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 JUNE 30, 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 [X]              No  [ ]

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 JUNE 30, 2005



                                      INDEX


<TABLE>
<CAPTION>
<S>           <C>                                                                                                    <C>
                                                                                                                     PAGES
PART I.       FINANCIAL INFORMATION
   Item 1.    Consolidated Financial Statements:

              Consolidated Balance Sheets as of
              June 30, 2005 (unaudited) and December 31, 2004..........................................................1

              Consolidated Statements of Operations for Each of the Three-and Six-Month
              Periods Ended June 30, 2005 (unaudited) and June 30, 2004 (unaudited)....................................2

              Consolidated Statements of Stockholders' Deficit for the Six- Month
              Period Ended June 30, 2005 (unaudited)...................................................................3

              Consolidated Statements of Cash Flows for Each of the Six-Month
              Periods Ended June 30, 2005 (unaudited) and June 30, 2004 (unaudited)....................................4

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

   Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations.....................................................................22

   Item 3.    Quantitative and Qualitative Disclosures about Market Risk..............................................31

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


PART II.      OTHER INFORMATION

   Item 1.    Legal Proceedings.......................................................................................34

   Item 1A.   Risk Factors............................................................................................34

   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.............................................34

   Item 3.    Defaults upon Senior Securities.........................................................................35

   Item 4.    Submission of Matters to a Vote of Security Holders.....................................................35

   Item 5.    Other Information.......................................................................................35

   Item 6.    Exhibits................................................................................................36




                                                        i
<PAGE>


PART I            FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

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

                                                                              As of                     As of
                                                                          June 30, 2005           December 31, 2004
                                                                       ---------------------    ----------------------
                                                                           (unaudited)

                              ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                $            75             $         466
  Accounts receivable, net of allowance for doubtful accounts
      of $0 and $1,584 in 2005 and 2004, respectively                                  180                     4,087
  Inventories, net                                                                       -                     2,201
  Prepaid expenses and other current assets                                              -                       218
                                                                       ---------------------    ----------------------
      Total current assets                                                             255                     6,972

NON CURRENT ASSETS:
  Equipment, net                                                                         -                     2,044
  Other assets                                                                           -                        98
                                                                       ---------------------    ----------------------
      Total assets                                                          $          255             $       9,114
                                                                       =====================    ======================

               LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable                                                          $        6,445             $       7,398
  Accrued expenses                                                                     205                       902
  Convertible notes payable                                                          2,819                     1,576
  Line of credit                                                                         -                       331
  Note payable to related party                                                      1,004                     1,004
  Notes payable                                                                      1,063                     1,319
                                                                       ---------------------    ----------------------
      Total current liabilities                                                     11,536                    12,530

NON CURRENT LIABILITIES:
  Derivative and warrant liabilities                                                   819                     4,788
                                                                       ---------------------    ----------------------
      Total liabilities                                                             12,355                    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 in 2005 and 2004,
      respectively                                                                   1,130                     1,130
  Additional paid-in capital                                                        14,204                    14,204
  Accumulated deficit                                                              (21,227)                  (17,331)
                                                                       ---------------------    ----------------------
                                                                                    (5,893)                   (1,997)

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

      Total stockholders' deficit                                                  (12,100)                   (8,204)
                                                                       ---------------------    ----------------------

      Total liabilities and stockholders' deficit                           $          255             $       9,114
                                                                       =====================    ======================

      See accompanying notes to condensed consolidated financial statements

</TABLE>

                                                1
<PAGE>

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


                                                                        For the Three Months             For the Six Months
                                                                               Ended                            Ended
                                                                              June 30,                        June 30,
                                                                        2005           2004              2005          2004
                                                                       ----------   ------------        ---------    -------------
<S>                                                                     <C>             <C>              <C>           <C>
Net sales                                                               $   (762)       $ 9,141          $   448       $ 28,489
Cost of sales                                                                727          8,484             (428)        25,395
                                                                       ----------   ------------        ---------    -------------
     Gross profit (loss)                                                     (35)           657               20          3,094

