registration rights agreements, security
                  agreements
                  and other ancillary documents we executed in connection an aggregate
                  of
                  $3,875,884 of 6% debentures the Company sold during the period
                  from
                  December 28, 2005 to March 31, 2006. The material changes give
                  the holders
                  the same rights of redemption in the event of a cash purchase of
                  our
                  assets as those held by the of $1,773,470.83 aggregate principal
                  amount of
                  6% Secured Debentures issued on June 30, 2006. As a result of the
                  Amendment, all of the 6% Secured Debentures and warrants must be
                  redeemed
                  by the Company at a premium if it agrees to sell all of the Company’s
                  assets to a third party for cash and cash equivalents. In addition,
                  as a
                  result of the amendment, all holders of the 6% Secured Debentures
                  have the
                  right to have shares of Common Stock issuable upon conversion of
                  the
                  debentures and exercise of the related warrants registered for
                  resale
                  under the Securities Act of 1933 within 60 days after receiving
                  written
                  demand of the holders of 60.1% of such securities and have it declared
                  effective 90 days thereafter.





e.
              On
                  August 30, 2006, the Company amended its certificate of incorporation
                  to
                  change its name from “CDKnet.com, Inc.” to “Arkados Group, Inc.,”
                  effective September 6, 2006.





f.
              On
                  September 26, 2006, the Company issued $500,000 additional principal
                  of
                  the 6% Secured Debentures to two institutional investors on substantially
                  the same terms as the 6% Secured Debentures previously issued.
                  After
                  giving effect to this additional issuance, there is $5,649,354
                  principal
                  amount of the 6% Secured Debentures outstanding, as well as 2,608,520
                  of
                  the five year and 2,608,520 of the short term warrants outstanding.




















F-24


ITEM
              8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.




On
      March
      18, 2005, our Board of Directors voted to dismiss, Radin, Glass & Co., LLP
      (“Radin,
      Glass”) and
      appointed Sherb & Co., LLP (“Sherb”) as our
      independent public accountant for our year ending May 31, 2005. We notified
      Radin, Glass of its dismissal on March 24, 2005.





The
      reports issued by Radin, Glass on our consolidated financial statements of
      as of
      and for the fiscal years ended May 31, 2004 and May 31, 2003 and the period
      from
      March 24, 2004 (date of inception) to May 31, 2004 did not contain any adverse
      opinion or disclaimer of opinion, nor were they qualified or modified as to
      uncertainty, audit scope or accounting principles, except that Radin, Glass’
report with respect to these periods contained an explanatory paragraph
      indicating that there was substantial doubt as to our ability to continue as
      a
      going concern.





During
      the fiscal years ended May 31, 2004 and May 31, 2003 and the period from March
      24, 2004 (date of inception) to May 31, 2004 and through the date of our filing
      the Form 8-K reporting the change of auditors, there were no disagreements
      between Radin, Glass and our management on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedure, which, if not resolved to the satisfaction of Radin, Glass,
      would have caused Radin, Glass to make reference to the subject matter of the
      disagreements in connection with its reports on our consolidated financial
      statements for such periods, nor have there been any reportable events as listed
      in Item 304 (a)(1)(iv) of Regulation S-B.





Prior
      to
      engaging Sherb as its independent accountant, neither we nor anyone acting
      on
      our behalf consulted with Sherb regarding any of the matters or events set
      forth
      in Item 304(a)(2)(i) and (ii) of Regulation S-B. We provided Radin, Glass with
      a
      copy of the foregoing disclosures, and a letter from Radin, Glass confirming
      its
      agreement with these disclosures was filed as Exhibit 16.1 to our Form 8-K
      Report dated March 18, 2005.


.


ITEM
              8A.
            CONTROLS
                AND PROCEDURES




In
        performing its audit of our Consolidated Financial Statements for Fiscal
        2006,
        our independent auditors, Sherb & Co., LLP “ Sherb”, notified our Board of
        Directors of a material weakness in internal controls under standards
        established by the American Institute of Certified Public Accountants.
        Reportable conditions and material weaknesses involve matters coming to the
        attention of our auditors relating to significant deficiencies in the design
        or
        operation of internal controls that, in their judgment, could adversely affect
        our ability to record, process, summarize, and report financial data consistent
        with the assertions of management in the consolidated financial statements.
 
