UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





(Mark
One)


Form
10-Q





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





For
      the quarterly period ended June 30,
2009





or





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





For
      the transition period from __________________ to
      __________________________Commission
      file number: 0-27828





DIGITAL
      LIFESTYLES GROUP, INC.(Name of registrant as specified
      in its charter)





Delaware
                  13-3779546(State
      or other jurisdiction of incorporation or organization)
                  (I.R.S.
      Employer Identification
No.)





649
      Sparta Highway, Suite 102, Crossville, TN
                  38555(Address
      of principal executive offices)
                  (Zip
      Code)





(931)
      707-9601(Registrant's
      telephone number, including area
code)








not
      applicable(Former
      name, former address and former fiscal year, if changed since last
      report)





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 [√ ]





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act.





Large
      accelerated filer
                [
      ]
                Accelerated
      filer
                [
      ]Non-accelerated
      filer
                  (Do
      not check if smaller reporting company)
                [
      ]
                Smaller
      reporting company
                [√]





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





Yes [ ]
No [√]


Indicated the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.  32,223,975 shares of common stock are issued and
outstanding as of August 31, 2009.









TABLE
OF CONTENTS





Page
      No.PART
      I. - FINANCIAL INFORMATIONItem
      1.
                            Financial
      Statements
                            3Item
      2.
                            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                            4Item
      3.
                            Quantative
      and Qualitative Disclosures About Market Risk.
                            8Item
      4T
                            Controls
      and Procedures.
                            8PART
      II - OTHER INFORMATIONItem
      1.
                            Legal
      Proceedings.
                            9Item
      1A.
                            Risk
      Factors.
                            9Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds.
                            9Item
      3.
                            Defaults
      Upon Senior Securities.
                            9Item
      4.
                            Submission
      of Matters to a Vote of Security Holders.
                            9Item
      5.
                            Other
      Information.
                            9Item
      6.
                            Exhibits.
                            9





CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION





This report contains forward-looking
statements. These forward-looking statements are subject to known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.  These forward-looking statements were based on various
factors and were derived utilizing numerous assumptions and other factors that
could cause our actual results to differ materially from those in the
forward-looking statements.  These factors include, but are not
limited to, our ability to bring our filing requirements with the Securities and
Exchange Commission current, our ability to satisfy our obligations, our ability
to consummate the acquisition of an operating entity and/or assets, our ability
to generate revenues and pay our operating expenses, our ability to raise
capital as necessary, economic, political and market conditions and
fluctuations, government and industry regulation, interest rate risk, U.S. and
global competition, and other factors.  Most of these factors are
difficult to predict accurately and are generally beyond our
control.  You should consider the areas of risk described in
connection with any forward-looking statements that may be made
herein.  Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this report in
its entirety, including the risks described in "Item 1A. - Risk
Factors".  Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events.  These
forward-looking statements speak only as of the date of this report, and you
should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.





OTHER
PERTINENT INFORMATION





Unless
specifically set forth to the contrary, when used in this prospectus the terms
“Digital Lifestyles", "we"", "our", the "Company" and similar terms refer to
Digital Lifestyles Group Inc., a Delaware corporation, and our
subsidiaries.  In addition, when used herein and unless specifically
set forth to the contrary, “2009” refers to the year ending December 31, 2009
and “2008” refers to the year ended December 31, 2008.





2





PART
1 - FINANCIAL INFORMATION





Item
1.                                Financial
Statements.




TABLE
      OF CONTENTSFinancial
      Statements:Consolidated
      Balance Sheets
                  
                  
                  F-1Consolidated
      Statements of Operations
                  
                  F-2Consolidated
      Statement of  Stockholders' (Deficit)
                  F-3Consolidated
      Statements of Cash Flows
                  
                  F-4Notes
      to Consolidated Financial Statements
                  F-5




3




DIGITAL
      LIFESTYLES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(In
      thousands)ASSETSAs
      Of
                                                              
                                                              
                                                              As
      OfJune
      30, 2009
                                                              
                                                              
                                                              December
      31, 2008(unaudited)CURRENT
      ASSETSCash
      and cash equivalents
                                                              
                                                              $
                                                              10
                                                              
                                                              
                                                              $
                                                              22TOTAL
      CURRENT ASSETS
                                                              
                                                              
                                                              10
                                                              
                                                              
                                                              
                                                              22Total
      Assets
                                                              
                                                              $
                                                              10
                                                              
                                                              
                                                              $
                                                              22LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
                                                              
