UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2005

                                       OR



            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

           For the transition period from            to
                                          ----------    ----------

                        Commission file number 333-113140

                         Digital Lifestyles Group, Inc.
             (Exact name of registrant as specified in its charter)

                   Delaware                                   13-3779546
         (State or Other Jurisdiction                      (I.R.S. Employer
       of Incorporation or Organization)                Identification Number)

            727 Brea Canyon Road #6
              Walnut, California                                 91789
   (Address of Principal Executive Offices)                   (Zip Code)

                                 (909) 869-0595
              (Registrant's telephone number, including area code)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports);  and (2) has been subject to such
filing requirements for the past 90 days.

Yes     [ ]           No     [X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer  [ ]  Accelerated filer  [ ]  Non-accelerated filer  [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

Yes     [ ]           No     [X]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date. As of August 1, 2006 there were
32,865,975 shares of common stock, par value $0.03 per share, outstanding and no
shares of preferred stock, par value $0.01 per share.


<PAGE>


                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                      FOR THE QUARTER ENDED MARCH 31, 2005



                                      INDEX



                                                                           Pages

Part I.       Financial Information
   Item 1.    Consolidated Financial Statements:

              Consolidated Balance Sheets as of
              March 31, 2005 (unaudited) and December 31, 2004...............1

              Consolidated Statements of Operations for Each of
              the Three-Month Periods Ended March 31, 2005 (unaudited)
              and March 31, 2004 (unaudited).................................2

              Consolidated Statements of Stockholders' Deficit for the
              Three-Month Period Ended March 31, 2005 (unaudited)............3

              Consolidated Statements of Cash Flows for Each of the
              Three-Month Periods Ended March 31, 2005 (unaudited)
              and March 31, 2004 (unaudited).................................4

              Notes to Consolidated Financial Statements (unaudited).........5

   Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations...........................23

   Item 3.    Quantitative and Qualitative Disclosures about Market Risk....32

   Item 4.    Controls and Procedures.......................................32

Part II.      Other Information

   Item 1.    Legal Proceedings.............................................35

   Item 1A.   Risk Factors..................................................35

   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds...35

   Item 3.    Defaults Upon Senior Securities...............................36

   Item 4.    Submission of Matters to a Vote of Security Holders...........36

   Item 5.    Other Information.............................................36

   Item 6.    Exhibits......................................................37




<PAGE>


PART I   FINANCIAL INFORMATION

ITEM 1.  Financial Statements.

                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)
<TABLE>
<CAPTION>

                                                                           As of                 As of
                                                                       March 31, 2005      December 31, 2004
                                                                     ------------------    ------------------

                                                                      (unaudited)
<S>                                                                         <C>                    <C>
                              ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                           $           117       $            466
  Accounts receivable, net of allowance for doubtful accounts
      of $1,588 and $1,584 in 2005 and 2004, respectively                       1,278                  4,087
  Inventories, net                                                              1,398                  2,201
  Prepaid expenses and other current assets                                       176                    218
                                                                     ------------------    -------------------
      Total current assets                                                      2,969                  6,972

NON CURRENT ASSETS:
  Equipment, net                                                                2,116                  2,044
  Other assets                                                                     98                     98
                                                                     ------------------    -------------------
      Total assets                                                    $         5,183       $          9,114
                                                                     ==================    ===================

        LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable                                                    $         7,229       $          7,398
  Accrued expenses                                                                835                    902
  Convertible notes payable                                                     1,620                  1,576
  Line of credit                                                                    -                    331
  Note payable to related party                                                 1,004                  1,004
  Notes payable                                                                 1,063                  1,319
                                                                     ------------------    -------------------
      Total current liabilities                                                11,751                 12,530

NON CURRENT LIABILITIES:
  Derivative and warrant liabilities                                            3,141                  4,788
                                                                     ------------------    -------------------
      Total liabilities                                                        14,892                 17,318

COMMITMENTS AND CONTINGENCIES (Note 14)

STOCKHOLDERS' DEFICIT:
  Preferred stock, $0.01 par value; 5,000 shares authorized,                                              -
      0 shares issued and outstanding, liquidation
      preference of $0
  Common stock, $0.03 par value; 50,000 shares authorized,
      37,648 shares issued and outstanding                                      1,130                  1,130
  Additional paid-in capital                                                   14,204                 14,204
  Accumulated deficit                                                        (18,836)               (17,331)
                                                                     ------------------    -------------------
                                                                              (3,502)                (1,997)

  Less: Unearned ESOP shares                                                  (6,207)                (6,207)
                                                                     ------------------    -------------------

      Total stockholders' deficit                                             (9,709)                (8,204)
                                                                     ------------------    -------------------

      Total liabilities and stockholders' deficit                     $         5,183       $          9,114
                                                                     ==================    ===================
</TABLE>


      See accompanying notes to condensed consolidated financial statements


<PAGE>


                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                      (In thousands, except per share data)
<TABLE>
<CAPTION>


                                                                            For the Three Months Ended
                                                                          March 31, 2005      March 31, 2004
                                                                        -----------------   -----------------
<S>                                                                            <C>                 <C>

Net sales                                                                  $      1,210         $    19,348
Cost of sales                                                                   (1,155)              16,911
                                                                        -----------------   -----------------
     Gross profit                                                                    55               2,437

Operating expenses                                                                1,476               2,268
                                                                        -----------------   -----------------
     Operating profit (loss)                                                    (1,421)                 169
                                                                        -----------------   -----------------

Other (income) expense:                                                               -
  Interest expense                                                                  203                 127
  Change in fair value derivative and current liabilities                       (1,647)                   -
  Loss on disposal of assets                                                      1,532                   -
  Other, net                                                                        (4)                  13
                                                                        -----------------   -----------------
     Total other expense                                                             84                 140
                                                                        -----------------   -----------------

Income (loss) before provision for income taxes                                 (1,505)                  29

Provision for (benefit from) income taxes                                             -                   -
                                                                        -----------------   -----------------

Net income (loss)                                                          $    (1,505)         $        29
                                                                       ==================   =================

Basic income (loss) per share                                              $     (0.04)         $         -
                                                                       ==================   =================

Diluted income (loss) per share                                            $     (0.04)         $         -
                                                                       ==================   =================

Weighted average shares of common stock outstanding:
  Basic                                                                          37,648              18,943
                                                                       ==================   =================
  Diluted                                                                        37,648              20,246
                                                                       ==================   =================
</TABLE>

      See accompanying notes to condensed consolidated financial statements




<PAGE>


                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                   (unaudited)
                                 (In thousands)


<TABLE>
<CAPTION>

                                                              Additional       Unearned                              Total
                                         Common Stock           Paid-in          ESOP          Accumulated       Stockholders'
                                                                Capital          Shares          Deficit             Deficit
                                     ---------------------    ------------    -----------    ---------------    ---------------

                                      Shares       Amount
                                     --------    ---------
<S>                                     <C>          <C>           <C>            <C>               <C>                <C>

Balance,                              37,648      $ 1,130       $ 14,204       $ (6,207)       $ (17,331)          $ (8,204)
January 1, 2005

Net loss                                   -            -              -               -          (1,505)            (1,505)
                                     --------    ---------    ------------    -----------    ---------------    ---------------

Balance, March 31, 2005               37,648      $ 1,130       $ 14,204       $ (6,207)       $ (18,836)          $ (9,709)
                                     ========    =========    ============    ===========    ===============    ===============



</TABLE>

      See accompanying notes to condensed consolidated financial statements



<PAGE>


                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                    For the Three Months Ended
                                                                               March 31, 2005        March 31, 2004
                                                                              ------------------    ------------------
<S>                                                                                   <C>                  <C>

Cash flows from operating activities
   Net income (loss)                                                            $    (1,505)           $        29
   Adjustments to reconcile net income (loss) to net cash provided by
      (used in) operating activities:
     Depreciation and amortization                                                        76                    87
     Loss on disposal of assets                                                        1,532                    19
     Amortization of debt discount and issuance costs                                    108                     -
     Change in fair value of derivative and warrant and liabilities                  (1,647)                     -
     Stock-based compensation                                                              -                    13
     Provision for losses on accounts receivable                                           -                    22
     Changes in operating assets and liabilities:
         Accounts receivable                                                           1,241               (1,964)
         Inventories                                                                     803                   761
         Prepaid expenses and other current assets                                        42                  (20)
         Accounts payable                                                              (169)                   (5)
         Accrued expenses                                                               (67)                   227
                                                                              ------------------    ------------------

Net cash provided by (used in) operating activities                                      414                 (831)
                                                                              ------------------    ------------------

Cash flows from investing financial activities:
   Purchases of equipment                                                              (148)                  (62)
                                                                              ------------------    ------------------

   Payments on note payable                                                            (615)                   (4)
   Advances from related party                                                             -                   500
   Payments on note payable from related party                                             -                 (500)
   Borrowings under short-term financing, net                                              -                 1,247
                                                                              ------------------    ------------------

Net cash (used in) provided by financing activities                                    (615)                 1,243
                                                                              ------------------    ------------------

Net increase (decrease) in cash and cash equivalents                                   (349)                   350

Cash and cash equivalents, beginning of period                                           466                   464
                                                                              ------------------    ------------------

Cash and cash equivalents, end of period                                        $        117           $       814
                                                                              ==================    ==================
</TABLE>

      See accompanying notes to condensed consolidated financial statements


<PAGE>


                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

                 For the Quarters Ended March 31, 2005 and 2004

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Interim Information

The accompanying interim condensed consolidated financial statements include the
accounts of Digital Lifestyles Group, Inc. and its wholly owned subsidiaries and
have been prepared,  without audit, pursuant to the rules and regulations of the
Securities and Exchange  Commission  ("SEC"). We have eliminated all significant
intercompany transactions.  We have condensed or omitted certain information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with generally accepted accounting principles in the United States of
America pursuant to such regulations.  These financial statements should be read
in  conjunction  with the audited  financial  statements  and the notes  thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2004.

In the opinion of our management,  the accompanying financial statements contain
all adjustments  necessary to present fairly our financial position at March 31,
2005,  and the results of  operations  and cash flows for the three months ended
March 31, 2005 and 2004. Certain  reclassifications have been made to prior year
amounts in order to conform to the  current  year  presentation.  The results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year.

Organization

The accompanying financial statements include the accounts of Digital Lifestyles
Group, Inc. ("Digital" "we," "our," "us," or the "Company")  (formerly Northgate
Innovation,  Inc. or "Northgate") and Digital's wholly owned  subsidiaries.  All
significant intercompany transactions have been eliminated.

In December  2003,  an  investor  group  acquired a majority of our  outstanding
common stock and in early 2004 this investor  group brought in a new  management
team and  implemented  a new  business  strategy.  As part of this new  business
strategy, in June 2004, we changed our name from Northgate Innovations,  Inc. to
Digital  Lifestyles Group, Inc. Beginning in late 2004, we deemphasized the sale
of  our  old  Northgate(R)   brand  products  to  focus  our  resources  on  the
development,  marketing and sale of our new hip-e(TM) brand product line,  which
was designed and targeted to the teen market.

Basis of Presentation

In April 2005, we received notice from Microsoft Corporation  ("Microsoft") that
it had terminated our license to use its proprietary Windows(R) operating system
(see Note 2), due to our failure to make required royalty  payments.  Due to the
loss of the license, we were unable to ship our products,  the majority of which
use Microsoft's  proprietary Windows(R) operating system and as a result we were
unable to fulfill any orders for our hip-e(TM) brand desktop computers.

As we lacked  sufficient  funds required to renew our license with Microsoft and
were unable to distribute or sell our products,  in May 2005 our management team
decided  to cease all  ongoing  operations,  except  for  operations  related to
helping our secured  creditor,  Laurus Master Fund, Ltd.  ("Laurus"),  liquidate
their  collateral  (see Notes 7 and 15). As a result of the  liquidation  effort
through the remainder of 2005, the Company generated cash to repay $1,063,000 of
Laurus principal, resulting in a loss of on disposition of assets of $4,553,000.
$1,532,000 of the loss on  disposition  of assets was recorded by the Company in
the first quarter of 2005.

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION, continued

As of June 30,  2006,  we have no business  operations  other than to assist our
secured  creditor,  Laurus,  liquidate its collateral.  As of August 7, 2006, we
have  approximately  $40,000 of cash and as of June 30,  2006,  $2.1  million of
secured debt and approximately $7.6 million in unsecured debt,  virtually all of
which is past due. During the fiscal year ending December 31, 2006, we expect to
incur costs of approximately $800,000 primarily related to operating costs, such
as rent for office space, utilities, employee compensation, costs of maintaining
the business as a public  entity,  professional  expenses  (including  legal and
accounting fees) related to negotiating a business  combination and bringing the
Company current in its SEC filings, and insurance.

We currently have capital resources sufficient to meet our operating and capital
needs  through  approximately  August 31, 2006.  However,  as we have no current
sales or other  sources of  revenue,  we depend  upon our ability to arrange for
additional debt or equity financing to meet our liquidity  requirements.  Due to
our insolvency stemming from our lack of operations, severe shortage of capital,
significant debt, and our default under existing credit and loan agreements,  we
may not be able to arrange for debt or equity  financing  from third  parties on
favorable terms, or at all.

Since  August  2005,  our  principal  business  purpose has been to identify and
consummate  a  business  combination  (either by merger or  acquisition)  with a
private entity. On September 9, 2005, we executed a non-binding letter of intent
to enter into a merger agreement with Protron Digital Corporation ("Protron"), a
consumer  electronics  company  focused  on the  manufacture  and  sale  of home
entertainment systems.  Protron is a privately held company, of which one of its
principal owners is Leo Chen, a member of our board of directors.