Operating expenses                                                           448          2,595            1,924          4,863
                                                                       ----------   ------------        ---------    -------------
Operating loss                                                              (483)        (1,938)          (1,904)        (1,769)
                                                                       ----------   ------------        ---------    -------------

Other (income) expense:
   Interest expense                                                        1,193            196            1,396            323
   Change in fair value of derivative and warrant liabilities             (2,322)             -           (3,969)             -
   Loss on disposal of assets                                              3,021              -            4,553              -
   Other, net                                                                  -         (1,493)              (4)        (1,480)
                                                                       ----------   ------------        ---------    -------------
      Total other (income) expense                                         1,892         (1,297)           1,976         (1,157)
                                                                       ----------   ------------        ---------    -------------

Loss before provision for income taxes                                    (2,375)          (641)          (3,880)          (612)

Provision for income taxes                                                    16               -              16              -
                                                                       ----------   ------------        ---------    -------------
Net loss                                                               $  (2,391)       $  (641)       $  (3,896)        $ (612)
                                                                       ==========   ============        =========    =============
Basic and diluted loss per share                                       $   (0.06)      $  (0.03)        $  (0.10)      $  (0.03)
                                                                       ==========   ============        =========    =============
Weighted average shares of common stock outstanding:
Basic and diluted                                                         37,648         18,943           37,648         18,943
                                                                       ==========   ============        =========    =============


      See accompanying notes to condensed consolidated financial statements

</TABLE>


                                                2
<PAGE>

<TABLE>
<CAPTION>
                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                   (unaudited)
                                 (in thousands)


                                                                  Additional      Unearned                              Total
                                            Common Stock            Paid-in         ESOP          Accumulated       Stockholders'
                                        Shares      Amount          Capital        Shares           Deficit            Deficit
                                        ---------   ----------    ------------    -----------    ---------------   ----------------
<S>     <C>                              <C>         <C>           <C>             <C>             <C>                <C>
Balance,
January 1, 2005                          37,648      $ 1,130       $  14,204       $ (6,207)       $   (17,331)       $    (8,204)
Net loss                                      -            -               -              -             (3,896)            (3,896)
                                        ---------   ----------    ------------    -----------    ---------------   ----------------
Balance, June 30, 2005                   37,648      $ 1,130       $  14,204       $ (6,207)       $   (21,227)       $   (12,100)
                                        =========   ==========    ============    ===========    ===============   ================


      See accompanying notes to condensed consolidated financial statements

                                                3
</TABLE>


<PAGE>

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

                                                                                     For the Six Months Ended
                                                                                             June 30,

                                                                                       2005                 2004
                                                                              ------------------    ------------------
Cash flows from operating activities
<S>                                                                               <C>                    <C>
   Net loss                                                                       $     (3,896)          $      (612)
   Adjustments to reconcile net loss to net cash used
    in operating activities:
      Depreciation and amortization                                                        113                   164
      Loss on disposal of assets                                                         4,553                    19
      Change in fair value of derivative and warrant liabilities                        (3,969)                    -
      Stock-based compensation                                                               -                    25
      Amortization of debt discount and issuance cots                                    1,306                     -
      Provision for losses on accounts receivable                                            -                    22
      Changes in operating assets and liabilities:
         Accounts receivable                                                             1,827                 2,149
         Inventories                                                                     1,262                  (250)
         Prepaid expenses and other current assets                                         218                  (116)
         Other assets                                                                       98                     -
         Accounts payable                                                                 (941)               (1,248)
         Accrued expenses                                                                 (746)                  528
         Accrued royalties                                                                   -                (1,400)
                                                                              ------------------    ------------------

Net cash used in operating activities                                                     (175)                 (719)
                                                                              ------------------    ------------------

Cash flows from investing activities
   Purchases of equipment                                                                 (148)                 (235)
   Proceeds from sale of fixed assets                                                    1,063                     -
                                                                              ------------------    ------------------

Net cash provided by (used in) investing activities                                        915                  (235)
                                                                              ------------------    ------------------