                                                              $
                                                              6,378
                                                              
                                                              
                                                              $
                                                              6,378Liquidated
      damages payable
                                                              
                                                              
                                                              2,436
                                                              
                                                              
                                                              
                                                              2,436Accrued
      expenses
                                                              
                                                              
                                                              1,069
                                                              
                                                              
                                                              
                                                              950Convertible
      notes payable, net of debt discount
                                                              
                                                              
                                                              1,500
                                                              
                                                              
                                                              
                                                              1,490TOTAL
      CURRENT LIABILITIES
                                                              
                                                              
                                                              11,383
                                                              
                                                              
                                                              
                                                              11,254Derivitave
      and warrant liabilities
                                                              
                                                              
                                                              200
                                                              
                                                              
                                                              
                                                              100Total
      Liabilities
                                                              
                                                              
                                                              11,583
                                                              
                                                              
                                                              
                                                              11,354STOCKHOLDERS'
      (DEFICIT)Common
      stock, $.03 par value: 50,000 shares authorized,33,224
      and 33,224 shares issued and outstanding
                                                              
                                                              
                                                              996
                                                              
                                                              
                                                              
                                                              996Additional
      paid-in capital
                                                              
                                                              
                                                              16,348
                                                              
                                                              
                                                              
                                                              16,348Accumulated
      (deficit)
                                                              
                                                              
                                                              (22,710
                                                              )
                                                              
                                                              
                                                              (22,469
                                                              )(5,366
                                                              )
                                                              
                                                              
                                                              (5,125
                                                              )Less:
      Unearned ESOP shares
                                                              
                                                              
                                                              (6,207
                                                              )
                                                              
                                                              
                                                              (6,207
                                                              )Total
      stockholders' (deficit)
                                                              
                                                              
                                                              (11,573
                                                              )
                                                              
                                                              
                                                              (11,332
                                                              )Total
      liabilities and stockholders' (deficit)
                                                              
                                                              $
                                                              10
                                                              
                                                              
                                                              $
                                                              22


See
accompanying notes to consolidated financial statements




F-1




DIGITAL
      LIFESTYLES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(unaudited)(In
      thousands, except per share data)For
      the Three Months Ended
                                                                        
                                                                        
                                                                        For
      the Six Months EndedJune
      30, 2009
                                                                        
                                                                        
                                                                        June
      30, 2008
                                                                        
                                                                        
                                                                        June
      30, 2009
                                                                        
                                                                        
                                                                        June
      30, 2008Net
      sales
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -Cost
      of sales
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -GROSS
      PROFIT
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -OPERATING
      EXPENSES
                                                                        
                                                                        
                                                                        37
                                                                        
                                                                        
                                                                        
                                                                        169
                                                                        
                                                                        
                                                                        
                                                                        61
                                                                        
                                                                        
                                                                        
                                                                        235Operating
      loss
                                                                        
                                                                        
                                                                        (37
                                                                        )
                                                                        
                                                                        
                                                                        (169
                                                                        )
                                                                        
                                                                        
                                                                        (61
                                                                        )
                                                                        
                                                                        
                                                                        (235
                                                                        )OTHER
      INCOME (EXPENSE)Interest
      expense
                                                                        
                                                                        
                                                                        (43
                                                                        )
                                                                        
                                                                        
                                                                        (48
                                                                        )
                                                                        
                                                                        
                                                                        (86
                                                                        )
                                                                        
                                                                        
                                                                        (96
                                                                        )Gain
      on debt relief
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        10
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        10Change
      in fair value of derivativeand
      warrant liabilities
                                                                        
                                                                        
                                                                        (106
                                                                        )
                                                                        
                                                                        
                                                                        13
                                                                        
                                                                        
                                                                        
                                                                        (100
                                                                        )
                                                                        
                                                                        
                                                                        94Other,
      net
                                                                        
                                                                        
                                                                        3
                                                                        
                                                                        
                                                                        
                                                                        36
                                                                        
                                                                        
                                                                        
                                                                        6
                                                                        
                                                                        
                                                                        
                                                                        36TOTAL
      OTHERINCOME
      (EXPENSE)
                                                                        
                                                                        
                                                                        (146
                                                                        )
                                                                        
                                                                        
                                                                        11
                                                                        
                                                                        
                                                                        
                                                                        (180
                                                                        )
                                                                        
                                                                        
                                                                        44(LOSS)
      BEFORE INCOME TAXES
                                                                        
                                                                        
                                                                        (183
                                                                        )
                                                                        