On March 8, 2006, the Company,  Protron,  Protron Acquisition,  Inc., a Delaware
corporation  and a wholly owned  subsidiary  of the  Company,  Leo Chen and Alex
Chung  entered  into a definitive  Merger  Agreement  (the "Merger  Agreement"),
pursuant  to  which  Protron  Acquisition,  Inc.  will be  merged  with and into
Protron,  with Protron  continuing  as a wholly owned  subsidiary of the Company
(the  "Merger").  At the  effective  time of the Merger,  the Company will issue
74,353,942   shares  of  its  common  stock  to  the  stockholders  of  Protron,
representing 70% of the issued and outstanding  shares of the Company.  Upon the
closing of the Merger,  the  stockholders of Protron will acquire voting control
of the Company.  The consummation of the Merger is subject to customary  closing
conditions,  including,  among others:  (i) the approval of the Merger Agreement
and the Merger by our  stockholders;  (ii) the Company  having filed all reports
required  to be filed  pursuant  to the  Securities  Exchange  Act of  1934,  as
amended; (iii) receipt of all applicable regulatory approvals;  (iv) the absence
of any government action prohibiting consummation of the Merger; and (v) neither
the Company nor Protron having suffered any material  adverse effect.  The terms
of the Merger Agreement  require that all conditions to closing be satisfied and
the Merger completed by December 31, 2006.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The  preparation of the  consolidated  financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires us 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  consolidated  financial  statements and the recorded  amount of
revenues and expenses  during the reporting  periods.  On an on-going  basis, we
evaluate our  estimates  including  but not limited to, those related to (i) the
allowance for doubtful accounts  receivable,  (ii) realizability of inventories,
(iii) sales allowances, (iv) useful life or impairment of long-lived assets, and
(v) deferred tax asset valuation allowances. We base our estimates on historical
experience and on various other  assumptions  that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the  carrying  values  of  assets  and  liabilities  that are not  readily
apparent  from other  sources.  Actual  results may differ from these  estimates
under different assumptions or conditions,  and such differences may be material
to the consolidated financial statements.



<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Cash and Cash Equivalents

Cash and cash  equivalents  consist  of cash on hand,  cash on  deposit  and all
highly liquid investments with original  maturities at the date of purchase less
than three months. Cash equivalents consist primarily of cash deposited in money
market  accounts.  While our cash and cash  equivalents are on deposit with high
quality financial  institutions,  at times deposits may exceed federally insured
limits. We have not experienced any losses in such accounts.

Fair Value of Financial Instruments

The carrying value of certain of our financial instruments, consisting primarily
of cash equivalents, receivables, accounts payable and accrued expenses, line of
credit,  notes payable and related-party  notes payable  approximates fair value
due to the  short-term  nature  of  these  agreements.  The  fair  value  of the
convertible notes payable is not determinable because equivalent instruments are
difficult to locate and certain of the notes are in default.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using
average  cost.  Inventory  costs  include  raw  materials,  labor and  overhead.
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable value, which establishes a new cost basis for the
related inventory items.

From time to time we  maintained  at our  facilities  consigned  inventory  that
remained  the  property  of the  vendors  supplying  the  inventory  ("consigned
inventory") until such time as we elected to use the inventory. At the time that
we  elected  to use the  consigned  inventory,  the cost of such  inventory  was
reflected in our inventory  accounts and a corresponding  account payable to the
vendor was recorded.

As a result of our shut down of  operations  in the second  quarter of 2005,  we
wrote down  inventory  balances to the amounts  ultimately  realized  upon their
liquidation (see Note 1). We have no inventory as of June 30, 2006.

Equipment

Equipment is stated at cost and depreciated using the straight-line method based
over the estimated useful lives of the respective assets, which range from three
to five years.  Leasehold  improvements  are stated at cost and  amortization is
computed using the  straight-line  method over the shorter of the useful life of
the asset or the term of the lease. Upon retirement or disposition of equipment,
the cost and  accumulated  depreciation  are removed  from the  accounts and any
resulting gain or loss is reflected in operations.

As a result of our shut down of  operations  in the second  quarter of 2005,  we
wrote down  equipment  balances to the amounts  ultimately  realized  upon their
liquidation (see Note 1). We have no equipment as of June 30, 2006.

Software Development Costs

In 2004, we  capitalized  software  development  costs  pursuant to SFAS No. 86,
"Accounting for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed," after technological feasibility of the software is established, which
is generally the completion of a working prototype and ends upon general release
of the  product  to our  customers.  All  costs  incurred  in the  research  and
development  of new software and costs incurred  prior to the  establishment  of
technological  feasibility  are expensed as incurred.  Amortization  of software
development  costs  commences  when the product  becomes  available  for general
release to customers and is computed based on the straight-line  method over the
software's estimated economic life of approximately three years. Amortization of
software  development  costs was $0 during the quarters ended March 31, 2005 and
2004, as product sales had not yet commenced.

We reviewed the unamortized  software development costs in the second quarter of
2005 upon the Company's shut-down of operations and wrote down the balance to $0
(see Note 1).  Software  development  costs were  reflected  as a  component  of
equipment in the consolidated balance sheets (see Note 3).



<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Goodwill and Intangible Assets

Identifiable  assets  and  liabilities  acquired  in  connection  with  business
combinations  accounted  for under the  purchase  method are  recorded  at their
respective  fair values.  Deferred income taxes have been recorded to the extent
of differences  between the fair value and the tax basis of the assets  acquired
and liabilities  assumed.  Intangible assets are allocated between  identifiable
intangibles and goodwill.

We have adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill  associated with acquisitions  consummated after June 30, 2001
is not to be  amortized,  and  effective  January  1, 2002,  goodwill  and other
intangible  assets  with  indefinite  lives are no longer  subject  to  periodic
amortization  but  are  instead  reviewed  annually  for  impairment,   or  more
frequently  if  impairment  indicators  arise.  We have  decided to perform  the
impairment  test on  goodwill  as of December  31.  Based on our  analysis as of
December 31, 2003, we determined that $590,000 of the recorded  goodwill balance
was impaired and was written down.  During the quarter ended  December 31, 2004,
we chose to abandon the business line associated with our goodwill. As a result,
the remaining  amount of goodwill  totaling  $3,492,000 was impaired and written
down in 2004.

Long-Lived Assets

In the event that  facts and  circumstances  indicate  that  equipment  or other
long-lived  assets may be impaired,  an  evaluation of  recoverability  would be
performed.  If an evaluation is required,  the estimated future  discounted cash
flows  associated with the asset are compared to the asset's  carrying amount to
determine if an impairment  charge is necessary.  The amount of long-lived asset
impairment,  if any, is charged to operations in the period in which  long-lived
asset impairment is determined.  We believe that software  development costs and
tooling  became fully  impaired due to the shut-down of operations in the second
quarter  of 2005,  and  were  written  down at that  time as part of the loss on
disposition of assets (see Note 1). We have no long-lived  assets as of June 30,
2006.

Concentrations

Financial  instruments that potentially  subject us to a concentration of credit
risk consist  primarily of cash and cash  equivalents  and accounts  receivable.
Sales are  primarily  concentrated  in the United  States and we have  primarily
offered consumers personal  computers and related products through  distribution
channels that include large electronic and office supply  retailers,  television
shopping  networks and mail order catalogues.  We perform credit  evaluations on
our customers and we provide  allowances for potential credit losses and product
sales returns.  Due to the shutdown of business operations in the second quarter
of 2005, we wrote down  accounts  receivable in that quarter to the amounts that
we were  able to  collect  subsequent  to that  date  (see  Note 1).  We have no
accounts receivable as of June 30, 2006.

For the quarters ended March 31, 2005 and 2004, major customers accounted for
approximately 14% and 53%, respectively, of total sales. At March 31, 2005 and
December 31, 2004, $325,000 and $2,700,000, respectively, of accounts receivable
related to these customers.

For the quarters ended March 31, 2005 and 2004,  major  suppliers  accounted for
11% and 19%, respectively, of total purchases.



<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

We had a nonexclusive  licensing  agreement with Microsoft for various operating
system and  application  software for which we were obligated to pay Microsoft a
licensing  fee.  Microsoft  terminated  this  license  in April  2005 due to the
Company's failure to pay outstanding licensing fees (see Note 1).

In 1999, we entered into an Internet  access and portal  co-marketing  agreement
with Microsoft and the Microsoft  Network ("MSN") to provide  Internet access to
our end users, for which we paid MSN a subscriber fee. Under this agreement, MSN
also  had  the  obligation  to  pay us for  the  end  users  that  continued  as
subscribers  to MSN.  This  agreement was  terminated  in July 2001.  During the
second quarter of 2004, based in part on correspondence  with MSN and discussion
with our outside legal counsel,  we eliminated our estimate of accruals  related
to our liability for certain  subscriber fees to MSN,  resulting in reduction of
the accrual and the recognition of other income of $1.4 million.

Derivative Financial Instruments

Our derivative financial  instruments consist of embedded derivatives related to
Laurus  notes  entered  into on  November  30,  2004 (see Note 7). The  embedded
derivatives  include  the  conversion   feature,   variable  interest  features,
liquidated  damages  clauses in the  registration  rights  agreement and certain
default provisions. The accounting treatment of derivative financial instruments
requires that the Company record the derivatives  and related  warrants at their
fair values as of the  inception  date of the  agreement and at fair value as of
each  subsequent  balance sheet date. In addition,  under the provisions of EITF
Issue No. 00-19,  "Accounting for Derivative  Financial  Instruments Indexed to,
and  Potentially  Settled in, a Company's Own Stock," the Company is required to
classify  all other  non-employee  stock  options  and  warrants  as  derivative
liabilities  and mark them to market at each  reporting  date. The fair value of
all derivatives at March 31, 2005 totaled approximately  $3,141,000.  Any change
in fair value of these instruments will be recorded as  non-operating,  non-cash
income or expense at each reporting  date. If the fair value of the  derivatives
is higher at the  subsequent  balance  sheet  date,  the  Company  will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the  subsequent  balance  sheet  date,  the Company  will record  non-operating,
non-cash  income.  Derivatives  were valued  primarily  using the  Black-Scholes
Option  Pricing  Model with the  following  assumptions:  dividend  yield of 0%,
annual  volatility of 212%-364%,  risk free interest rate of 2.11% - 4.39%,  and
expected life of 3-10 years.

The derivatives are classified as long-term liabilities (see Note 7).

For the quarter ended March 31, 2005, the net decrease in derivative and warrant
liabilities was  approximately  $1,647,000,  which is recorded as a component of
other income in the accompanying consolidated statements of operations.

Revenue Recognition

Until April 2005 we derived revenue primarily from sales of personal  computers,
and to a lesser extent, from software,  peripherals and accessories.  Generally,
we  recognized  revenue  when  persuasive  evidence of an  arrangement  existed,
delivery had occurred,  the fee was fixed or  determinable  and  collection  was
probable.  We recorded discounts provided to resellers for achieving  purchasing
targets as a reduction of revenue on the date of sale.

For sales of merchandise  owned and warehoused by us revenue was recognized when
title to  products  sold had  transferred  to the  customer in  accordance  with
shipping terms. We also sold merchandise from suppliers on a "drop-ship"  basis.
We took title to this  merchandise  from the time it was shipped by the supplier
until the time it was received by the customer.

We  ceased  all  operations  in  April  2005 and  have no  substantive  revenues
thereafter.



<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Accounting for Shipping and Handling Revenue, Fees and Costs

We classified  amounts billed for shipping and handling as revenue in accordance
with EITF Issue 00-10  "Accounting  for Shipping  and Handling  Fees and Costs."
Shipping and handling fees and costs are included in cost of sales.

Merchandise Return and Warranty Policy

We provided warranties for our products for one year following the date of sale.
The majority of the products used in the production of our computers are covered
by the original  manufacturer's  warranties,  which are  generally  one to three
years. Other products that we sold are covered by the third-party manufacturer's
warranty.  We  provided  allowances  for  estimated  future  returns and product
warranty  (included in accrued  liabilities) to the customer based on historical
experience.

While certain of the products we sold are covered by third-party  manufacturer's
warranties, we may have products returned by customers the costs of which we may
not be able to recover from the  manufacturer.  Returns of this nature have been
immaterial in the past;  however,  should actual product failure rates increase,
or if the  manufacturers  go out of business  or refuse to honor their  warranty
obligations,  we may be forced to cover these  warranty  costs and the costs may
differ from our estimates.

Advertising Revenue and Costs

Advertising revenue is recognized upon receipt of income.  Advertising costs are
charged to expense as incurred.  Net advertising expense was $80,000 and $22,000
for the quarters ended March 31, 2005 and 2004, respectively, and is included in
operating expenses.

Income Taxes

We follow the provisions of SFAS No. 109,  "Accounting  for Income Taxes," which
requires  recognition  of deferred tax assets and  liabilities  for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements and tax returns.  Deferred tax assets and  liabilities are determined
based upon the  difference  between  the  financial  statement  and tax bases of
assets and  liabilities,  using the  enacted tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that deferred tax assets will not be realized.

Stock-Based Compensation

We have adopted SFAS No. 123,  "Accounting for Stock-Based  Compensation."  SFAS
No. 123 requires disclosure of the compensation cost for stock-based  incentives
granted  after January 1, 1995 based on the fair value at grant date for awards.
At March 31, 2005, we have one stock-based employee  compensation plan, which is
described  more fully in Note 9. We account for this plan under the  recognition
and  measurement  principles  of  APB  25,  and  related   interpretations.   No
stock-based employee  compensation cost related to this plan is reflected in the
statement of operations  in 2005,  as all options  granted under those plans had
exercise prices equal to the market value of the underlying  common stock on the
dates  of  grant.  In the  first  quarter  of 2004,  we  recognized  $13,000  in
compensation  expense  under APB 25 in  connection  with the  vested  portion of
certain  options  granted  which had  exercise  prices less than the fair market
value of the common  stock  underlying  the  options  on the date of grant.  The
following table  illustrates the effect on net loss and loss per share if we had
applied the minimum value  recognition  provisions  SFAS No. 123, to stock-based
employee compensation:



<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
<TABLE>
<CAPTION>

                                                                            Quarters Ended March 31,
                                                                    ---------------------------------------
                                                                          2005                  2004
                                                                    ------------------    -----------------
<S>                                                                        <C>                   <C>

Net income (loss), as reported                                        $    (1,505)          $       29

Add:
     Stock-based compensation expense under APB 25                               -                  13
Deduct:
     Total stock-based compensation expense under
       fair value based method for all awards, net of
       related tax effects                                                 (1,505)                (33)
                                                                    ------------------    -----------------

Pro forma net loss                                                    $    (1,505)          $      (9)
                                                                    ==================    =================

Basic and diluted income (loss) per share - as reported               $     (0.04)          $        -
                                                                    ==================    =================

Basic and diluted loss per share - pro forma                          $     (0.04)          $        -
                                                                    ==================    =================

</TABLE>

401(k) Plan

We offer a 401(k) plan that covers all full time employees who are not a covered
by a  collective  bargaining  agreement.  Employees  are  eligible  for the plan
following one year of service.  We made matching  contributions  to participants
equal to 50% of the first 6% of the employee's  contribution  through June 2001.
Expenses  relating to the 401(k) plan were $0 for the  quarters  ended March 31,
2005 and 2004.