Cash flows form financial activities:
   Payments on note payable                                                             (1,131)                   (5)
   Payments on advances from related party                                                   -                  (500)
   Advances from related party                                                               -                   500
   Borrowings under short-term financing, net                                                -                   946
                                                                              ------------------    ------------------

Net cash (used in) provided by financing activities                                     (1,131)                  941
                                                                              ------------------    ------------------

Net increase (decrease) in cash and cash equivalents                                      (391)                  (13)

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

Cash and cash equivalents, end of period                                            $       75            $      451
                                                                              ==================    ==================

      See accompanying notes to condensed consolidated financial statements

</TABLE>

                                                4
<PAGE>


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

                  FOR THE QUARTERS ENDED JUNE 30, 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 June 30,
2005, and the results of operations and cash flows for the three and six months
ended June 30, 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,
all of which was recorded by the Company through the second quarter of 2005.

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.


                                       5
<PAGE>


NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED

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.

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.


                                       6
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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 six months ended June 30, 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).


                                       7
<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 six months ended June 30, 2005 and 2004, major customers accounted for
approximately 13% and 47%, respectively, of total sales. At June 30, 2005 and
December 31, 2004, $232,000 and $14,099,000, respectively, of accounts
receivable related to these customers.

For the six months ended June 30, 2005 and 2004, major suppliers accounted for
11% and 16%, respectively, of total purchases.

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.


                                       8
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

DERIVATIVE FINANCIAL INSTRUMENTS

Our derivative financial instruments consist of embedded derivatives related to
Laurus notes entered into on November 30, 2004 and the Alloy note (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 June 30, 2005 totaled approximately
$819,000. 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 six months ended June 30, 2005, the net decrease in derivative and
warrant liabilities was approximately $3,969,000, 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.

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.



                                       9
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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 $120,000
for the six months ended June 30, 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 June 30, 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 $20,000 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:


<TABLE>
<CAPTION>
                                                            For The Three Months       For The Six Months Ended
                                                               Ended June 30,                  June 30,
                                                          -------------------------    --------------------------
<S>                                                          <C>            <C>           <C>            <C>
                                                             2005           2004          2005           2004

Net loss, as reported                                      $     (2,391)  $   (641)   $    (3,896)  $    (612)

Add:
     Stock-based compensation expense under APB 25                    -          7              -          20

Deduct:
     Total stock-based compensation expense under
       fair value based method for all awards              $          -       (590)             -        (621)
                                                            ------------   --------    ----------    -----------

Pro forma net loss                                         $     (2,391)  $ (1,224)   $    (3,896)  $  (1,213)
                                                            ============   ========    ===========   ===========

Basic and diluted loss per share - as reported             $     (0.06)   $ (0.03)    $    (0.10)   $  (0.03)
                                                            ============   ========    ===========   ===========

Basic and diluted loss per share - pro forma               $     (0.06)   $ (0.06)    $    (0.10)   $  (0.06)
                                                            ============   ========    ===========   ===========
</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 six months ended June 30,
2005 and 2004.

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


                                       10
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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.
For the six months ended June 30, 2005 and June 30, 2004 the additional
potential dilutive shares are 20,595,124, and 3,023,754 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 six months ended June 30, 2005 and 2004.

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 six months ended June 30, 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.



                                       11
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

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.

NOTE 3 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                               June 30,             December 31,
                                                                                 2005                   2004
                                                                         ---------------         ----------------
<S>                                                                     <C>                     <C>
Raw material                                                            $              -        $           2,201
WIP and finished goods                                                                 -                        -
                                                                         ---------------         ----------------

                                                                        $              -        $           2,201
                                                                         ===============         ================

Equipment consists of the following (in thousands):

                                                                               June 30,             December 31,
                                                                                 2005                   2004
                                                                         -----------------      ------------------

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

Less accumulated depreciation and amoritization                                        -                  (1,290)
                                                                         ---------------         ---------------

                                                                        $              -        $          2,044
                                                                         ===============         ===============

</TABLE>

Depreciation and amortization expense on equipment was approximately $113,000
and $164,000 for the six months ended June 30, 2005 and 2004, respectively.