                                                                        
                                                                        (158
                                                                        )
                                                                        
                                                                        
                                                                        (241
                                                                        )
                                                                        
                                                                        
                                                                        (191
                                                                        )INCOME
      TAX EXPENSEProvision
      for income taxes
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -NET
      (LOSS)
                                                                        
                                                                        $
                                                                        (183
                                                                        )
                                                                        
                                                                        $
                                                                        (158
                                                                        )
                                                                        
                                                                        $
                                                                        (241
                                                                        )
                                                                        
                                                                        $
                                                                        (191
                                                                        )Basic
      and diluted (loss) per share
                                                                        
                                                                        $
                                                                        (0.01
                                                                        )
                                                                        
                                                                        $
                                                                        (0.00
                                                                        )
                                                                        
                                                                        $
                                                                        (0.01
                                                                        )
                                                                        
                                                                        $
                                                                        (0.01
                                                                        )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                                                                        
                                                                        
                                                                        33,224
                                                                        
                                                                        
                                                                        
                                                                        33,224
                                                                        
                                                                        
                                                                        
                                                                        33,224
                                                                        
                                                                        
                                                                        
                                                                        33,224


See
accompanying notes to consolidated financial statements


F-2




DIGITAL
      LIFESTYLES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' (DEFICIT)(unaudited)(In
      thousands)Additional
                                                                                          
                                                                                          
                                                                                          UnearnedCommon
      Stock
                                                                                          
                                                                                          
                                                                                          Paid-In
                                                                                          
                                                                                          
                                                                                          ESOP
                                                                                          
                                                                                          
                                                                                          AccumulatedShares
                                                                                          
                                                                                          
                                                                                          Amount
                                                                                          
                                                                                          
                                                                                          Capital
                                                                                          
                                                                                          
                                                                                          Shares
                                                                                          
                                                                                          
                                                                                          Deficit
                                                                                          
                                                                                          
                                                                                          TotalBalance,
      January 1, 2009
                                                                                          
                                                                                          
                                                                                          33,224
                                                                                          
                                                                                          
                                                                                          $
                                                                                          996
                                                                                          
                                                                                          
                                                                                          $
                                                                                          16,348
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (6,207
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (22,469
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (11,332
                                                                                          )Net
      (Loss)
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (241
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (241
                                                                                          )Balance,
      June 30, 2009
                                                                                          
                                                                                          
                                                                                          33,224
                                                                                          
                                                                                          
                                                                                          $
                                                                                          996
                                                                                          
                                                                                          
                                                                                          $
                                                                                          16,348
                                                                                          
                                                                                          
                                                                                          
                                                                                          (6,207
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (22,710
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (11,573
                                                                                          )


See
accompanying notes to consolidated financial statements




F-3




DIGITAL
      LIFESTYLES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(unaudited)(In
      thousands)For
      the Six Months EndedJune
      30, 2009
                                                              
                                                              
                                                              June
      30, 2008Cash
      flows from operating activities:Net
      (Loss)
                                                              
                                                              $
                                                              (241
                                                              )
                                                              
                                                              $
                                                              (191
                                                              )Adjustments
      to reconcile net (loss) to net cashused
      by operating activitiesChange
      in fair value of derivative and warrant liabilities
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              (94
                                                              )Gain
      on debt relief
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (10
                                                              )Stock
      and stock rights issued for services
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              167Accounts
      payable
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (2
                                                              )Accrued
      expenses
                                                              
                                                              
                                                              119
                                                              
                                                              
                                                              
                                                              98Net
      cash used in operating activities
                                                              
                                                              
                                                              (22
                                                              )
                                                              
                                                              
                                                              (32
                                                              )Cash
      flows from financing activities:Proceeds
      from convertible note payable, net of issuance costs
                                                              
                                                              
                                                              10
                                                              
                                                              
                                                              
                                                              38Net
      cash provided (used) by financing activities
                                                              
                                                              
                                                              10
                                                              
                                                              
                                                              
                                                              38Net
      Change in cash and cash equivalents
                                                              
                                                              
                                                              (12
                                                              )
                                                              
                                                              
                                                              6Cash
      and cash equivalents, beginning of year
                                                              
                                                              
                                                              22
                                                              
                                                              
                                                              
                                                              -Cash
      and cash equivalents, end of year
                                                              
                                                              $
                                                              10
                                                              
                                                              
                                                              $
                                                              6


See
accompanying notes to consolidated financial statements




F-4
 
  DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Three and Six Months Ended June 30, 2009
 
 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 accounting principles generally accepted 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,
2008.
 