Effective  June 30, 2005, we  discontinued  our 401(k) plan and all  participant
accounts became fully vested and were liquidated.

Net Loss Per Share

Basic net loss per share excludes  dilution and is computed by dividing net loss
by the weighted average number of common shares  outstanding during the reported
periods.  Diluted net loss per share reflects the potential  dilution that could
occur if other commitments to issue common stock were exercised.

Since we reported losses for 2005, basic and diluted weighted average shares are
the same for that  quarter,  as the  effect of  potentially  diluted  shares are
anti-dilutive  and thus not included in the diluted loss per share  calculation.
Additional  potential  dilutive  shares are  20,595,124  and  20,246,000 for the
quarters ended March 31, 2005 and 2004, respectively.

Product Licenses

From time to time, we receive notices from companies and  individuals  asserting
exclusive patent, copyright,  trademark or other intellectual property rights to
technologies  or marks that are important to the technology  industry and/or our
business.  We evaluate each claim relating to its products and, if  appropriate,
seek a  license  to use  the  protected  technology.  The  licensing  agreements
generally do not require the licensor to assist us in  duplicating  its patented
technology nor do these  agreements  protect us from trade secret,  copyright or
other  violations  by us,  or our  suppliers  in  developing  or  selling  these
products.  Liabilities  are recorded when claims  asserted are probable and such
costs to the Company can be estimated.  No such costs have been recorded  during
the quarters ended March 31, 2005 and 2004.



<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Comprehensive Income

We have adopted SFAS No. 130, "Reporting  Comprehensive  Income." This statement
established  standards  for  the  reporting  of  comprehensive  income  and  its
components.  Comprehensive  income,  as defined,  includes all changes in equity
(net assets)  during a period from  non-owner  sources.  There was no difference
between net loss and  comprehensive  loss for the quarters  ended March 31, 2005
and 2004.

New Accounting Pronouncements

In December 2004, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 123  (revised  2004)  ("SFAS  123(R)"),  "Share-Based  Payment,"  to provide
investors and other users of financial statements with more complete and neutral
financial  information  by  requiring  that the  compensation  cost  relating to
share-based payment transactions be recognized in the financial statements. That
cost  will be  measured  based on the  fair  value of the  equity  or  liability
instruments issued. SFAS 123(R) covers a wide range of share-based  compensation
arrangements including share options, restricted share plans,  performance-based
awards,  share  appreciation  rights,  and employee share purchase  plans.  SFAS
123(R)  replaces  SFAS No.  123,  and  supersedes  APB No. 25.  SFAS No. 123, as
originally issued in 1995,  established as preferable a fair-value-based  method
of accounting for share-based payment transactions with employees. However, that
Statement  permitted  entities the option of continuing to apply the guidance in
APB No. 25, as long as the footnotes to the financial  statements disclosed what
net income would have been had the preferable fair-value-based method been used.
We will be required to apply SFAS 123(R) as of the first annual reporting period
that begins after June 15, 2005. We are in the process of evaluating whether the
adoption of SFAS 123(R) will have a significant impact on our overall results or
operations or financial position.

In  December  2004,  the FASB issued SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets," an amendment of APB No. 29, "Accounting for Nonmonetary  Transactions."
APB No. 29 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 APB
No. 29, however,  included  certain  exceptions to that principle.  SFAS No. 153
amends APB No. 29 to  eliminate  the  exception  for  nonmonetary  exchanges  of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary  assets that do not have commercial  substances,  that is, if the
future cash flows of the entity are not  expected to change  significantly  as a
result of the  exchange.  The  provisions  of this  statement  are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. We  anticipate  that SFAS No. 153 will not have an impact on our financial
statements.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections"  which  replaces  Accounting   Principles  Board  Opinions  No.  20
"Accounting  Changes" and SFAS No. 3, "Reporting  Accounting  Changes in Interim
Financial  Statements  - An  Amendment  of APB  Opinion  No.  28." SFAS No.  154
provides guidance on the accounting for and reporting of accounting  changes and
error  corrections.  It  establishes  retrospective  application,  or the latest
practicable  date,  as the required  method for reporting a change in accounting
principle  and the  reporting  of a  correction  of an  error.  SFAS No.  154 is
effective for  accounting  changes and correction of errors made in fiscal years
beginning after December 15, 2005 and is required to be adopted by us in January
2006. We are currently  evaluating  the effect that the adoption of SFAS No. 154
will have on our consolidated  results of operations and financial condition but
does not expect it to have a material impact.



<PAGE>


NOTE 3 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                    ----------------------------------------
                                                                         March 31,             December 31,
                                                                           2005                   2004
                                                                    ------------------    ------------------
<S>                                                                        <C>                   <C>

Raw material                                                          $        694          $      2,201
WIP and finished goods                                                         704                     -
                                                                    ------------------    ------------------

                                                                      $      1,398          $      2,201
                                                                    ==================    ==================

Equipment consists of the following (in thousands):

                                                                    ----------------------------------------
                                                                         March 31,           December 31,
                                                                           2005                 2004
                                                                    ------------------    ------------------

Machinery and equipment                                               $      1,883          $      1,808
Software                                                                     1,059                   991
Leasehold improvements                                                         391                   391
Vehicles                                                                        34                    34
Furniture and fixtures                                                         115                   110
                                                                    ------------------    ------------------
                                                                             3,482                 3,334

Less accumulated depreciation and amortization                            (1,366)               (1,290)
                                                                    ------------------    ------------------

                                                                      $      2,116          $      2,044
                                                                    ==================    ==================

</TABLE>

Depreciation and amortization expense on equipment was approximately $76,000 and
$87,000 for the quarters ended March 31, 2005 and 2004, respectively.

NOTE 4 - GOODWILL IMPAIRMENT

In response to uncertain  macroeconomic  conditions,  deteriorating  margins and
significant operating loss for 2003 and in connection with the employment of the
new  management  team and the addition of new members to the Company's  board of
directors,  we  initiated a strategic  review of our core  business and began to
develop a new business plan to launch a hardware and software  offering targeted
at what we  believed  was an  untapped  segment  of the  personal  computer  and
Internet market. The strategic review triggered an impairment  evaluation of the
intangible assets related to our acquisition in 2002,  resulting in a write-down
of these intangible  assets totaling $590,000 during the year ended December 31,
2003. During the fourth quarter ended December 31, 2004, we chose to abandon the
business  associated  with our  acquisition in 2002. As a result,  the remaining
amount of goodwill, totaling $3,492,000, was impaired and written down in 2004.

The following represents the changes in the goodwill balance:
<TABLE>
<CAPTION>

          <S>                                                                             <C>

        Balance, January 1, 2004                                                   $    3,492,000

        Impairment loss on goodwill in the quarter ended December 31, 2004            (3,492,000)
                                                                                 ----------------

        Balance, December 31, 2004 and March 31, 2005                              $            -
                                                                                 ================

</TABLE>




<PAGE>


NOTE 5 - SHORT-TERM FINANCING

At December  31, 2003,  we had a $2,500,000  revolving  credit  facility  with a
commercial bank. The facility expired in January 2004.

In February 2004, we entered into a purchase and sale agreement with a financial
institution.  Under the terms of that  agreement,  we  assigned  certain  of our
accounts  receivable to the  financial  institution  for  immediate  cash in the
amount of 75% of the  assigned  receivables.  We also  received a portion of the
remaining  balances of the assigned accounts  receivable,  depending on how soon
after assignment the financial  institution  received payment on those accounts.
Under this arrangement,  we had an effective interest rate of approximately 3.0%
to 4.0% per month.  Our obligations to this financial  institution  were paid in
full as of December 31, 2004 and replaced with  financing  from Laurus (see Note
7).

NOTE 6  -  NOTES PAYABLE

At March 31, 2005, we had a $1,063,000  note payable to an individual.  Interest
on the note was payable  monthly at 9% and the note was due January 1, 2005.  In
the third quarter of 2005, this note was settled for $70,000 resulting in a gain
on settlement of debt of approximately $1,115,000.

NOTE 7 - CONVERTIBLE NOTES PAYABLE

At  March  31,  2005,  we  had  $100,000  of  convertible  notes  payable  to an
individual,  dated June 18, 1999.  Interest was payable at 10% per annum through
December  18,  2000 and is  payable  at 12%  thereafter.  The  note and  accrued
interest were due December 18, 2000. The note is convertible at $20.00 per share
and is currently in default. Management has held settlement discussions with the
note holder but has been unable to reach a settlement for payment.

On November 30, 2004, we entered into a $7,500,000  secured credit facility with
Laurus. The facility consisted of a $4,750,000  convertible revolving note and a
$2,750,000 convertible term note. We initially borrowed approximately $3,255,000
under this  facility,  net of  issuance  costs of  $287,000,  which  represented
$2,750,000  under the  convertible  term note and $792,000 under the convertible
revolving  note.  These  funds  were  used to fund  the  repayment  of  existing
short-term financing (see Note 5). The outstanding balance of the revolving note
and the principal  balance of the term note are  convertible  into shares of our
common stock,  subject to certain  limitations  set forth in the agreement based
upon the stock's trading volume and Laurus' ownership  position.  The conversion
price of the  notes is $0.39 per  share,  which is a  premium  over the  average
closing  price of our  common  stock over the ten  trading  days  preceding  the
execution of the agreement,  with conversion reset rights if we issue any shares
for less than the initial conversion price. In connection with the facility,  we
also issued to Laurus warrants to purchase up to 3,846,154  shares of our common
stock at $0.44 per share (70% of these  warrants  were  vested at  December  31,
2004).  We agreed  to file a  registration  statement  with the  Securities  and
Exchange  Commission  registering  the resale of the shares of our common  stock
issuable  to  Laurus  upon  conversion  of the  term  note and  exercise  of the
warrants.  Failure to file such a registration  statement timely and to maintain
its  effectiveness  will  subject  us to  liquidated  damages  as defined in the
registration  rights agreement.  The notes are due on November 29, 2007 and bear
interest  at the  prime  rate plus 2% (7.75%  at March  31,  2005),  subject  to
downward  adjustment  based on our common stock price. Our obligations to Laurus
under the credit facility are secured by substantially  all of our assets (other
than  intellectual  property rights),  including our ownership  interests in our
operating subsidiaries.

The convertible revolving note balance was $0 at March 31, 2005. The convertible
term note balance at March 31, 2005,  was  $1,217,000,  net of debt  discount of
$1,166,000,  and is classified as part of convertible  notes in the accompanying
consolidated balance sheet (see below).



<PAGE>


NOTE 7 - CONVERTIBLE NOTES PAYABLE, continued

The notes include  certain  features  that are  considered  embedded  derivative
financial instruments,  such as the conversion feature, a variable interest rate
feature,  events of default and a  liquidated  damages  clause,  which have been
recorded at their fair value.

As the Laurus notes are not  conventional  debt, we were also required to record
the related vested warrants at their fair market value.  The total of the Laurus
related  derivative  and  warrant  liability  as of November  30,  2004  totaled
$1,023,000.  We recorded the value of the warrants and the embedded  derivatives
to debt discount,  which will be amortized to interest  expense over the term of
the notes. In addition,  we incurred debt issuance costs of $287,000,  which are
also  recorded to debt  discount and will be amortized to interest  expense over
the term of the notes.  Amortization  expense for debt  discount for the quarter
ended March 31, 2005 was $108,000.  In the second quarter of 2005, the remaining
debt discount  balance of $1,166,000  was amortized  into interest  expense as a
result of the default (see below).

At March 31,  2005,  we have  shown all of the  convertible  note  balance  as a
current  liability  because of the  default  in the second  quarter of 2005 (see
below).

On May 4, 2005,  we  received a notice  from  Laurus  that a number of events of
default had occurred and were existing under the Security Agreement entered into
by us and  Laurus in  connection  with the credit  facility.  As a result of our
failure to cure these defaults, Laurus commenced foreclosure proceedings against
all of our assets. We presently owe Laurus  approximately $2.0 million under the
credit  facility.  On December 8, 2005, we entered into a letter  agreement with
Laurus whereby we agreed to a payment plan for the  outstanding  secured debt we
owe to Laurus (the  "Payment  Plan").  We agreed to make  interest only payments
beginning   retroactively  on  December  1,  2005,  until  the  earlier  of  the
consummation  of a merger with  Protron or February  20,  2006.  On February 15,
2006,  Laurus agreed to extend the Payment Plan until March 1, 2006. The Payment
Plan  provides  that on the date we  consummate a merger with  Protron,  in full
satisfaction  of our debt to  Laurus,  we will pay Laurus  $950,000  in cash and
issue to them  that  number  of  shares  of our  common  stock  that is equal to
$950,000,  based upon a conversion  price of the 30 day average volume  weighted
average price  calculated as of the date prior to the merger.  On March 1, 2006,
Laurus agreed to indefinitely extend our right to make interest-only payments to
them,  subject to our assurances that we will use our best efforts to consummate
a merger with  Protron as soon as is  practicable.  We will record a gain on the
settlement of the debt once the payment is made to Laurus.

Convertible notes payable are summarized as follows:
<TABLE>
<CAPTION>

                                                                             March 31,       December 31,
                                                                               2005               2004
                                                                          ---------------   ---------------
<S>                                                                             <C>              <C>

Convertible note payable to a third party with an interest
  rate of 10% per annum, matured in December 2000, currently
  in default. Default interest rate is 15%. Late payments
  also incur a late fee of 6% per month                                    $   100,000       $   100,000
Convertible credit facility with a related party, with an interest
  rate of approximately 7.75% as of March 31, 2005, in default
  after March 31, 2005 (default interest rate changed to 12%).
  Payment is due upon completion of a merger with another company.
  Net of unamortized debt discount of $1,166,000 and $1,274,000,
  respectively                                                               1,520,000         1,476,000
                                                                          ---------------   ---------------

                                                                           $ 1,620,000       $ 1,576,000
                                                                          ===============   ===============
</TABLE>



<PAGE>


NOTE 8 - RELATED PARTY TRANSACTIONS

During 2003, we received advances of approximately  $3,306,000 from Mr. Teng. We
repaid  approximately  $2,306,000 of these advances during 2003.  During January
2004,  we recorded an additional  $500,000 in  repayments to Mr. Teng.  Mr. Teng
returned the $500,000 on February 2, 2004.  The advances  from Mr. Teng recorded
by us and the payments to Mr. Teng on the recorded advances were not approved by
our board of  directors.  In 2004,  we  received  a demand  from Mr.  Teng,  for
repayment of $1,210,000 in advances,  including  $210,000  discussed  below.  In
April 2004, Mr. Teng filed suit to collect this amount.  We paid interest on the
outstanding  advances during the year at 3.5%. Total interest expense related to
these  advances was  approximately  $0, $0 and $18,000 for 2005,  2004 and 2003,
respectively. In September 2005, we settled this debt (see below).