 Sherb
        designed its audit procedures to address the matter described below in order
        to
        obtain reasonable assurance that the financial statements are free of material
        misstatement and to issue an unqualified audit report.
  A
        material weakness is a control deficiency or combination of control deficiencies
        that results in more than a remote likelihood that a material misstatement
        of
        the annual or interim financial statements will not be prevented or detected.
        As
        of May 31, 2006, we did not maintain effective controls related to transactional
        accounting and financial reporting. These deficiencies included a lack of
        timely
        and sufficient financial statement account reconciliation and analysis and
        lack
        of sufficient support resources within the accounting and finance department.
        Management believes that such control deficiencies represents a material
        weakness in internal control over financial reporting that result in a
        reasonable likelihood that a material misstatement in our financial statements
        will not be prevented or detected by our employees in the normal course of
        performing their assigned functions.


35
 
 We
          continue our efforts to remediate these conditions and has and will continue
          to
          implement enhanced procedures to accelerate improvement of its internal
          controls.
 
 Our
          senior management is responsible for establishing and maintaining a system
          of
          disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15
          under
          the Exchange Act) designed to ensure that information required to be disclosed
          by us in the reports that we file or submit under the Exchange Act is recorded,
          processed, summarized and reported within the time periods specified in
          the
          SEC's rules and forms. Disclosure controls and procedures include, without
          limitation, controls and procedures designed to ensure that information
          required
          to be disclosed by an issuer in the reports that it files or submits under
          the
          Act is accumulated and communicated to the issuer's management, including
          its
          principal executive officer or officers and principal financial officers,
          to
          allow timely decisions regarding required disclosure.
 
 We
          have
          carried out an evaluation under the supervision and with the participation
          of
          our management, including our Chief Executive Officer and Chief Accounting
          Officer, of our disclosure controls and procedures as defined in Exchange
          Act
          Rule 13(a)-15(e). In designing and evaluating our disclosure controls and
          procedures, we recognize that any disclosure controls and procedures, no
          matter
          how well designed and operated, can only provide reasonable assurance of
          achieving the desired control objective. Due to the material weakness in
          internal control over financial reporting previously noted and insufficient
          passage of time to test the enacted changes to determine if such changes
          are
          effective as at and prior to May 31, 2006, management concludes that our
          disclosure controls and procedures are ineffective.




ITEM
              8B.
            OTHER
                INFORMATION





None.


36


PART
      III




ITEM
              9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE
                WITH SECTION 16(a) OF THE EXCHANGE
                ACT





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 9 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2006.





Information
      concerning executive officers is set forth in Item 1 above.





ITEM
              10.
            EXECUTIVE
                COMPENSATION





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 10 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2006.





ITEM
              11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 10 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2006.





ITEM
              12.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 12 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2006.





37




ITEM
              13.
            EXHIBITS





EXHIBIT
      INDEX





**Incorporated
                by Reference****Exhibit**
              **Number**
            **Exhibit
                Description**
            
            **Form**
            **File**
              **Number**
            **Exhibit**
            **Filing**
              **Date**
            **Filed**
              **Herewith**2.1
            Agreement
                and Plan of Merger dated as of May 7, 2004 between CDKnet.com, Inc.,
                CDK
                Merger Corp., Miletos, Inc. and Andreas Typaldos, as Representative
                of
                Certain Stockholders of Miletos, Inc.
            
            10-KSB
            0-27587
            2.1
            9/17/042.2
            Amendment
                dated May 21, 2004 to the Agreement and Plan of Merger dated as of
                May 7,
                2004 between CDKnet.com, Inc., CDK merger Corp., Miletos, Inc. and
                Andreas
                Typaldos, as Representative of Certain Stockholders of Miletos,
                Inc.
            
            10-KSB
            0-27587
            2.2
            9/17/042.3
            Amendment
                Number 2, dated January 19, 2005, amending the Agreement and Plan
                of
                Merger, dated as of May 7, 2004, by and among CDKNet.Com, Inc., CDK
                Merger
                Corp., and Miletos, Inc., and Andreas Typaldos, in his individual
                capacity
                and as representative of the following stockholders of the Company:
                Renee
                Typaldos, Patra Holdings LLC, Andreas Typaldos Family Limited Partnership
                and Renee Typaldos Family Partnership, Ltd.
            