 In the
opinion of our management, the accompanying financial statements contain all
adjustments necessary to present fairly our financial position at June 30, 2009,
and the results of operations and cash flows for the three and six months ended
June 30, 2009 and 2008. 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.
 
 The
accompanying consolidated financial statements include the accounts of Digital
Lifestyles Group, Inc. ("Digital" "we," "our," "us," or the "Company") (formerly
Northgate Innovations, Inc. or "Northgate") and Digital's wholly owned
subsidiaries. All significant intercompany transactions have been
eliminated.
 
 As of
June 30, 2009, we have no business operations. Currently, we have approximately
$11.6 million in unsecured debt, virtually all of which is past due, and we have
insignificant assets. During the fiscal year ended December 31, 2008, we
incurred cash costs of approximately $35,000 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 attempting to negotiate a business
combination and bringing the Company current in its SEC filings.
 
 We
currently have capital resources sufficient to meet our operating and capital
needs for approximately the next two months. 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 the
cessation of our business operations, we have a severe shortage of capital,
significant debt, and are under default under existing credit and loan
agreements, and we may not be able to arrange for debt or equity financing from
third parties on favorable terms, or at all.
 
 F-5
  DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 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 of less than three
months. Cash equivalents consist primarily of cash deposited in money market
accounts. Our cash and cash equivalents are on deposit with financial
institutions, and at times, may exceed federally insured limits.
 
 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)
valuation of derivative instruments, (ii) fair value of stock transactions,
and  (iii) 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.
 
 FAIR VALUE OF FINANCIAL
INSTRUMENTS
 
 Our
derivative and warrant liabilities are presented on our balance sheets at fair
value. For other liabilities it is not practical to estimate the fair value
because there is no established market for these instruments as we do not
currently have the resources to settle them and it is inappropriate to estimate
future cash flows, which are largely dependent on the need for additional
capital.
 
 CONCENTRATIONS
 
 There are
no financial instruments that potentially subject us to a concentration of
credit risk. Due to the shutdown of business operations in the second quarter of
2005, we have an insignificant amount of cash and no accounts receivable as of
June 30, 2009 and December 31, 2008.
 
 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 totaling $1,377,895 at June 30, 2009
and December 31, 2008.
 
 F-6
  DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
 
 DERIVATIVE FINANCIAL
INSTRUMENTS
 
 The
Company has historically used derivative instruments to facilitate its financing
transactions. Under the provisions of Emerging Issues Task Force ("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 certain non-employee stock options and warrants (free-standing
derivatives) as liabilities. Our derivative financial instruments also consist
of embedded and free-standing derivatives related to the Alloy note (see Note
3). The accounting treatment of derivative financial instruments requires that
the Company record the derivatives at their fair values as of the inception date
of the agreement and at fair value as of each subsequent balance sheet date. The
fair value of all derivatives at June 30, 2009 and December 31, 2008 totaled
approximately $200,000 and $100,000, respectively, and are classified as
long-term liabilities. 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. At June 30, 2009 and
December 31, 2008 derivatives were valued primarily using the Black-Scholes
Option Pricing Model with the following assumptions: dividend yield of 0%,
annual volatility of 179% , risk free interest rate of 2.11% - 4.83%, and
expected life of 1-7 years.
 
 For the
six months ended June 30, 2009 the net increase (decrease) in the derivative and
warrant liabilities was approximately $100,000. For the six months ended June
30, 2008 the net increase (decrease) in the derivative and warrant liabilities
was approximately ($94,000) both of which are recorded as components of other
income (expense) in the accompanying consolidated statements of
operations.
 
 REVENUE
RECOGNITION
 
 We ceased
all operations in April 2005 and have no significant current
revenues.
 
 STOCK-BASED
COMPENSATION
 
 Stock-based
compensation expense recognized in the statement of operations for the six
months ended June 30, 2009 and 2008 is based on awards ultimately expected to
vest. Compensation expense has been reduced for estimated pre-vesting
forfeitures. SFAS No. 123 requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. We estimated forfeitures to be 0% of the options
issued.
 
 NET (LOSS) PER
SHARE
 
 Basic net
(loss) per share excludes dilution and is computed by dividing net (loss) income
by the weighted average number of common shares outstanding during the reported
periods. Diluted net (loss) income
per share reflects the potential dilution that could occur if other commitments
to issue common stock were exercised.
 