On October 27, 2003,  we received an advance of  approximately  $200,000  from a
trust account in the name of our employee stock ownership plan ("ESOP").  At the
instruction  of Mr. Teng, the sole trustee of the ESOP, we recorded that advance
as an advance from Mr. Teng, individually. In January 2004, the Company received
another advance of approximately $10,000 from a trust account in the name of the
ESOP. In 2004 the Company set aside $210,000 in a separate bank account, for the
benefit of the ESOP. On September 13, 2004,  Mr. Teng was replaced as trustee of
the ESOP by an  independent  trustee.  In November  2004, the Company turned the
funds that were being held for the ESOP over to the new trustee.

On September 14, 2004, we completed a private  placement of shares of our common
stock (see Note 10). Three of the investors in the private placement were at the
time of the private placement officers,  directors,  or entities affiliated with
our officers or directors:  (i) Theodore B. Muftick,  our former chief financial
officer,  purchased  722,543  shares of common  stock and  warrants  to purchase
361,271  shares  of  common  stock;  (ii)  Savage  Interests,  L.P.,  an  entity
affiliated with Kent A. Savage,  our former chief  executive  officer and former
chairman of the our board of  directors,  which  purchased  1,011,560  shares of
common stock and warrants to purchase  505,780 shares of common stock; and (iii)
R-2 Group  Holdings,  LLC,  an entity  affiliated  with Suhail  Rizvi,  a former
non-employee  director of the Company,  which purchased 433,526 shares of common
stock and warrants to purchase 216,763 shares of common stock.

On September 22, 2005,  Andy Teng, our chief  executive  officer and chairman of
the board,  agreed to convert all of the outstanding  unsecured debt owed to him
by us  into  shares  of  our  common  stock  at a  price  of  $1.00  per  share,
substantially  above current  market price.  Mr. Teng has been issued  1,000,000
shares of our common  stock in exchange  for the  extinguishment  of all amounts
owed by us to Mr.  Teng and a general  release of any and all claims held by him
in connection with these debts. No gain on extinguishment of debt is recorded on
this transaction since Mr. Teng is a related party.

In the second quarter of 2005, as part of the liquidation of our assets,  Laurus
negotiated the sale of a portion of our inventory to Mr. Teng (through a bidding
process),  who was not a  member  of our  management  at that  time.  The  total
proceeds  received  from Mr. Teng were  $460,000,  which were remitted to Laurus
(see Note 1).

NOTE 9 - STOCKHOLDERS' EQUITY

Private Placements

On December 9, 2003,  we closed a private  placement of 4,000,000  shares of our
common  stock  for a  purchase  price of $0.25 per  share,  and  realized  gross
proceeds of  $1,000,000.  The  investor in the private  placement  was a limited
liability  company,  which is  controlled  by Samuel J. Furrow,  Jr. and Marc B.
Crossman, each of whom joined our board of directors as a result of that private
placement.  We used the proceeds of the private  placement  for working  capital
needs.



<PAGE>


NOTE 9 - STOCKHOLDERS' EQUITY, continued

On September 14, 2004, we completed a private placement of our equity securities
in which we raised  approximately  $4.6  million  in net  proceeds  for  working
capital.  The private placement was completed pursuant to a Securities  Purchase
Agreement,  dated  September 9, 2004,  with  certain  investors,  including  our
previous chief financial officer and entities affiliated with our previous chief
executive  officer and an outside director (see Note 9). Under the terms of that
agreement,  we sold an  aggregate of  14,450,858  shares of our common stock and
warrants to purchase an aggregate of 7,225,426  shares of our common stock.  The
common stock and warrants were sold as a unit,  with each  investor  receiving a
warrant to purchase one share of common stock,  at the exercise  price of $0.475
per share, for every two shares of common stock purchased by such investor.  The
purchase  price for each unit was  $0.346 per share of common  stock  purchased.
Included in the total  units sold were  450,867  shares of our common  stock and
warrants to purchase  225,433  shares of our common  stock issued to a financial
advisor  in lieu of  cash  commissions.  We also  issued  warrants  to  purchase
1,000,000  shares of common stock to an affiliate of the  financial  advisor for
services  performed  in  connection  with the private  placement.  Pursuant to a
related  registration  rights  agreement,   we  are  required  to  register  the
underlying shares related to these shares and warrants.

Stock Split and Conversion

On September 3, 2004, at the instruction of the administrative  committee of our
ESOP, a co-trustee of the ESOP elected to convert 1,350,000 shares of our Series
A Preferred Stock, which constitutes all of the issued and outstanding shares of
our preferred stock, into 4,253,567 shares of our common stock (see Note 10).

During the third quarter of 2005, we issued 1,000,000 shares of common stock for
the settlement of a $1,004,000 related party note payable (see Note 8).

During the fourth quarter of 2005, certain  stockholders  unilaterally  returned
5,867,000  shares of our  common  stock  held by them for no  consideration.  In
connection  with  the  return  of these  shares,  approximately  76,000  related
warrants were exercised for $36,000.  The  unexercised  warrants  related to the
returned shares were retained by the holders.

Dividends

In December 2001, our board of directors  approved a dividend of $1.00 per share
for all preferred  shareholders,  of which $96,000 was paid in 2001 and was used
to service the ESOP debt (see Note 10). In 2004, in connection  with our plan to
terminate  the ESOP,  we  reversed  our unpaid  dividends  of  $185,000  against
retained earnings (see Note 10).

Employee Stock Option Plans

Terms and  conditions  of our option  plans,  including  exercise  price and the
period in which options are exercisable,  generally are at the discretion of our
board of directors;  however,  no options are exercisable for more than 10 years
after the date of grant.

In February  2000,  our board of  directors  approved the 1999 Stock Option Plan
(the "1999  Plan") for  issuance of common  stock to eligible  participants.  In
February 2002, our  stockholders  approved the Mcglen Internet Group,  Inc. 2000
Stock Option Plan for issuance of our common stock to eligible participants (the
"2000 Plan"). On March 2004, our board of directors terminated the 1999 Plan and
effective May 2004 our board of directors  terminated the 2000 Plan. We will not
make any  further  grants  under  either  the 1999  Plan or the 2000  Plan.  Our
stockholders  adopted the Company's  2004 Stock  Incentive Plan in May 2004 (the
"2004  Plan").  Each of the 1999 Plan,  2000 Plan and 2004 Plan provides for the
granting of incentive  stock options and  non-qualified  stock options.  Options
under each of the plans generally expire 10 years after the date of grant.

No options were granted or cancelled during the quarter ended March 31, 2005.



<PAGE>


NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN

On December 1, 1999, we  established a leveraged  ESOP that covers all employees
who complete  1,000 or more hours of service in a Plan year.  To  establish  the
plan,  the  ESOP  borrowed   $10,000,000   from  Mr.  Teng,  then  our  majority
stockholder,  which we then used to purchase  all of our  outstanding  preferred
stock (a total of  1,350,000  shares) from Mr. Teng at the then  estimated  fair
value, $7.41 per share.

The preferred  stock is  convertible  into common stock at an exchange rate of 1
share of  preferred  stock to  3.12828  shares  of  common  stock,  (subject  to
adjustment  based on future stock  issuances),  has a liquidation  preference of
$1.00 per share, and has certain protective provisions which allow the preferred
shareholders  to vote on matters  that would  alter the  preferred  shareholders
rights,  privileges,  powers or restrictions from those currently granted to the
preferred  shareholders.  In  September  2004,  the  ESOP  converted  all of its
preferred stock to common stock (see Note 9).

We received no funds from the formation of the ESOP;  however,  we were required
to record the ESOP's  liability on our books as we had  guaranteed the ESOP debt
(see  below),  in  accordance  with the SOP  93-6,  "Employers'  Accounting  for
Employee Stock Ownership  Plans." Under SOP 93-6, we record an unearned employee
benefit expense related to the cost basis of unreleased shares (determined based
on the  portion  of the ESOP loan  obligation  not yet  repaid by the ESOP - see
below),  and, as such,  we record it as a  reduction  to  stockholders'  equity,
"Unearned ESOP shares."

We make  annual  contributions  to the ESOP  equal to a  minimum  of the  ESOP's
required  debt  service  less  dividends  received by the ESOP.  The ESOP shares
initially were pledged as collateral for its debt. As the debt is repaid, shares
are released from  collateral  and allocated to active  employees,  based on the
proportion  of debt  service  paid in the year.  As  shares  are  released  from
collateral,  we report compensation expense equal to the current market price of
the shares and the released  shares become  outstanding  for  earnings-per-share
computations. We recognized no compensation expense for the quarters ended March
31,  2005 and 2004.  In the fourth  quarter of 2004,  we  recognized  $16,000 of
non-cash  compensation  expense  related to the value of the  47,991  additional
shares of our common stock allocated to the ESOP participants as a result of the
DOL audit (see  below).  Dividends  on released  ESOP  shares are  recorded as a
reduction of retained earnings; dividends on unreleased ESOP shares are recorded
as a reduction of debt and accrued  interest when paid.  ESOP  interest  expense
related to the ESOP note was $0 for the quarters ended March 31, 2005 and 2004.

The ESOP note payable required monthly principal payments of $119,000 commencing
January 1, 2000 plus  interest at 8% for the first two years.  In January  2001,
the ESOP renegotiated its note with Mr. Teng, reducing the interest rate from 8%
to 6% and lowering the required  monthly  principal  payments  from  $119,000 to
$25,000.  The note's  maturity  date was also  extended  to  December  2009 from
January 2006.

On or about  December 16, 2002,  we were  informed  that the Pension and Welfare
Benefits Administration of the Department of Labor ("DOL") had selected our ESOP
for review.  The DOL raised issues regarding a transaction  between Mr. Teng and
the ESOP in  December  1999,  as well as other minor  questions.  As part of the
transaction between Mr. Teng and the ESOP in December 1999, Mr. Teng sold shares
of our common stock to the ESOP in connection with the ESOP's establishment. The
DOL indicated  that this  transaction  might have been a prohibited  transaction
because the  purchase  price of the shares was above their fair market  value at
the  time of the  transaction.  During  August  through  October  2004,  we made
numerous corrections related to the ESOP based on the DOL investigation,  one of
which was to  allocate  47,991  additional  shares of our  common  stock to ESOP
participants.   In  December  2004,  the  DOL  issued  a  final  report  on  its
investigation,  indicating it would take no further action against us, the ESOP,
the administrative committee, or Mr. Teng.

In December 2003, Mr. Teng agreed to release the ESOP from its obligations under
the $10.0 million  promissory note,  thereby  releasing us from our guarantee of
the ESOP  debt.  In  connection  with Mr.  Teng's  release  of the ESOP from its
obligations  under the promissory note, we eliminated the guarantee of ESOP loan
payable and ESOP interest payable balances against  additional  paid-in capital,
totaling  $9,114,000,  as this debt  release is  considered  a  contribution  of
capital to us by Mr. Teng. In addition, in 2004 we determined that the remaining
dividends payable to the preferred  stockholders would not be paid, resulting in
the accrued  dividend  balance of $185,000  being  eliminated  against  retained
earnings.



<PAGE>


NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN, continued

Since the ESOP was then under  investigation  by the DOL in December  2003,  Mr.
Teng was not able to foreclose on the unreleased  shares upon his release of our
obligation  under the $10.0 million  promissory note, as was his right under the
ESOP  agreement.  In  December  2003,  Mr.  Teng  notified  us that while he was
releasing us from our obligation  under the promissory  note, he was not waiving
any rights he may have to foreclosure  against the unreleased  shares.  Although
the DOL investigation has been completed, we have not yet released the shares to
the ESOP and Mr. Teng has not yet  exercised  any right he may have to foreclose
on the unreleased  shares.  If Mr. Teng is able to foreclose on the ESOP shares,
the value of the  unearned  ESOP shares will be  eliminated  against  additional
paid-in  capital,  which will reduce our additional  paid-in  capital balance by
approximately $6,207,000, with no net change to our stockholders' deficit.

Common shares held by the ESOP are as follows:
<TABLE>
<CAPTION>

                                                                                         (in thousands)
                                                                          ---------------------------------
                                                                              March 31,       December 31,
                                                                                2005             2004
<S>                                                                             <C>               <C>
                                                                          ---------------   ---------------
Allocated shares                                                                 1,613             1,613
Shares released for allocation                                                       -                 -
Unreleased (unearned) shares                                                     2,641             2,641
                                                                          ---------------   ---------------

Total ESOP shares                                                                4,254             4,254
                                                                          ===============   ===============


Fair value of unreleased (unearned) shares
(based on closing price of our stock)                                       $      607        $      924
                                                                          ===============   ===============

</TABLE>

In the event a terminated ESOP participant  desires to sell his or her shares of
our common stock, or for certain  employees who elect to diversify their account
balances,  we may be  required to purchase  the shares from the  participant  at
their fair market value.  During the quarters  ended March 31, 2005 and 2004, we
did not purchase any stock from ESOP participants nor did we have any obligation
to do so at any time during this period.

During  2003,  we  received  advances  from  the  ESOP  of  $210,000  that  were
non-interest bearing and due on demand. In 2004, we repaid these advances.

NOTE 11 - WARRANTS

In December  2003, we committed to issue  2,500,000  warrants at $0.50 per share
(exercisable  through  December  2008) to a  consultant  pursuant to a six-month
consulting  agreement.  As these shares were fully vested and  nonforfeitable at
the date of the  agreement  and we  determined  that no future  benefit would be
derived  from the  consulting  agreement  in 2004,  we measured the value of the
entire  warrant  issuance  at  December  31,  2003 and  recorded  such  value to
consulting  expenses in accordance  with 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."  The value was  determined  in
accordance  with the  Black-Scholes  formula  under SFAS No.  123,  and  totaled
$625,000.

On May  24,  2004,  in  connection  with  entering  into a  product  development
agreement  with M3  Designs,  Inc.,  we granted M3  Designs,  Inc.  warrants  to
purchase an aggregate of 60,000 shares of our common stock as consideration  for
their services.  Such warrants  provide for an exercise price of $0.50 per share
and expire five years after the date of the grant.  Warrants to purchase  15,000
shares  vested  on the date of the grant and the  remaining  warrants  vested in
three  increments  of  15,000  shares  each  on  the  date  certain  performance
milestones were achieved by M3 Designs.  As all warrants were earned in 2004, we
recorded  the  value  of  the  warrants   (determined  in  accordance  with  the
Black-Scholes  formula under SFAS No. 123) as a consulting expense of $29,000 in
the fourth quarter in 2004.