            10-QSB
            0-27587
            2.1
            1/23/063.1
            Articles
                of Incorporation of the Registrant.
            
            10-SB
            0-27587
            3.1
            10/7/993.2
            Amendment
                to the Articles of Incorporation.
            
            10-SB
            0-27587
            3.2
            10/7/993.3
            By-Laws
                of the Registrant.
            
            10-SB
            0-27587
            3.3
            10/7/993.4
            Certificate
                of Merger of the Registrant.
            
            10-SB
            0-27587
            3.4
            10/7/993.5
            Amendment
                to the Articles of Incorporation.
            
            10-SB
            0-27587
            3.5
            10/7/993.6
            Amended
                and Restated Series A Designation
            
            10-QSB
            0-27587
            3.1
            2/14/033.7
            Amendment
                to Certificate of Incorporation (Reverse Split ) filed November 31,
                2003.
            
            10-QSB
            0-27587
            3.1
            2/17/043.8
            Certificate
                of Amendment to Certificate of Incorporation
            
            10-QSB
            0-27587
            3.2
            2/17/043.9
            Certificate
                of Ownership and Merger dated August 30, 2006.
            
            8-K
            0-27587
            3.1
            9/1/06




38




4.1
            Specimen
                of Common Stock Certificate.
            
            
            
            
            
            X4.2*
            Form
                of Stock Option Grant Agreement under the CDKnet.com, Inc. 2004 Stock
                Option and Restricted Stock Plan.
            
            10-KSB
            0-27587
            4.7
            9/17/044.3
            Form
                of 6% Secured Convertible Debenture due December 28, 2008
            
            8-K
            0-27587
            4.1
            1/4/064.4
            Form
                of Common Stock Purchase Warrant (long term and short term warrants
                differ
                as to price and expiration date as set forth in footnotes to the
                form
                filed)
            
            8-K
            0-27587
            4.2
            1/4/064.5
            Registration
                Rights Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K
            0-27587
            4.3
            1/4/064.6
            Form
                of 6% Secured Convertible Debenture due December 28, 2008
            
            8-K/A
            0-27587
            4.1
            7/11/064.7
            Form
                of Common Stock Purchase Warrant (long term and short term warrants
                differ
                as to price and expiration date as set forth in footnotes to the
                form
                filed)
            
            8-K/A
            0-27587
            4.2
            7/11/064.8
            Registration
                Rights Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K/A
            0-27587
            4.3
            7/11/0610.1*
            Technology
                Horizons Corp. 1998 Equity Incentive Plan.
            
            10-SB
            0-27587
            10.1
            10/7/9910.2
            Registration
                Rights Agreements dated as of May 21, 2004 between CDKnet.Com, Inc.
                and
                several stockholders.
            
            10-KSB
            0-27587
            10.17.1
              10.17.2
            9/17/0410.3*
            Consulting
                Agreement dated as of May 21, 2004 between CDKnet.Com, Inc. and Andreas
                Typaldos.
            
            10-KSB
            0-27587
            10.18
            9/17/0410.4*
            Employment
                Agreement dated as of May 23, 2004 between CDKnet.Com, Inc. and Oleg
                Logvinov.
            
            10-KSB
            0-27587
            10.19
            9/17/0410.5
            Silicon
                Product Development Production Collaboration Agreement dated August
                ___,
                2004 between GDA Technologies, Inc. and Arkados, Inc.
            
            10-KSB
            0-27587
            10.23
            9/17/0410.6
            Form
                of 10% convertible extendible note due June 8, 2005 in the aggregate
                authorized principal amount of $750,000
            
            10-QSB
            0-27587
            10.1
            4/19/0510.7
            Form
                of three year warrant exercisable at $0.67
            
            10-QSB
            0-27587
            10.2
            4/19/05




39




10.8
            Form
                of registration rights agreement relating to the 10% convertible
                extendible notes and three year warrants
            
            10-QSB
            0-27587
            10.3
            4/19/0510.9*
            Stock
                Option Grant Agreement dated June 21, 2005
            
            8-K
            0-27587
            10.1
            6/24/0510.10
            Form
                of Securities Purchase Agreement
            
            8-K
            0-27587
            10.1
            7/14/0510.11
            Form
                of 6% Convertible Subordinated Note due July 7, 2007 in the aggregate
                authorized principal amount of $2.4 million
            
            8-K
            0-27587
            10.2
            7/14/0510.12
            Form
                of three year warrant exercisable at $0.35
            
            8-K
            0-27587
            10.3
            7/14/0510.13
            Securities
                Purchase Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K
            0-27587
            99.1
            1/4/0610.14
            Security
                Agreement, dated as of December 28, 2005, by and among the Registrant,
                Gamma Opportunity Capital Partners, L.P. Class A, and Gamma Opportunity
                Capital Partners, L.P. Class C
            
            8-K
            0-27587
            99.2
            1/4/0610.15
            Subsidiary
                Guarantee dated as of December 28, 2005 executed by Arkados,
                Inc.
            