 F-7
  DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
  The
assumed effects of the exercise of all potentially dilutive securities at June
30, 2009 and 2008, respectively, and the application of the treasury stock
method would have been anti-dilutive. Therefore, there are no differences
between basic and diluted per share amounts in the 2009 and 2008 quarterly
statements of operations.
 
 RECENT ACCOUNTING
PRONOUNCEMENTS
 
 In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS
157”).  This standard defines fair value, establishes the framework
for measuring fair value in accounting principles generally accepted in the
United States and expands disclosure about fair value
measurements.  This pronouncement applies under other accounting
standards that require or permit fair value measurements. Accordingly, this
statement does not require any new fair value measurement. This statement is
effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years.  The adoption of SFAS 157 did not have a
material impact on our financial statements.
 
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FAS 115 (“SFAS
159”).  SFAS 159 allows companies to choose, at specified election
dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value.  Unrealized
gains and losses shall be reported on items for which the fair value option has
been elected in earnings at each subsequent reporting date.  SFAS 159
also establishes presentation and disclosure requirements.  We are
continuing to evaluate the desirability of adopting SFAS 159.  SFAS
159 was effective for fiscal years beginning after November 15, 2007 and will be
applied prospectively if and when adopted.
 
 In
December 2007, the FASB issued SFAS 141(R), “Business Combinations,” (“SFAS
141(R)”) and SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements,” (“SFAS 160”).  These standards were designed to improve,
simplify and converge internationally the accounting for business combinations
and the reporting of noncontrolling interests in consolidated financial
statements.  SFAS 141(R) requires an acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and financial effect of
the business combination.  SFAS 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements.  SFAS 160 also eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions.  SFAS 141(R) and SFAS 160 became effective for fiscal
years beginning after December 15, 2008.  The adoption of these pronouncements
did not have a material impact on the Company's financial position or results of
operations.
 
 F-8
 DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
  In April
2008, the FASB issued EITF 07-5, Determining whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-5”). EITF 07-5 provides
guidance on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to its own stock
for the purpose of evaluating the first criteria of the scope exception in
Paragraph 11(a) of SFAS 133. EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and early application
is not permitted. Management does not believe that the implementation of this
standard will have a significant impact on the financial statements of the
Company.
 
 In May
2009, the FASB issued Statement No. 165, "Subsequent Events" which establishes
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Statement sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. In
accordance with this Statement, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009.  The
Company evaluated subsequent events for recognition or disclosure through August
31, 2009, which is the date the financial statements were issued.
 
 F-9
 
 DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
3 - CONVERTIBLE NOTES PAYABLE
 
 The
Company’s obligations under convertible notes payable, substantially all of
which are in default, are summarized as follows at June 30, 2009 and December
31, 2008.
  June
      30,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008Convertible
      note payable to a third party with an interest rateof
      7% per annum, due September 19, 2006, net of unamortizeddebt
      discount of $0
                                  
                                  $
                                  500,000
                                  
                                  
                                  $
                                  500,000Convertible
      note payable to a third party with an interest rateof
      7% per annum, due October 27, 2006, net of unamortizeddebt
      discount of $0
                                  
                                  
                                  50,000
                                  
                                  
                                  $
                                  50,000Convertible
      line of credit note payable to a third party with an interest
      rateof
      7.5% per annum, amended due date December 2009
                                  
                                  
                                  349,850
                                  
                                  
                                  
                                  339,850Convertible
      note payable to Alloy, payable upon demand
                                  
                                  
                                  600,000
                                  
                                  
                                  
                                  600,000$
                                  1,499,850
                                  
                                  
                                  $
                                  1,489,850
  The
Company's convertible notes payable obligate the Company to file and maintain a
registrationstatement for the shares underlying the conversion options. The
Company has failed in the performance of this obligation. Terms of certain of
the notes require the payment of liquidated damages during the period that the
Company fails to maintain the effectiveness of its registration statement.
Accordingly, the Company has, under provisions of EITF 00-19, accrued liquidated
damages of $2,436,000 through June 2009 for this failure.
 