During the fourth quarter of 2005, approximately 76,000 warrants were exercised.
Also, in the fourth quarter of 2005, we issued 175,000 fully vested  warrants to
consultants valued at $21,000.



<PAGE>


NOTE 12 - SEGMENT INFORMATION

SFAS  No.  131   "Disclosure   about  Segments  of  an  Enterprise  and  Related
Information," requires companies to report financial and descriptive information
about its  reportable  operating  segments,  including  segment  profit or loss,
certain  specific  revenue and expense  items,  and segment  assets,  as well as
information about the revenues derived from products or services,  the countries
in which the companies earn revenues and holds assets, and major customers. SFAS
No.  131 also  requires  companies  that  have a single  reportable  segment  to
disclose  information about products and services,  information about geographic
areas, and information  about major customers.  SFAS No. 131 requires the use of
the  management  approach to  determine  the  information  to be  reported.  The
management  approach is based on the way management  organizes the enterprise to
assess  performance  and make  operating  decisions  regarding the allocation of
resources.  It is management's opinion that we have only one reportable segment,
and have no  concentration  of customers in one specific  geographic area within
the United States.

NOTE 13 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                                               Quarters Ended March 31,
                                                                          ---------------------------------
                                                                               2005             2004
                                                                          ---------------   ---------------
<S>                                                                             <C>              <C>

(In thousands)

Cash paid during quarter:

     Interest                                                               $       66        $       57

     Income taxes                                                           $        -        $        -
</TABLE>

NOTE 14 - COMMITMENTS AND CONTINGENCIES

We have made certain indemnities and guarantees,  under which we may be required
to make payments to a guaranteed or  indemnified  party,  in relation to certain
transactions. We indemnify our directors,  officers, employees and agents to the
maximum  extent  permitted  under  the  laws  of the  State  of  California.  In
connection with our facility leases, we have indemnified our lessors for certain
claims arising from the use of the facilities. In connection with certain of our
debt,  management and stock purchase  agreements,  we have indemnified  lenders,
buyers and others for certain claims arising from our breach of  representations
and warranties  contained in the corresponding  agreements.  The duration of the
guarantees  and  indemnities  varies,  and in many  cases is  indefinite.  These
guarantees  and  indemnities  do not provide for any  limitation  of the maximum
potential future payments we could be obligated to make.  Historically,  we have
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these  indemnities  and  guarantees  in the  accompanying
consolidated balance sheet.

At this  time,  we are not  involved  in any other  legal  proceedings  that our
management  currently  believes  would be  material to our  business,  financial
condition  or  results  of  operations.  We could be  forced  to incur  material
expenses with respect to these legal  proceedings,  and in the event there is an
outcome in any that is adverse to us, our financial position and prospects could
be harmed.



<PAGE>

NOTE 15 - SUBSEQUENT EVENTS

On April 1, 2005, we issued to Alloy Marketing and Promotions,  LLC ("Alloy") an
unsecured  subordinated  convertible  promissory note in the principal amount of
approximately  $600,000 in payment of services  provided to us by Alloy in 2004,
which was previously recorded in accounts payable.  The note matures upon demand
by Alloy and may be converted  into shares of our common stock at any time after
April 1, 2005 at a  conversion  price equal to 75% of fair  market  value of the
common stock,  defined as the lesser of (i) the average of the closing prices of
the common  stock for the five trading  days  immediately  prior to the first to
occur of (A) the date on which we include the  registration of the resale of the
common stock issuable upon  conversion of the note in a  registration  statement
filed with the  Securities  and  Exchange  Commission  and (B) any date on which
Alloy  delivers to us a notice of  conversion,  or (ii) the closing price of the
common stock for the trading day immediately prior to the first to occur of such
dates.  We may  prepay  the note at any time  without  penalty  or  premium.  In
connection with the subordinated  convertible promissory note, we entered into a
registration rights agreement with Alloy, pursuant to which we agreed to use our
commercially  reasonable  efforts to file with the SEC a registration  statement
for  offerings to be made on a continuous  basis  pursuant to Rule 415 under the
Securities Act of 1933, as amended,  with respect to the resale of the shares of
common stock  issuable upon the  conversion of the note. We are obligated to pay
Alloy a cash  fee,  as  liquidated  damages,  equal  to  1.50%  of the  original
principal  amount of the note for each  thirty day  period,  beginning  April 1,
2005, until the registration statement is declared effective. We would also have
to make similar  payments if the  registration  statement,  after it is declared
effective, ceases to be effective for more than twenty consecutive calendar days
or more than thirty days in the aggregate  during a year, or the common stock is
not listed or quoted or is  suspended  from  trading on any  trading  market for
three  consecutive  trading days, and such suspension shall not have been lifted
within thirty days or the common stock is not listed on another  trading market.
Through  December 31, 2005, we have accrued $81,000 as liquidated  damages under
this agreement.

On September  19, 2005,  we executed an agreement  with one investor  whereby we
received  $250,000 in  immediately  available  funds  through the  issuance of a
convertible  promissory note. The investor also committed an additional $250,000
in funds provided we achieve certain  milestones.  $325,000 was received on this
note prior to December  31,  2005,  and  $175,000  was  received  subsequent  to
December 31, 2005. The  convertible  promissory note bears interest at a rate of
7% per annum and has an initial  maturity date of September 19, 2006,  which may
be extended in the event of the subsequent  investment.  The note is convertible
at any time from the date of issuance into shares of our common stock at a price
per share equal to $0.25.  We will pay interest only payments until the maturity
date of the  convertible  note,  unless it is converted  or prepaid.  We have an
option to make one prepayment of the note, in whole or in part,  without penalty
at any time after six months of the date of issue. In the event that we elect to
prepay the convertible  note, the holder of the note may elect within 3 business
days to convert all or a portion of the note into shares of our common stock and
thus prevent prepayment of the convertible note. In connection with the issuance
of the note,  the investor was also issued  warrants to purchase an aggregate of
200,000 shares of our common stock.  The warrants are  immediately  exercisable,
have an exercise price of $0.25 per share and expire five years from the date of
issuance. We have also granted certain registration rights related to the shares
of its common stock  underlying the convertible  note and warrants issued to the
investor.  The value of these  warrants  have been  recorded as debt discount of
$64,000 and amortized to interest expense on the effective  interest method over
the life of the  promissory  note.  $16,000  of  amortization  expense  has been
recorded during 2005 for this debt discount.

On October 28, 2005, we issued a convertible  promissory  note to an investor in
exchange for $50,000 in immediately available funds. The convertible  promissory
note bears  interest at a rate of 7% per annum and has an initial  maturity date
of October 28, 2006. The convertible  promissory note is convertible at any time
into shares of our common stock at a conversion price of $0.25. We are obligated
to make  interest  only  payments  until the maturity  date or until the note is
converted or prepaid in full.  We have an option to make one  prepayment  of the
note,  in whole or in part,  without  penalty at any time  beginning  six months
after the date of the note.  In the event that we elect to prepay the note,  the
noteholder  may elect within three  business days to convert all or a portion of
the note into shares of our common stock and prevent  prepayment of the note. In
connection  with the issuance of the note, the investor was also issued warrants
to purchase an aggregate of 40,000  shares of our common  stock.  The warrant is
exercisable  at $0.25 per share,  is  exercisable  immediately  and expires five
years  from the date of  issuance.  We have also  granted  certain  registration
rights related to the shares of our common stock underlying the convertible note
and  warrants  issued to the  investor.  The value of these  warrants  have been
recorded as debt  discount of $16,000 and  amortized to interest  expense on the
effective  interest method over the life of the promissory  note.  Approximately
$3,000 of  amortization  expense  has been  recorded  during  2005 for this debt
discount.


<PAGE>


ITEM 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

     Reference in this  Quarterly  Report on Form 10-Q (this "Form 10-Q" or this
"Report") to "Digital," the  "Company,"  "we," "our," and "us" refers to Digital
Lifestyles  Group,   Inc.,  a  Delaware   corporation,   and  our  wholly  owned
subsidiaries.

FORWARD-LOOKING STATEMENTS

     This  Form  10-Q  contains  statements  that  constitute   "forward-looking
statements" within the meaning of Section 21E of the Securities  Exchange Act of
1934  and  Section  27A of the  Securities  Act of  1933.  The  words  "expect,"
"estimate,"  "anticipate,"  "predict,"  "believe"  and similar  expressions  and
variations thereof are intended to identify  forward-looking  statements.  These
statements  appear in a number of places in this filing and  include  statements
regarding the intent,  belief or current  expectations of Digital, our directors
or  officers  with  respect  to,  among other  things (a) trends  affecting  our
financial  condition  or results of  operation  (b) our ability to meet our debt
service  obligations,  (c) our ability to consummate a strategic  merger and (d)
our business and growth  strategies.  Our  stockholders are cautioned not to put
undue  reliance  on  these  forward-looking  statements.  These  forward-looking
statements  are not  guarantees  of future  performance  and  involve  risks and
uncertainties,  and actual results may differ materially from those projected in
this  Report,  for the  reasons,  among  others,  discussed  in the  Sections --
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  and "Risk  Factors."  Although  we believe  that the  expectations
reflected in our forward-looking statements are reasonable, actual results could
differ  materially  from  those  projected  or  assumed.  Our  future  financial
condition, as well as any forward-looking  statements, are subject to change and
to inherent risks and  uncertainties,  including those disclosed in this Report.
We undertake no obligation to publicly revise these  forward-looking  statements
to reflect events or circumstances that arise after the date hereof.

Executive Overview

Overview

     We were originally incorporated in May 1994. In December 1999, we completed
a reverse merger with McGlen Micro,  Inc., in which the  stockholders  of McGlen
Micro,  Inc.,  acquired  control of us, and changed our name to McGlen  Internet
Group, Inc. In March 2002, we merged with Lan Plus  Corporation,  or Lan Plus, a
manufacturer of branded turnkey computer  products and services.  In the merger,
the  stockholders  of Lan Plus  acquired a majority  of our  outstanding  common
stock. Following the merger we changed our name from McGlen Internet Group, Inc.
to Northgate  Innovations,  Inc. Under our Northgate(R) brand name we developed,
manufactured,  marketed,  and sold a wide  range of  desktop  systems,  notebook
computers,  workstations and network  servers,  as well as offering a variety of
hardware components and peripherals to complement our desktop systems,  notebook
computers, and network.

     In December 2003, an investor group acquired a majority of our  outstanding
common stock. In early 2004 this investor group brought in a new management team
and  implemented a new business  strategy.  In connection with this new business
strategy, in June 2004, we changed our name from Northgate Innovations,  Inc. to
Digital  Lifestyles Group,  Inc.  Beginning in 2004, we discontinued the sale of
our old  Northgate(R)  brand  products  to focus  our  resources  solely  on the
development,  marketing and sale of a new product line, branded hip-e(TM), which
was comprised of desktop systems,  notebook  computers and peripherals  designed
and targeted to the teen market.

     After the  discontinuation of the production of our only revenue generating
production line we depended on our ability secure outside  financing to fund the
development,  marketing and sale our hip-e(TM) brand products.  However, we were
unable to secure  financing  in  amounts  adequate  to fund the  production  our
hip-e(TM) brand products in quantities  sufficient to meet customer orders. As a
result of our inability to fill customer orders on a timely basis, or at all, we
were unable to establish a market for our hip-e(TM) brand products.  Our failure
to  generate  demand  for our new  hip-e(TM)  brand  products  left us unable to
generate  revenues  sufficient to remain  current in our payment  obligations to
certain of our creditors over the course of 2004 and the first quarter of 2005.

     In April 2005, we received  notice from Microsoft  Corporation  that it had
terminated our license to use its proprietary  Windows(R)  operating system, for
failure to timely make related royalty payments. Due to the loss of the license,
we were unable to ship our  products,  the  majority  of which used  Microsoft's
proprietary  Windows(R)  operating  system  and as a result  we were  unable  to
fulfill any orders for our hip-e(TM) brand products.

     As we lacked  sufficient funds required to renew our license with Microsoft
and were unable to distribute or sell our products,  our management team decided
to immediately cease all ongoing  operations,  other than liquidating assets for
the benefit of our secured creditor, Laurus Master Fund, Ltd., or Laurus.

     In  June  2005,   four  members  of  our  board  of   directors   resigned.
Additionally,  the  individuals  serving as our chief executive  officer,  chief
financial officer,  vice president,  general counsel and secretary resigned from
their positions.

     On August 10,  2005,  we hired  Andy Teng,  our  original  founder,  as its
chairman of the board of Directors,  chief executive officer and chief financial
officer.  On August 23, 2005,  we announced the  appointment  of Leo Chen to its
board of directors.

     As of  December  31,  2005,  we have no business  operations  other than to
assist our secured creditor,  Laurus, liquidate its collateral.  As of August 7,
2006,  we  have  approximately   $40,000  of  cash  and  as  of  June  30,  2006
approximately  $2.1  million of secured debt and  approximately  $7.6 million in
unsecured  debt,  virtually  all of which is past due.  During the  fiscal  year
ending December 31, 2006, we expect to incur  operating  costs of  approximately
$800,000,  primarily  related to operating costs, such as rent for office space,
utilities, employee compensation,  costs of maintaining the business as a public
entity,  professional  expenses (including legal and accounting fees) related to
negotiating a business  combination  and bringing us current in our filings with
the Securities  Exchange  Commission,  and  insurance.  We estimate our existing
capital  resources are  sufficient to meet our operating and capital needs until
August  31,  2006.  However,  as we have no  current  sales or other  sources of
revenue,  we depend upon our ability to arrange  for  additional  equity or debt
financing to meet our liquidity  requirements beyond August 31, 2006. Due to our
lack of operations and inability to generate sales,  severe shortage of capital,
significant  debt,  and our default under existing  credit and loan  agreements,
described  under the section  titled "Recent Sales of  Unregistered  Securities"
above,  as  well  as the  other  factors  described  under  the  section  titled
"Cautionary Statements and Risk Factors," we may not be able to arrange for debt
or equity financing from third parties on favorable terms, or at all.