            8-K
            0-27587
            99.3
            1/4/0610.16
            Waiver
                dated as of January 17, 2006 to the Securities Purchase Agreement,
                dated
                as of December 28, 2005, by and among the Registrant, Bushido Capital
                Master Fund, L.P., Gamma Opportunity Capital Partners, L.P. Class
                A, and
                Gamma Opportunity Capital Partners, L.P. Class C
            
            10-QSB
            0-27587
            10.1
            1/23/0610.17
            Additional
                Issuance Agreement dated February 1, 2006 between the Registrant
                and
                Bushido Capital Master Fund, L.P.
            
            8-K
            0-27587
            99.4
            2/6/0610.18
            Amended
                and Restated Extension Waiver and Debt Conversion Agreement dated
                as of
                February 1, 2006 by and among the Registrant and each of the holders
                of
                the Registrant’s outstanding 10% Convertible Extendable Notes originally
                due June 8, 2005, 6% Convertible Notes original due October 15, 2005
                and
                that Grid Note dated October 15, 2004
            
            8-K
            0-27587
            99.5
            2/6/0610.19
            Debt
                Conversion Agreement (Note) dated as of January 11, 2006 between
                the
                Registrant and William Carson
            
            8-K
            0-27587
            99.6
            2/6/0610.20
            Debt
                Conversion Agreement (Advances) dated as of January 11, 2006 between
                the
                Registrant and William Carson
            
            8-K
            0-27587
            99.7
            2/6/06




40




10.21
            Debt
                Conversion Agreement (Advances) dated as of January 11, 2006 between
                the
                Registrant and Gennaro Vendome
            
            8-K
            0-27587
            99.8
            2/6/0610.22
            Second
                Additional Issuance Agreement dated February 24, 2006 between the
                Registrant and Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital Partners, L.P. Class A, and Gamma Opportunity Capital Partners,
                L.P. Class C
            
            8-K
            0-27587
            99.5
            3/2/0610.23
            Third
                Additional Issuance Agreement dated March 31, 2006 between the Registrant
                and Cargo Holdings LLC
            
            8-K
            0-27587
            99.6
            4/6/0610.24
            Letter
                Agreement dated march 31, 2006 between the Registrant and Bushido
                Capital
                Master Fund, L.P., Gamma Opportunity Capital Partners, L.P. Class
                A, and
                Gamma Opportunity Capital Partners, L.P. Class C
            
            8-K
            0-27587
            99.7
            4/6/0610.25
            Warrant
                agreement dated March 20, 2006 issued to Emerging Capital Markets
                LLC
            
            8-K
            0-27587
            99.8
            4/6/0610.26
            Lease
                Agreement effective May 8, 2006 between Arkados, Inc. and Bridgeview
                Plaza
                Associates.
            
            8-K
            0-27587
            99.1
            5/9/0610.27
            Securities
                Purchase Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K/A
            0-27587
            99.1
            7/11/0610.28
            Security
                Agreement, dated as of December 28, 2005, by and among the Registrant,
                Gamma Opportunity Capital Partners, L.P. Class A, and Gamma Opportunity
                Capital Partners, L.P. Class C
            
            8-K/A
            0-27587
            99.2
            7/11/0610.29
            Subsidiary
                Guarantee dated as of December 28, 2005 executed by Arkados,
                Inc.
            