                                       12
<PAGE>


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>                                                                   <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 June 30, 2005                                           $               -
                                                                                                 ================
</TABLE>

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 June 30, 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 June 30, 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.



                                       13
<PAGE>


NOTE 7 - CONVERTIBLE NOTES PAYABLE CONTINUED

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 default interest rate of 12%, 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 June 30, 2005. The convertible
term note balance at June 30, 2005 was $2,119,000, and is classified as part of
convertible notes in the accompanying consolidated balance sheet (see below).

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 six months
ended June 30, 2005 was $1,274,000.

At June 30, 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.


                                       14
<PAGE>




NOTE 7 - CONVERTIBLE NOTES PAYABLE, CONTINUED

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.

Convertible notes payable are summarized as follows:
<TABLE>
<CAPTION>
<S>                                                                     <C>                     <C>
                                                                               June 30,             December 31,
                                                                                 2005                   2004
                                                                          --------------------   --------------------

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 note payable to a third party, payable upon demand                   600,000                       -

Convertible credit facility with a related party, with a default interest rate
  of approximately 12% as of June 30, 2005. Payment is due upon completion of a
  merger with another company. Net of
  unamortized debt discount of $0 and  $1,274,000, respectively                2,119,000                1,476,000
                                                                         ---------------         ----------------

                                                                        $      2,819,000        $       1,576,000
                                                                         ===============         ================

</TABLE>


                                       15
<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).



                                       16
<PAGE>


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.

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 six months ended June 30, 2005.


                                       17
<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 six months ended
June 30, 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 six months ended June 30, 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.


                                       18
<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)
                                                                                --------------- -- ----------------
                                                                                   June 30,         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            $     158            $    924
stock)                                                                          ===============    ================

</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 six months ended June 30, 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.



                                       19
<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

                                             Six Months Ended June 30,
                                       ---------------------------------------
                                             2005                  2004
                                       -----------------     -----------------
(In thousands)

Cash paid during period:

     Interest                          $            67      $          334

     Income taxes                      $             -      $            -

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.


                                       20
<PAGE>


NOTE 15 - SUBSEQUENT EVENTS

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.

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)


                                       21
<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.


                                       22
<PAGE>


     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 our
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
$0.8 million, 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 it 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.



                                       23
<PAGE>


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.


                                       24
<PAGE>


     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 JUNE 30, 2005 COMPARED TO QUARTER ENDED JUNE 30, 2004.

     NET SALES. Our net sales decreased $9.9 million, or 108%, to $(0.76)
million for the quarter ended June 30, 2005 from $9.14 million for the quarter
ended June 30, 2004. The decrease in net sales was attributable to our decision
in the May 2005 to cease all ongoing operations, except for operations related
to helping our secured creditor liquidate its collateral resulting in a large
number of returns occurring during the quarter.

     GROSS LOSS. We had a gross loss of $0.04 million for the quarter ended June
30, 2005. This represented a decrease of $0.61 million, or 94%, compared to a
gross profit of $0.65 million for the comparable period in 2004. The increase in
gross loss was attributable to our decision in the May 2005 to cease all ongoing
operations, except for operations related to helping our secured creditor
liquidate its collateral.

     TOTAL OPERATING EXPENSES. Our total operating expenses decreased 2.16
million, or 83%, to $0.44 million for the quarter ended June 30, 2005 from $2.60
million for the quarter ended June 30, 2004. The decrease was attributable to
our decision in the May 2005 to cease all ongoing operations, , except for
operations related to helping our secured creditor liquidate its collateral.

     OTHER INCOME (EXPENSES). Our other non-operating expense increased $3.19
million to $1.89 million for the quarter ended June 30, 2005 from $(1.30)
million for the comparable period in 2004. The increase was primarily related to
the loss on the disposal of assets following the ending of operations in May
2005 and the liquidation of our assets by our secured creditor.

     NET LOSS. We incurred a net loss of $2.39 million for the quarter ended
June 30, 2005. This represented an increase of $1.75 million, or 273%, compared
to a net loss of $0.64 million for the quarter ended June 30, 2004.