     On September 9, 2005,  we announced  that we had entered into a non-binding
letter  of  intent  to  enter  into a  merger  agreement  with  Protron  Digital
Corporation,   or  Protron,  a  consumer  electronics  company  focused  on  the
manufacture and sale of home entertainment systems.  Protron is a privately held
company, of which one of its principal owners is Leo Chen, a member of our board
of directors.

     On March 8, 2006,  we  entered  into a  definitive  merger  agreement  with
Protron,  Leo  Chen,  Alex  Chung  and  our  wholly  owned  subsidiary,  Protron
Acquisition,   Inc.,  a  Delaware   corporation,   pursuant  to  which   Protron
Acquisition,  Inc. will be merged with and into Protron, with Protron continuing
as our wholly owned  subsidiary.  At the effective  time of the merger,  we will
issue  74,353,942  shares of our common  stock to the  stockholders  of Protron,
representing 70% of our issued and outstanding  shares.  Upon the closing of the
merger,  the  stockholders  of Protron  will acquire  voting  control of us. The
consummation  of  the  merger  is  subject  to  customary  closing   conditions,
including, among others: (i) the approval of the merger agreement and the merger
by our  stockholders;  (ii) our having  filed all  reports  required to be filed
pursuant  to the  Exchange  Act;  (iii)  receipt  of all  applicable  regulatory
approvals; (iv) the absence of any government action prohibiting consummation of
the merger;  and (v) neither we nor Protron having suffered any material adverse
effect. The terms of the merger agreement require that all conditions to closing
be satisfied and the merger completed by December 31, 2006. A copy of the merger
agreement  has been filed as  Exhibit  10.1 to our  Current  Report on Form 8-K,
filed with the SEC on March 13, 2006.

Basis of Presentation, Critical Accounting Policies and Estimates

Management's  discussion  and  analysis of  financial  condition  and results of
operations is based upon our financial  statements,  which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The  preparation  of these  financial  statements  requires us to make
estimates and judgments that affect the reported amounts of assets,  liabilities
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going  basis,  we evaluate  our  estimates,  including  those  related to our
revenue  recognition,  deferred  taxes,  impairment  of  long-lived  assets  and
inventory.  We base our estimates on historical  experience and on various other
assumptions that we believe are reasonable under the circumstances,  the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.

Basis of Accounting

     In  April  2005,  we  ceased  all  ongoing  operations,  except  for  those
operations  related to helping our secured  creditor,  Laurus to  liquidate  its
collateral. Our management currently has no plan to liquidate and distribute our
remaining  assets  to  our  stockholders.  Based  on  management's  plan,  these
financial  statements  have been prepared under the "going  concern"  assumption
which  presumes that we will continue our existence for the  foreseeable  future
and are not subject to imminent liquidation.

     Revenue Recognition.  Historically, we derived revenue primarily from sales
of our personal computers,  and to a lesser extent,  from software,  peripherals
and accessories. Generally, we recognized revenue when persuasive evidence of an
arrangement  existed,  delivery had occurred,  the fee was fixed or determinable
and  collection was probable.  We have provided for estimated  costs of doubtful
accounts  and  product  warranties  as a  reduction  in  revenue  at the time we
recognized  revenue.  Estimates of costs of doubtful accounts are based upon our
historical collection experience. If the historical data used to calculate these
estimates does not properly  reflect future returns,  reported  revenue could be
overstated.

     Vendor Rebates.  Historically,  we earned rebates from our vendors that are
based on various  quantitative  contract  terms.  Amounts we expected to receive
from vendors relating to the purchase of merchandise inventories were recognized
as a reduction of cost of goods sold at the time the  merchandise  was sold.  If
the amounts of rebates we actually  receive are less than we expected,  our cost
of sales will be understated for the period covered.  We record rebates received
that represent a reimbursement of incremental  costs, such as advertising,  as a
reduction  to the  related  expense in the period  that the  related  expense is
incurred.  We have several  controls in place that we believe allow us to ensure
that these amounts are recorded in accordance  with the terms of the  applicable
contracts.  Should the vendors  paying the  rebates  reach  different  judgments
regarding  the  terms of these  contracts,  they  may seek to  recover  all or a
portion of the rebates from us.

     Deferred  Taxes.  As  part  of  the  process  of  preparing  our  financial
statements,  we are required to estimate our income taxes. This process involves
estimating  our actual current tax exposure  together with  assessing  temporary
differences  resulting from differing  treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included  within our balance sheet.  We must then assess the likelihood that
our deferred tax assets will be recovered  from future taxable income and to the
extent we believe  that  recovery is not likely,  we must  establish a valuation
allowance.  To the extent we establish a valuation  allowance  or increase  this
allowance in a period,  we must include an expense  within the tax  provision in
our statement of operations.

     Significant   judgment   involving   multiple   variables  is  required  in
determining our deferred tax assets and liabilities and any valuation  allowance
recorded  against  our net  deferred  tax assets.  In  assessing  the  potential
realization of deferred tax assets,  we consider  whether it is more likely than
not that some portion or all of the  deferred  tax assets will be realized.  The
ultimate  realization of deferred tax assets is dependent upon achieving  future
taxable  income  during  the  period  in  which  our  deferred  tax  assets  are
recoverable.  If our estimates  regarding our future  taxable income prove to be
incorrect, we may have to write down the value of the deferred tax assets.

     Impairment  of Long-Lived  Assets.  We evaluate the  recoverability  of our
long-lived  assets and review  these  assets for  recoverability  when events or
circumstances  indicate a potential  impairment.  Factors we consider  important
that could trigger an impairment review include the following:

o  significant  underperformance  relative to historical or projected  operating
   results;

o  significant  changes in the manner or use of the assets or the  strategy  for
   our overall business; and

o  significant negative industry or economic trends.

     When we  determine  that the  carrying  value of  these  assets  may not be
recoverable  based on the  existence of one or more of the above  indicators  of
impairment,  we measure any impairment by estimating the undiscounted cash flows
to be generated from the use and ultimate disposition of these assets. We record
assets to be  disposed  of at the lower of the  carrying  amount or fair  market
value less anticipated costs of sales.

     Impairment  of Goodwill  and Other  Intangible  Assets.  As a result of our
adoption of Statement of Financial  Accounting  Standards No. 142, "Goodwill and
Other Intangible  Assets",  we now annually review goodwill and other intangible
assets that have  indefinite  lives for impairment and whether events or changes
in circumstances  indicate the carrying value of these assets might exceed their
current fair values.  These reviews require us to estimate the fair value of our
identified  reporting  units and  compare  those  estimates  against the related
carrying values.

     Inventory.  We  record  inventories  at the  lower  of cost or  market.  In
assessing  the ultimate  realization  of  inventories,  we make  judgments as to
future demand  requirements and compare that with current or committed inventory
levels. Any write-downs in inventory result in a permanent reduction of the cost
basis of the related inventory.

Results of Operations

Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004.

     Net  Sales.  Our net sales  decreased  $18.1  million,  or 94.1%,  to $1.21
million for the quarter ended March 31, 2005 from $19.35 million for the quarter
ended March 31,  2004.  The decrease in net  revenues  was  attributable  to our
decision in the second  half of 2004 to  discontinue  sales of our  Northgate(R)
brand of products to focus on the sale of our new hip-e(TM)  brand product line,
and our inability to generate  customer  demand for our hip-e(TM)  brand product
line.

     Gross Profit (Loss).  We had a gross profit of $55,000 for the three months
ended March 31, 2005.  This  represented a decrease of $1.89 million,  or 77.5%,
compared to a gross profit of $2.44 million for the  comparable  period in 2004.
The decrease in net revenues was attributable to our decision in the second half
of 2004 to discontinue  sales of our Northgate(R)  brand of products to focus on
the sale of our new  hip-e(TM)  brand product line and our inability to generate
customer demand for our hip-e(TM) brand product line.

     Total  Operating  Expenses.  Our total operating  expenses  decreased $1.10
million,  or 48.5%,  to $1.17  million for the quarter ended March 31, 2005 from
$2.27  million  for  the  quarter  ended  March  31,  2004.   The  decrease  was
attributable to our decision in the second half of 2004 to discontinue  sales of
our  Northgate(R)  brand  of  products  and a  delay  in the  launch  of our new
hip-e(TM) brand product line.

     Other Income (Expenses). Our other non-operating expenses decreased $60,000
to $80,000 for the quarter ended March 31, 2005 from $140,000 for the comparable
period in 2004.

     Net Loss.  We incurred a net loss of $1.51  million  for the quarter  ended
March 31, 2005. This represented an increase of $1.81 million, compared to a net
income of $29,000 for the quarter ended March 31, 2004.

Liquidity and Capital Resources

     Prior to 2004, we financed our operations  and met our capital  expenditure
requirements primarily from cash provided by operations, borrowings from private
individuals,  and borrowings from financial institutions.  As of March 31, 2005,
we  had  approximately  $117,000  in  cash  and  cash  equivalents  compared  to
approximately  $466,000 at December 31, 2004 and $814,000 at March 31, 2004.  As
of August  7,  2006,  our  principal  sources  of  liquidity  were cash and cash
equivalents of approximately $40,000.

     We estimate that our existing capital  resources are sufficient to meet our
operating and capital needs until August 31, 2006.  However,  we have no current
sales or other  sources of  revenue,  are unable to service  our debt,  and will
depend  upon  additional  debt  or  equity  financings  to  meet  our  liquidity
requirements  beyond  August 31, 2006.  Our limited  financial  resources  could
materially  affect  our  ability  to  consummate  a  merger  or  other  business
combination,  on acceptable  terms, if at all. Due to our  insolvency,  stemming
from our lack of operations,  severe shortage of capital,  significant debt, and
our default  under  existing  credit and loan  agreements,  described  under the
section titled "Debt Obligations"  below, as well as the other factors described
under the section titled "Cautionary Statements and Risk Factors," we may not be
able to arrange for debt or equity  financing  from third  parties on  favorable
terms,  or at all. If we are unable to pay our debt as it becomes due we will be
forced to consider steps that would protect our assets against our creditors.

Debt Obligations

     At August 7, 2006, our cash  obligations  for short-term and long-term debt
consisted of:

<TABLE>
<CAPTION>
           <S>                                                      <C>

         Convertible note payable - others                   $    650,000
         Convertible note payable - Laurus                      2,019,000
         Convertible note payable - Alloy                         600,000
                                                         -----------------
         Total debt                                         $   3,269,000
                                                         =================
</TABLE>

     On November  30,  2004,  we closed a financing  transaction  with Laurus to
obtain a $7.5 million credit facility. The financing was completed pursuant to a
security  agreement  with Laurus,  pursuant to which we issued to Laurus a $2.75
million secured  convertible  minimum  borrowing note,  which is structured as a
term note, and a $4.75 million  secured  convertible  revolving  note,  which is
structured as a revolving balance note. As of December 31, 2004, we had borrowed
approximately $3.3 million under this facility,  net of issuing costs. A portion
of these  funds  were  used to repay  our  existing  short-term  financing.  Our
obligations to Laurus under the credit facility are secured by substantially all
of our assets  (other  than  intellectual  property),  including  our  ownership
interests in our operating  subsidiaries.  In May 2005, following the occurrence
of a number of events of default under the credit facility,  Laurus  accelerated
our payment obligations and ultimately commenced foreclosure proceedings against
all of our assets for failure to make payment.  Following the liquidation of all
of our accounts  receivable,  inventories  and equipment we presently owe Laurus
approximately  $2.1 million under this credit facility.  On December 8, 2005, we
entered into a letter  agreement with Laurus whereby we agreed to a payment plan
for the  outstanding  secured debt we owe to Laurus.  Under our  agreement  with
Laurus we agreed to make interest only payments to them beginning  retroactively
on December  1, 2005,  until the  earlier of the  consummation  of a merger with
Protron or February 20, 2006. On February 15, 2006,  Laurus agreed to extend the
date  that  interest  only  payments  would be made  until  March 1,  2006.  Our
agreement  with Laurus  provides  that on the date we  consummate  a merger with
Protron, in full satisfaction of our debt to Laurus, we will pay Laurus $950,000
in cash and issue to them that  number of  shares of our  common  stock  that is
equal to $950,000,  based upon a conversion  price of the 30 day average  volume
weighted average price  calculated as of the date prior to the merger.  On March
1, 2006,  Laurus agreed to  indefinitely  extend our right to make interest only
payments to them, subject to our assurances that we will use our best efforts to
consummate a merger with Protron as soon as is practicable.

     Effective  January 1, 2005, we negotiated an extension of the maturity date
of a promissory note with an outstanding principal amount of $1.3 million, which
we originally  issued in June 1999 with an original  maturity date of January 1,
2005.  Under the terms of the amended and restated  note,  we paid the holder of
the note $134,750 on January 13, 2005. The  outstanding  obligations  under this
note  were  settled  in  September  2005  for  $70,000,  resulting  in a gain on
extinguishment of debt of approximately $1.1 million in 2005.

     On April 1,  2005,  we  issued to Alloy  Marketing  and  Promotions,  LLC a
subordinated   convertible   promissory   note  in  the   principal   amount  of
approximately  $600,000.  The note was issued in payment of a similar amount due
to Alloy for services provided to us by Alloy in 2004. The note is unsecured and
matures  upon  demand by Alloy.  Alloy may  convert  the note into shares of our
common stock at any time at a conversion price equal to 75% of fair market value
of the common  stock,  defined as the lesser of (i) the  average of the  closing
prices of the common stock for the five trading  days  immediately  prior to the
first to occur of (A) the date on  which  we  include  the  registration  of the
resale  of  the  common  stock  issuable  upon  conversion  of  the  note  in  a
registration  statement  filed  with  the SEC and (B) any  date on  which  Alloy
delivers to us a notice of  conversion,  or (ii) the closing price of the common
stock for the trading day immediately prior to the first to occur of such dates.
We may prepay the note at any time  without  penalty or premium.  In  connection
with the subordinated convertible promissory note we entered into a registration
rights agreement with Alloy, pursuant to which we agreed to use our commercially
reasonable  efforts to file with the SEC a registration  statement for offerings
to be made on a continuous  basis  pursuant to Rule 415 under the Securities Act
of 1933,  as amended,  with  respect to the resale of the shares of common stock
issuable  upon the  conversion of the note. We are obligated to pay Alloy a cash
fee, as liquidated  damages,  equal to 1.50% of the original principal amount of
the note for each  thirty  day  period,  beginning  April  1,  2005,  until  the
registration statement is declared effective. We would also have to make similar
payments if the registration statement,  after it is declared effective,  ceases
to be  effective  for more than twenty  consecutive  calendar  days or more than
thirty days in the aggregate during a year, or the common stock is not listed or
quoted or is suspended from trading on any trading market for three  consecutive
trading days, and such suspension  shall not have been lifted within thirty days
or the common stock is not listed on another trading market.