            8-K/A
            0-27587
            99.3
            7/11/0610.30*
            Letter
                Amendment dated June 30, 2006 to the Consulting Agreement with Andreas
                Typaldos dated May 21, 2004
            
            8-K/A
            0-27587
            99.4
            7/11/0610.31
            Amendment
                Agreement dated August 18, 2006 between CDKnet.com, Inc., Bushido
                Capital
                Master Fund, LP, Gamma Opportunity Capital Partners, LP (Classes
                A and C),
                and Cargo Holdings LLC
            
            8-K
            0-27587
            99.1
            8/24/0610.32
            Additional
                Issuance Agreement dated September 26, 2006 between Arkados Group,
                Inc.,
                Bushido Capital Master Fund, LP, Pierce Diversified Strategy Master
                Fund,
                LLC - Series BUS, Andreas Typaldos and Andreas Typaldos Family Limited
                Partnership
            
            8-K
            0-27587
            99.5
            10/2/06




41




10.33
            Waiver
                and Amendment Agreement dated September 26, 2006 between Arkados
                Group,
                Inc. and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.6
            10/2/0610.34
            Limited
                waiver letter dated October 10, 2006 relating to the Employment Agreement
                dated as of May 23, 2006 between Arkados Group, Inc. (formerly CDKnet.com,
                Inc.) and Oleg Logvinov
            
            
            
            
            
            X14.1
            Code
                of Business Conduct and Ethics
            
            10-KSB
            0-27587
            14.1
            9/17/0414.2
            Code
                of Ethics for Financial Executives
            
            10-KSB
            0-27587
            14.2
            9/17/0416.1
            Letter
                dated March 24, 2005 from Radin, Glass & Co., LLP
            
            8-K
            0-27587
            16.1
            3/24/0521
            Subsidiaries
                of the Registrant.
            
            
            
            
            
            X31.1
            Certification
                of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a
                and
                Rule 15d-14(a).
            
            
            
            
            
            X31.2
            Certification
                of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a
                and
                Rule 15d-14(a).
            
            
            
            
            
            X32.1
            Certification
                of Chief Executive Officer of pursuant to 18 U.S.C. - Section
                1350.
            
            
            
            
            
            X32.2
            Certification
                of Chief Financial Officer of pursuant to 18 U.S.C. - Section
                1350.
            
            
            
            
            
            X





*Compensation
      plans or arrangements in which directors or executive officers are eligible
      to
      participate.





42


ITEM
              14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES





**Audit
      Fees**





The
      aggregate fees billed and unbilled for the fiscal years ended May 31, 2005
      and
      2006 for professional services rendered by our principal accountants for the
      audits of our annual financial statements, and the review of our financial
      statements included in our quarterly reports on Form 10-QSB were approximately
      $35,150 and $30,500, respectively.





**Audit-Related
      Fees**





The
      aggregate fees billed for the fiscal years ended May 31, 2005 and 2006 for
      assurance and related services rendered by our principal accountants related
      to
      the performance of the audit or review of our financial statements, specifically
      accounting research, were $0 and $0, respectively.





**Tax
      and Other Fees**





There
      aggregate fees billed for the fiscal years ended May 31, 2005 and 2006 for
      tax
      related or other services rendered by our principal accountants in connection
      with the preparation of our federal and state
      tax
      returns was $0 and $0, respectively.





**Approval
      of Non-audit Services and Fees**





We
      did
      not have an audit committee during fiscal 2005 or 2006 and did not have any
      independent directors until fiscal 2005. We plan to form an Audit Committee
      consisting solely of independent directors and, consistent with SEC policies
      and
      guidelines regarding audit independence, the Audit Committee will responsible
      for the pre-approval of all audit and permissible non-audit services provided
      by
      our principal accountants on a case-by-case basis.


43


SIGNATURES





In
      accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
      this report on to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Arkados
              Group, Inc. (Registrant)By:
            /s/ Oleg
              LogvinovPresident and Chief Executive Officer By:
              /s/ Kirk
                WarshawChief
                  Financial Officer (Principal
                Financial
                  and Accounting Officer)Date:
                October 10, 2006


In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the Registrant and in the capacities and on
      the
      dates indicated.







Date:
              October 10, 2006
            By: 
                 /s/ Oleg Logvinov
              
              Oleg
                Logvinov, President, Chief
              Executive
                Officer and a Director


Date:
              October 10, 2006
            By: 
                 /s/ Gennaro Vendome
              
              Gennaro
                  Vendome, Director


Date:
              October 10, 2006
            By: 
/s/
                William H. Carson
              
              William
                H. Carson, Director


Date:
              October 10, 2006
            By: 
/s/
                Andreas Typaldos
              
              Andreas
                Typaldos, Chairman






44