                                       25
<PAGE>


SIX MONTHS  ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004.

     NET SALES. Our net sales decreased $28.04 million, or 98%, to $0.45 million
for the six months ended June 30, 2005 from $28.49 million for the six months
ended June 30, 2004. The decrease in net sales was attributable to our decision
in the May 2005 to cease all ongoing operations, except for operations related
to helping our secured creditor liquidate its collateral resulting in a large a
large number of returns occurring during the quarter.

     GROSS PROFIT (LOSS). We had a gross profit of $0.02 million for the six
months ended June 30, 2005. This represented a decrease of $3.07 million, or
99%, compared to a gross profit of $3.09 million for the comparable period in
2004. The decrease in gross profit was attributable to our decision in the May
2005 to cease all ongoing operations, except for operations related to helping
our secured creditor liquidate its collateral.

     TOTAL OPERATING EXPENSES. Our total operating expenses decreased 2.94
million, or 60%, to $1.92 million for the six months ended June 30, 2005 from
$4.86 million for the six months ended June 30, 2004. The decrease was
attributable to our decision in the May 2005 to cease all ongoing operations, ,
except for operations related to helping our secured creditor liquidate its
collateral.

     OTHER INCOME (EXPENSES). Our other non-operating expense decreased $1.44
million to $0.04 million for the six months ended June 30, 2005 from $1.48
million for the comparable period in 2004. The decrease was primarily related to
the loss on the disposal of assets following the ending of operations in May
2005 and the liquidation of our assets by our secured creditor.

     NET LOSS. We incurred a net loss of $3.90 million for the six months ended
June 30, 2005. This represented an increase of $3.29 million, or 539%, compared
to a net loss of $0.61 million for the six months ended June 30, 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 June 30, 2005, we
had approximately $75,000 in cash and cash equivalents compared to approximately
$451,000 at June 30, 2004. As of August 7, 2006, our principal sources of
liquidity were cash and cash equivalents of $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:


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


                                       26
<PAGE>



     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 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.



                                       27
<PAGE>


     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 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 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.





                                       28
<PAGE>


                                  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 $0.8 million for the fiscal year ending
December 31, 2006. As of August 7, 2006, our principal sources of liquidity were
cash and cash equivalents of $40,000 million 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


                                       29
<PAGE>


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 quarters ended March 31,
2004, June 30, 2004, June 30, 2004, March 31, 2005 and June 30, 2005 and in our
reports on Form 10-K for the years ended December 31, 2003 and December 31,
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.

     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, March 31, 2005 and June 30, 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



                                       30
<PAGE>


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.



                                       31
<PAGE>


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 27,976,000
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


                                       32
<PAGE>


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 second 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.


                                       33
<PAGE>



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 June 30, 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 June 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, June 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, June 30, 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 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:


                                       34
<PAGE>


     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.


                                       35
<PAGE>


PART II 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.

     Information regarding risk factors appears in Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
various risk factors faced by us are also discussed elsewhere in Item 2 of this
report. In addition, risk factors are included in Item 1A of our Annual Report
on Form 10-K for our fiscal year ending December 31, 2004 and December 31, 2005,
filed with the Commission on April 7, 2006 and June 21, 2006, respectively.
There are no material changes from the risk factors previously disclosed on our
Annual Report on Form 10-K for the fiscal years ending December 31, 2004 and
December 31, 2005.

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



                                       36
<PAGE>


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.


                                       37
<PAGE>


ITEM 6. EXHIBITS.


EXHIBIT INDEX

<TABLE>
<CAPTION>
<S>             <C>
EXHIBIT NO.        DESCRIPTION

4.3               Convertible  Promissory  Note, dated April 1, 2005, issued by Registrant in favor of Alloy
                  Marketing and Promotions, LLC. (1)
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. +

+                 Filed herewith.

(1)               Incorporated by reference to Registrant's Current Report on Form 8-K filed with the Securities
                  and Exchange Commission on April 7, 2005.


</TABLE>



                                       38
<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