     On September 22, 2005, Mr. Teng agreed to convert the outstanding debt owed
to him by us into  shares of our  common  stock at a price of $1.00  per  share,
substantially  above  market  price at the time.  Mr. Teng was issued  1,000,000
shares of our common stock in exchange for the extinguishment of all outstanding
debt owed to him by us and a general  release of any and all claims  held by him
in connection with these debts.

     On September 20, 2005, we received $250,000 in immediately available funds,
in exchange for the issuance of a convertible  promissory  note,  issued to L.E.
Smith. The convertible  promissory note is convertible into shares of our common
stock at a conversion  price of $0.25.  The  convertible  promissory note issued
bears  interest  at a rate of 7% per annum and has an initial  maturity  date of
September 19, 2002.  We will pay interest only payments  until the maturity date
of the convertible note, unless it is converted or prepaid. We have an option to
make one  prepayment  of the note, in whole or in part,  without  penalty at any
time six months after the date of issuance. In the event that we elect to prepay
the convertible  note, Mr. Smith may elect within three business days to convert
all or a portion of the note into common  stock and thus prevent  prepayment  of
the convertible  note. We also issued a warrant to purchase up to 200,000 shares
of our  common  stock.  The  warrant  is  exercisable  at $0.25  per  share,  is
exercisable immediately and expires five years from the date of issuance.

     On October 28,  2005,  issued a  convertible  promissory  note to Robert H.
Wood,  Jr.  in  exchange  for  $50,000  in  immediately   available  funds.  The
convertible  promissory note bears interest at a rate of 7% per annum and has an
initial  maturity date of October 28, 2006. The  convertible  promissory note is
convertible at any time into shares of our common stock at a conversion price of
$0.25.  We our obligated to make interest only payments  until the maturity date
or until the note is converted or prepaid in full. We have an option to make one
prepayment  of the  note,  in  whole  or in part,  without  penalty  at any time
beginning  six months after the date of the note.  In the event that we elect to
prepay the note, Mr. Wood may elect within three business days to convert all or
a portion of the note into shares of our common stock and prevent  prepayment of
the note. We also issued a warrant to purchase up to 40,000 shares of our common
stock. The warrant is exercisable at $0.25 per share, is exercisable immediately
and expires five years from the date of issuance.

     In January 2006, we issued 80,000 options to two  consultants for services.
In March 2006, we issued  50,000  options to a consultant  for services.  We are
committed to issue Mr. Teng 300,000  additional  options  through May 2006 under
his employment agreement.

     In early 2006,  $175,000 was received  from a creditor  under a convertible
note payable  agreement.  The note is due in September 2006 and accrues interest
at the rate of 7% per annum.

     In addition,  in 2006 we entered into a Merger  Agreement with Protron (see
Note 1), and modified our Payment Plan with Laurus (see Note 7)


                                  RISK FACTORS

     Several of the matters  discussed  in this Report  contain  forward-looking
statements  that involve risks and  uncertainties.  Factors  associated with the
forward-looking  statements that could cause actual results to differ from those
projected or forecasted in this Report are included in the statements  below. In
addition to other  information  contained in this Report,  you should  carefully
consider the following  cautionary  statements  and risk factors.  The risks and
uncertainties  described below are not the only risks and uncertainties we face.
Additional  risks  and  uncertainties  not  presently  known  to us or  that  we
currently deem immaterial also may impair our business operations. If any of the
following risks actually occur, our business,  financial condition,  and results
of operations could suffer. In that event, the trading price of our common stock
could  decline,  and you may lose all or part of your  investment  in our common
stock. The risks discussed below also include forward-looking statements and our
actual  results  may  differ   substantially   from  those  discussed  in  these
forward-looking statements.

We  currently  have no  business  operations  or revenue and will be required to
raise additional debt or equity financing to execute our business plan.

     In April 2005 we discontinued all business operations, other than assisting
our secured  creditor to liquidate its collateral and we currently have no sales
or other  sources of revenues to generate  the cash flows to meet our  operating
and capital  needs,  which we expect to be  $800,000  for the fiscal year ending
December 31, 2006. As of August 7, 2006, our principal sources of liquidity were
cash and cash  equivalents  of  approximately  $40,000 and we have no  committed
sources  of  funding.  Our  current  forecast  projects  that our  current  cash
resources will only be sufficient to fund our operations  until August 31, 2006.
If we do not  raise  additional  debt or  equity  financing  we may be forced to
liquidate our remaining assets which are insufficient to meet our obligations to
our creditors.

Our lack of financial  resources and significant  indebtedness  could materially
affect  our  ability  to  consummate  a  merger  or  other  strategic   business
combinations.

     We currently  have no sales or other  sources of revenue.  Unless we secure
additional  financing,  we may not be able  to  consummate  a  merger  or  other
business combination before our existing sources of liquidity are exhausted,  in
which case we may be forced to liquidate our remaining  assets which are to meet
our  obligations  to  our  creditors.  We  have  and  will  continue  to  have a
significant amount of indebtedness and other  obligations.  As of June 30, 2006,
we had approximately $2.1 million of secured debt and approximately $7.6 million
of  unsecured  debt.  Due to our  lack  of  revenue  generating  operations  and
significant  indebtedness,  there can be no assurance that additional  financing
will be available on acceptable terms to us, or at all.

Consummation of the Protron merger will result in change in our voting control.

     At the effective time of the merger, we will issue 74,353,942 shares of our
common stock to the stockholders of Protron,  representing 70% of our issued and
outstanding  shares. As a result the stockholders of Protron will acquire voting
control  of us and  will be able to  control  the  composition  of our  board of
directors and to control all other decisions that may materially affect us.

We have not timely filed  quarterly or annual  reports with the  Securities  and
Exchange Commission since November 2004.

     The Company has not timely filed its quarterly or annual  reports  required
to be filed with the SEC since November 2004,  which limits the market liquidity
of our common stock and the ability of our  stockholders  to sell our securities
in the secondary  market.  The Company filed its annual reports on Form 10-K for
the years ended  December 31, 2004 and 2005, on April 7, 2006 and June 21, 2006,
respectively,  and is currently taking action to become current in its reporting
obligations but it cannot guarantee that it will do so. If the Company continues
to  remain   delinquent  in  its  filing   obligations  it  may  be  subject  to
disciplinarian  action by the SEC and may be prevented  from trading on the Pink
Sheets, LLC.

     Our  failure to remain  current  in our  reporting  requirements  under the
Exchange Act prevents us from  registering  additional  securities by means of a
S-3 registration  statement and we will remain ineligible to use this form for a
least one year  after we  become  current  in our  reporting  obligations.  This
increases  the  difficulty,  time  and  expense  for us to  register  additional
securities and reduces our ability to raise  additional  capital  through public
sales of our securities.

     Additionally, our having filed all reports required to be filed pursuant to
the Exchange Act, is a condition to the consummation of the merger with Protron.
Our failure to file all our public reports by December 31, 2006 will prevent the
merger from closing.

We have material  weaknesses in our controls over  financial  reporting that may
prevent us from being able to accurately report our financial results or prevent
fraud, which could harm our business and operating results.

     Effective  internal  controls are necessary for us to provide  reliable and
accurate  financial reports and prevent fraud. If we cannot provide reliable and
accurate financial reports and prevent fraud, our business and operating results
could be harmed.  In our  reports on Form 10-Q for the  quarter  ended March 31,
2004,  June 30,  2004 and  September  30,  2004 and March 31,  2005,  and in our
reports  on Form 10-K for the  years  ending  December  31,  2003 and  2004,  we
reported  our  disclosure  controls  and  procedures  were not  effective in all
material respects as of such periods,  and had not been effective as of December
31,  2003  and  December  31,  2004.  We  continue  to  experience   significant
deficiencies and material  weaknesses in our disclosure controls and procedures,
however, we believe that the measures we have implemented in connection with the
preparation  of this Report,  and which are  discussed in Item 4 - "Controls and
Procedures,"  have been effective to ensure that our financial  statements,  and
other  financial  information  included  in this  Report,  have  been  recorded,
processed, summarized and reported correctly.

     We  cannot  be  certain  the  steps we have  taken in  connection  with the
preparation of our past periodic  reports (as discussed  therein) or this Report
and any steps  that we may take in  connection  with the  preparation  of future
periodic  reports have been, or will be, effective in identifying and correcting
all weaknesses in our disclosure controls and procedures. As a result, our past,
current and future periodic reports may contain material errors.

     Remedying  the  material  weaknesses  that  have been  identified,  and any
additional deficiencies, significant deficiencies or material weaknesses that we
may identify in the future,  could require us to incur significant costs, expend
significant  time and management  resources or make other changes.  Any delay or
failure  to design and  implement  new or  improved  controls,  or  difficulties
encountered  in their  implementation  or  operation,  could harm our ability to
consummate  a  business  combination,  cause  us to fail to meet  our  financial
reporting  obligations,  or  prevent us from  providing  reliable  and  accurate
financial  reports or avoiding or detecting  fraud.  Disclosure  of  significant
deficiencies or material  weaknesses or our failure to remediate any significant
deficiencies  or material  weaknesses in a timely fashion could cause  investors
and  financing  institutions  to  lose  confidence  in  our  reported  financial
information, which could have a negative effect on our ability to access capital
markets in the future.

We face strong competition for a merger partner.

     In view of our limited financial resources and personnel,  the fact that we
are not current in our public  filings with the SEC, and the fact that we have a
large  amount of debt and all of our assets are  pledged  as  collateral  to our
existing  lenders,  we  will be at a  significant  competitive  disadvantage  in
identifying  possible  business  opportunities  and  successfully  completing  a
business combination.  Additionally,  many of the companies we will be competing
with have significantly  greater experience,  financial and personnel resources,
and managerial and technical capabilities.

We and our  stockholders  may suffer negative tax treatment as the result of any
business combination.

     We will endeavor to minimize any negative tax consequences in any merger we
may undertake. While we expect to undertake any merger so as to minimize federal
and state  tax  consequences  to both us and the  "target"  company,  we can not
assure you that a business combination will meet the statutory requirements of a
reorganization or that the parties will obtain the intended  tax-free  treatment
upon a transfer of stock or assets. A nonqualifying  reorganization could result
in the  imposition  of both  federal and state taxes which may have  substantial
adverse effect on us.

We may incur  additional  debt in  connection  with our  pursuit  of a  business
combination.

     There are currently no limitations  relating to our ability to borrow funds
and we may incur  additional  debt in our  pursuit  of  consummating  a business
combination.  We can not  assure you that any debt  financing,  if  required  or
otherwise  sought,  will  be  available  on  terms  deemed  to  be  commercially
acceptable and in our best interests. The amount and nature of any borrowings by
us will depend on numerous  considerations,  including our capital requirements,
our  perceived   ability  to  meet  debt  service  on  those   borrowings,   and
then-prevailing conditions in the financial markets, as well as general economic
conditions. Additionally, to the extent that debt financing ultimately proves to
be  available,  any  borrowings  may subject us to various  risks  traditionally
associated  with  incurring  indebtedness,  including the risks of interest rate
fluctuations  and  insufficient   cash  flow  to  pay  principal  and  interest.
Furthermore,  any entity with which we may combine may already  have  previously
incurred debt financing and, therefore, the risks inherent thereto, as discussed
above.

An  investment  in our  common  stock may be less  attractive  because it is not
traded on a recognized public market.

     In April 2001,  our common stock was  de-listed  from trading on the Nasdaq
SmallCap Market. In May 2005, our common stock was de-listed from trading on the
Over-the-Counter  Bulletin Board, and currently trades on the Pink Sheets,  LLC.
This  is  viewed  by  most  investors  as a less  desirable,  and  less  liquid,
marketplace.  As a result,  an investor may find it more  difficult to purchase,
dispose of and obtain accurate quotations as to the value of our common stock.

     In addition, since the trading price of our common stock is less than $5.00
per share,  trading in our common stock is also subject to the  requirements  of
Rule 15g-9 of the  Exchange  Act.  Our common  stock is also  considered a penny
stock under the  Securities  Enforcement  Remedies and Penny Stock Reform Act of
1990, which defines a penny stock,  generally, as any equity security not traded
on an exchange or quoted on the Nasdaq  SmallCap  Market that has a market price
of less than $5.00 per share. Under Rule 15g-9, brokers who recommend our common
stock to persons who are not established customers and accredited investors,  as
defined in the Exchange Act, must satisfy  special sales practice  requirements,
including requirements that they:

o  make an individualized  written suitability  determination for the purchaser;
   and

o  receive the purchaser's written consent prior to the transaction.

     The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also
requires additional  disclosures in connection with any trades involving a penny
stock,  including  the  delivery,  prior to any penny  stock  transaction,  of a
disclosure  schedule  explaining the penny stock market and the risks associated
with that market.  Such  requirements may severely limit the market liquidity of
our common stock and the ability of our stockholders to sell their securities in
the  secondary  market.  For all of these  reasons,  an investment in our equity
securities may not be attractive.

Our stock price is volatile, which could result in a loss of your investment.

     The market  price of our common stock has been and is likely to continue to
be highly  volatile.  Factors that may have a  significant  effect on the market
price of our common stock include the following:

o  additions or departures of key personnel;

o  sales of capital stock in the future;

o  stock liquidity or cash flow constraints;

o  announcements related to strategic transactions; and

o  other factors and events beyond our control.

     In addition, the stock market in general has experienced extreme volatility
that  often  has been  unrelated  to the  operating  performance  of  particular
companies. These broad market and industry fluctuations may adversely affect the
trading  price  of  our  common  stock,   regardless  of  our  actual  operating
performance.

     As a result of this  potential  stock price  volatility,  investors  may be
unable to sell their  shares of our  common  stock at or above the cost of their
purchase prices. In addition,  companies that have experienced volatility in the
market  price of their  stock have been the object of  securities  class  action
litigation.  If we were the subject of securities class action litigation,  this
could result in substantial costs, a diversion of our management's attention and
resources and harm to our business and financial condition.

Future sales of currently  outstanding  shares could adversely  affect our stock
price.

     The market  price of our common  stock could drop as a result of sales of a
large number of shares in the market or in response to the perception that these
sales could occur.  In addition  these sales might make it more difficult for us
to sell equity or  equity-related  securities  in the future at a time and price
that we deem appropriate.  We have 32,865,975 shares of common stock outstanding
as of August 1,  2006.  In  addition,  as of August 1, 2006,  we had  18,356,955
shares of our common stock reserved for issuance under  warrants,  stock options
and convertible notes.

We do not have sufficient authorized shares of our common stock

     We have only 50,000,000 shares of common stock authorized for issuance.  As
of  August  1,  2006,  we had  32,865,975  shares of  common  stock  issued  and
outstanding and approximately 27,976,000 shares of our common stock are issuable
upon  the  exercise  of  warrants  and  options  or the  conversion  of  certain
convertible promissory notes. The number of shares of common stock issuable upon
the exercise of warrants and options or the  conversion  of certain  convertible
promissory notes  fluctuates  depending upon the current trading price of common
stock. In order to provide us the  flexibility to raise  additional  equity,  to
consummate the proposed  merger with Protron or even to have  sufficient  shares
for our existing financial instruments, we will need to amend our certificate of
incorporation to increase the authorized  number of shares,  which would require
the approval of our existing stockholders. We are uncertain that we could obtain
this approval based on the dilutive effect of the issuance of additional  shares
of our common stock.  Any failure to obtain this approval could adversely affect
us and the market for our common stock.

     We do not intend to pay  dividends on our common  stock,  and therefore our
stockholders will be able to recover their investment in our common stock, if at
all, only by selling the shares of our stock that they hold.

     Some investors  favor companies that pay dividends on common stock. We have
never declared or paid any cash dividends on our common stock. We currently have
no  operations  and we intend to retain any future  earnings to pay our existing
liabilities  and we do not anticipate  paying cash dividends on our common stock
in the  foreseeable  future.  Because we may not pay  dividends,  a return on an
investment  in our stock  likely  depends on the  ability to sell our stock at a
profit.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

     We do not use derivative  financial  instruments to hedge interest rate and
foreign currency exposure.  We do not believe that we have any material exposure
to interest  rate risk.  We did not  experience a material  impact from interest
rate risk during the first quarter of fiscal 2005.

     Currently,  we  do  not  have  any  significant  investments  in  financial
instruments for trading or other speculative purposes, or to manage our interest
rate exposure.

ITEM 4. Controls and Procedures.

Disclosure Controls and Procedures

     Disclosure  controls and procedures (as defined in Rule 13a-15(e) under the
Exchange  Act are  controls  and other  procedures  that are designed to provide
reasonable  assurance that the  information  that we are required to disclose 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
rules  and  forms  of the  SEC,  and that the  information  is  accumulated  and
communicated to our management,  including our chief executive officer and chief
financial officer,  as appropriate to allow timely decisions  regarding required
disclosure.

     As of the  end of the  period  covered  by this  Report,  we  conducted  an
evaluation,  under the supervision and with the  participation  of our Principal
Executive Officer and Principal  Financial Officer,  of the effectiveness of the
design and operation of our disclosure  controls and  procedures.  Based on this
evaluation,  our Principal  Executive  Officer and Principal  Financial  Officer
concluded that, as a result of material weaknesses in our internal controls over
financial reporting discussed below, our disclosure controls and procedures were
not  effective  at the  reasonable  assurance  level as of  March  31,  2005.  A
"material weakness" is a significant  deficiency,  or combination of significant
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the financial statements will not be prevented or detected.

     Due to the material  weaknesses  described  below, we performed  additional
analyses  and  other   procedures  (as  described  below)  to  ensure  that  our
consolidated  financial  statements  included in this  Report  were  prepared in
accordance  with GAAP.  As a result of these  procedures  we concluded  that the
consolidated financial statements included in this Report present fairly, in all
material respects, our financial position,  results of operations and cash flows
for the periods presented in conformity with GAAP.

Material Weaknesses in Internal Control Over Financial Reporting

     In our Report on Form 10-Q for the quarter ended March 31, 2004, filed with
the SEC on May 17,  2004,  following  an  evaluation  by  prior  management,  we
reported that our disclosure  controls and procedures  were not effective in all
material  respects as of December 31, 2003 and that our disclosure  controls and
procedures  were still not  effective in all  material  respects as of March 31,
2004. Our prior  management in connection  with our Reports on Form 10-Q for the
quarters  ended June 30, 2004 and  September 30, 2004,  respectively,  conducted
evaluations of our disclosure controls and reporting. Based upon the conclusions
of our prior  management we disclosed in our Report on Form 10-Q for the quarter
ended June 30, 2004,  filed with the SEC on August 16, 2004,  our Report on Form
10-Q for the quarter ended November 30, 2004, filed with the SEC on November 15,
2004,  and our Report on Form 10-K for the year ended  December 31, 2004,  filed
with  the SEC on  April  7,  2006,  that we  continued  to  experience  material
weaknesses in our disclosure controls and procedures as of June 30, September 30
and December 31, 2004, respectively.

     In April 2005 our management team decided to cease all ongoing  operations,
except for  operations  related to helping our secured  creditor,  Laurus Master
Fund, Ltd.  liquidate their collateral.  In June 2005, four members of our board
of directors resigned, along with the individuals serving as our chief executive
officer, chief financial officer, vice president, general counsel and secretary.
Following  the end of  operations  in April  2005,  we  suffered  a  significant
reduction in our staff,  including  all members of our  accounting  staff.  As a
result we have been unable to timely  implement our quarter and year end closing
procedures and have failed to timely file our periodic reports with the SEC, for
the  quarters  ended March 31, June 30,  September  30 and December 31, 2005 and
March 31, 2006.

     In  connection  with the  preparation  of this  Report  on Form  10-Q,  our
management  and  board of  directors  have  concluded  that as a  result  of the
cessation of operations in April 2005, the resignation of our executive officers
in June 2005 and the significant  reduction in staff we have experienced we have
been unable maintain  effective  internal  control over financial  reporting and
have  continued to experience  the material  weaknesses  previously  identified.
Specifically,  we did not  maintain  adequate  systems,  policies or  procedures
principally with respect to:

o  entering transactions into our general and subsidiary ledgers;
o  timely and effective  documentation  of  transactions  to be entered into our
   accounting system;
o  timely reconciliation of general ledger to appropriate  underlying subsidiary
   records; and
o  implementation  of an appropriate  checks and balances system with respect to
   documentation and recording of transactions.

     In order to prepare this Report,  we have implemented  alternative  control
measures (or  "Alternative  Measures") to ensure that our financial  statements,
and other financial  information included in this Report,  fairly present in all
material respects our financial condition,  results of operations and cash flows
as of, and for, the periods presented in this Report. These Alternative Measures
include, but are not limited to:

o  repurchase of books, records,  accounting software and related equipment from
   our secured  creditor;
o  implementation  of a focused and detailed review and  cross-checking of prior
   financial statements by our principal financial officer, outside advisors and
   our board of directors;
o  extensive  research,  review,  cross-checking  and  documentation of material
   transactions  by our chief financial  officer,  with a focus on reporting for
   revenue  recognition,  cash  transactions  and balances,  receivables,  fixed
   assets,  payroll,  inventory,  payables and accrued expenses, and payments to
   affiliates; and
o  utilization of existing financial management software, reports for ledger and
   sub-ledger details for financial transactions.

     Our management does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control  system,  no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the  control  system's  objectives  will be met.  Further,  the design of a
control  system must reflect the fact that there are resource  constraints,  and
the benefits of controls must be considered relative to their costs.  Because of
the inherent  limitations in all control systems,  no evaluation of our controls
can provide  absolute  assurance that all of our control issues and instances of
fraud,  if any,  have been  detected.  These  inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur because of simple error or mistake.  Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people or by
management  override of the controls.  Because of the inherent  limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

Changes in Internal Control over Financial Reporting

     During  the  period  covered  by this  Report on Form  10-Q,  there were no
significant  changes in our  internal  controls  or in other  factors  that have
materially affected, or are likely to materially affect, our internal controls.

PART II

<PAGE>


OTHER INFORMATION

ITEM 1.  Legal Proceedings.

     At this  time,  we are not  involved  in any  legal  proceedings  that  our
management  believes would be material to our business,  financial  condition or
results of operations.

ITEM 1A. Risk Factors.

         None.

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

     During  fiscal  2005,  we issued the  following  securities  which were not
registered under the Securities Act of 1933, as amended,  the Securities Act. We
did not employ any form of general  solicitation  or  advertising  in connection
with the offer and sale of the  securities  described  below.  In  addition,  we
believe the  purchasers of the  securities  are  "accredited  investors" for the
purpose of Rule 501 of the Securities Act. For these reasons,  among others, the
offer  and  sale  of the  following  securities  were  made in  reliance  on the
exemption  from  registration  provided by Section 4(2) of the Securities Act or
Regulation  D  promulgated  by the  Securities  Exchange  Commission  under  the
Securities Act.

     On April 1,  2005,  we  issued to Alloy  Marketing  and  Promotions,  LLC a
subordinated   convertible   promissory   note  in  the   principal   amount  of
approximately  $600,000.  The note was issued in payment of a similar amount due
to Alloy for  services  provided  to us by Alloy in 2004.  Alloy may convert the
note into shares of our common stock at any time at a conversion  price equal to
75% of fair market value of the common  stock,  defined as the lesser of (i) the
average of the  closing  prices of the common  stock for the five  trading  days
immediately  prior to the first to occur of (A) the date on which we include the
registration  of the resale of the common stock issuable upon  conversion of the
note in a  registration  statement  filed with the SEC and (B) any date on which
Alloy  delivers to us a notice of  conversion,  or (ii) the closing price of the
common stock for the trading day immediately prior to the first to occur of such
dates.

     On September 20, 2005, we received $250,000 in immediately available funds,
in exchange for the issuance of a convertible  promissory note,  issued to L. E.
Smith. The convertible  promissory note is convertible into shares of our common
stock at a conversion  price of $0.25.  The  convertible  promissory  note bears
interest at a rate of 7% per annum and has an initial maturity date of September
19,  2006.  We also  issued a warrant to  purchase  up to 200,000  shares of our
common stock.  The warrant is  exercisable  at $0.25 per share,  is  exercisable
immediately and expires five years from the date of issuance.

     On  September  22,  2005,  Andy Teng,  our  chairman  of the  board,  chief
executive officer and chief financial officer, agreed to convert the outstanding
unsecured debt owed to him by us into shares of common stock at a price of $1.00
per share,  substantially  above current market price.  Mr. Teng has been issued
1,000,000  shares of our common  stock in exchange  for the  extinguishment  all
outstanding  debts owed to Mr.  Teng by us and a general  release of any and all
claims held by him in connection with these debts.

     On October 28, 2005, we issued a convertible  promissory  note to Robert H.
Wood,  Jr.  in  exchange  for  $50,000  in  immediately   available  funds.  The
convertible promissory note is convertible at any time into shares of our common
stock at a conversion price of $0.25. We also issued a warrant to purchase up to
40,000  shares of our common  stock.  The  warrant is  exercisable  at $0.25 per
share,  is  exercisable  immediately  and  expires  five  years from the date of
issuance.

ITEM 3.  Defaults Upon Senior Securities.

     At December 31, 2005,  we had $100,000 of  convertible  notes payable to an
individual,  dated June 18, 1999.  Interest was payable at 10% per annum through
December  18,  2000 and is  payable  at 12%  thereafter.  The  note and  accrued
interest were due December 18, 2000. The note is convertible at $20.00 per share
and is currently in default. Management has held settlement discussions with the
note holder but has been unable to reach a settlement for payment.

     On November  30,  2004,  we closed a financing  transaction  with Laurus to
obtain a $7.5 million credit facility. The financing was completed pursuant to a
security  agreement  with Laurus,  pursuant to which we issued to Laurus a $2.75
million secured  convertible  minimum  borrowing note,  which is structured as a
term note, and a $4.75 million  secured  convertible  revolving  note,  which is
structured as a revolving balance note. As of December 31, 2004, we had borrowed
approximately $3.3 million under this facility,  net of issuing costs. A portion
of these  funds  were  used to repay  our  existing  short-term  financing.  Our
obligations to Laurus under the credit facility are secured by substantially all
of our assets  (other  than  intellectual  property),  including  our  ownership
interests in our operating  subsidiaries.  In May 2005, following the occurrence
of a number of events of default under the credit facility,  Laurus  accelerated
our payment obligations and ultimately commenced foreclosure proceedings against
all of our assets for failure to make payment.  Following the liquidation of all
of our accounts  receivable,  inventories  and equipment we presently owe Laurus
approximately  $2.1 million under this credit facility.  On December 8, 2005, we
entered into a letter  agreement with Laurus whereby we agreed to a payment plan
for the  outstanding  secured debt we owe to Laurus.  Under our  agreement  with
Laurus we agreed to make interest only payments to them beginning  retroactively
on December  1, 2005,  until the  earlier of the  consummation  of a merger with
Protron or February 20, 2006. On February 15, 2006,  Laurus agreed to extend the
date  that  interest  only  payments  would be made  until  March 1,  2006.  Our
agreement  with Laurus  provides  that on the date we  consummate  a merger with
Protron, in full satisfaction of our debt to Laurus, we will pay Laurus $950,000
in cash and issue to them that  number of  shares of our  common  stock  that is
equal to $950,000,  based upon a conversion  price of the 30 day average  volume
weighted average price  calculated as of the date prior to the merger.  On March
1, 2006,  Laurus agreed to  indefinitely  extend our right to make interest only
payments to them, subject to our assurances that we will use our best efforts to
consummate a merger with Protron as soon as is practicable.

ITEM 4.  Submission of Matters to a Vote of Security Holders.

         None.

ITEM 5.  Other Information.

         None.

ITEM 6.  Exhibits.

Exhibit No.        Description

31.1    Certification of Andy Teng,  Principal  Executive  Officer,  pursuant to
        Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

31.2    Certification of Andy Teng,  Principal  Financial  Officer,  pursuant to
        Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

32.1    Certification of Andy Teng,  Principal  Executive  Officer and Principal
        Financial  Officer,  pursuant  to 18 U.S.C.  Section  1350,  as  adopted
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




<PAGE>



                                   SIGNATURES

     Pursuant to the requirements of the Securities Act, the registrant has duly
caused  this  quarterly  report to be signed on its  behalf by the  undersigned,
thereunto duly authorized

                                    DIGITAL LIFESTYLES GROUP, INC.


Dated:   August 10, 2006            By:     /s/ Andy Teng
                                            -----------------------------
                                    Name:   Andy Teng
                                    Title:  Chief Executive Officer,
                                            Chief Financial Officer and
                                            Chairman of the Board