 NOTE
4 – STOCK WARRANTS AND OPTIONS
 
 Stock
Option Plan
 
 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.
  F-10
  DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
4 – STOCK WARRANTS AND OPTIONS – (Continued)
 
 A summary
of our stock option and warrant activity, and related information for the six
months ended June 30, 2009 follows:
  WeightedAverageShares
                                    
                                    
                                    Exercise
      PriceOutstanding,
      beginning of year
                                    
                                    
                                    20,784,544
                                    
                                    
                                    $
                                    0.43Granted
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Expired/cancelled
                                    
                                    
                                    (893,333
                                    )
                                    
                                    
                                    0.60Outstanding
      and exercisable,end of year
                                    
                                    
                                    19,891,211
                                    
                                    
                                    $
                                    0.41Exercisable,
      end of year
                                    
                                    
                                    19,891,211
                                    
                                    
                                    $
                                    0.41
  During
the six months ended June 30, 2008, we expensed $167,000 representing the value
of options issued in 2008 and vested in 2009 to our Chief Executive
Officer.
 
 The
following table summarizes our stock options outstanding at June 30,
2009:
 
 Weighted-average
                              
                              
                              Weighted-remaining
                              
                              
                              averageExercise
      Price Range
                              
                              
                              Shares
                              
                              
                              contractual
      life
                              
                              
                              Exercise
      price$
                              0.18-$0.39
                              
                              
                              
                              4,476,952
                              
                              
                              
                              1.68
                              
                              
                              
                              0.24$
                              0.40-$0.49
                              
                              
                              
                              13,467,593
                              
                              
                              
                              2.54
                              
                              
                              
                              0.47$
                              0.50-$1.49
                              
                              
                              
                              1,946,666
                              
                              
                              
                              1.51
                              
                              
                              
                              0.50Total
                              
                              
                              
                              19,891,211
  NOTE
5 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  June
      30
                        
                        
                        June
      30(in
      thousands)
                        
                        2009
                        
                        
                        2008Cash
      paid during year ended:Interest
                        
                        $
                        -
                        
                        
                        $
                        -Income
      taxes
                        
                        $
                        -
                        
                        
                        $
                        -Non-cash
      investing and financing activities:Issuance
      of options as compensation
                        
                        $
                        -
                        
                        
                        $
                        167
 F-11
 DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
6 - 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
debts, management agreements 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 sheets.
 
 We may
become involved in various litigation and claims, government investigations and
other legal proceedings that arise from time to time in the ordinary course of
business. We could in the future incur judgments
or enter into settlements of claims that could have a material adverse effect on
our financial condition, liquidity and results of operations.
 
 NOTE
7 – FAIR VALUE
 
 On June
28, 2008, the Company adopted the provisions of SFAS No. 157 for all financial
assets and financial liabilities. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and
enhances disclosures about fair value measurements. SFAS No. 157 does not
require any new fair value measurements, but applies to other accounting
pronouncements that require or permit fair value measurements.
 
 Measurement of Fair
Value
 
 SFAS No.
157 defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required to be recorded at fair value,
the Company considers the principal or most advantageous market in which it
would transact and it considers assumptions that market participants would use
when pricing the asset or liability.
   F-12
  DIGITAL
LIFESTYLES GROUP, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 NOTE
7 – FAIR VALUE – (Continued)
  Fair Value
Hierarchy
 
 SFAS No.
157 establishes a fair value hierarchy based on whether the market participant
assumptions used in determining fair value are obtained from independent sources
(observable inputs) or reflect the Company's own assumptions of market
participant valuation (unobservable inputs). A financial instrument's
categorization within the fair value hierarchy is based upon the lowest level of
input that is significant
to the fair value measurement. SFAS No. 157 establishes three levels of inputs
that may be used to measure fair value:
 
 Level
1—Quoted prices in active markets that are unadjusted and accessible at the
measurement date for identical, unrestricted assets or liabilities;
 
 Level
2—Quoted prices for identical assets and liabilities in markets that are
inactive; quoted prices for similar assets and liabilities in active markets or
financial instruments for which significant inputs are observable, either
directly or indirectly; or
 
 Level
3—Prices or valuations that require inputs that are both unobservable and
significant to the fair value measurement.
 
 The
Company considers an active market to be one in which transactions for the asset
or liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis and views an
 inactive
market as one in which there are few transactions for the asset or liability,
the prices are not current, or price quotations vary substantially either over
time or among market makers. Where appropriate the Company's or the
counterparty's non-performance risk is considered in determining the fair values
of liabilities and assets, respectively.
 
 The fair
value of our financial instruments at June 30, 2009 follows:
  (in
      thousands)
                          
                          
                          
                          
                          Fair Value Measurements at Reporting Date
      UsingQuoted
      Prices inActive
      Markets for
                          
                          
                          Significant
      Other
                          
                          
                          SignificantIdentical
      Assets
                          
                          
                          Observable
      Inputs
                          
                          
                          Unobservable
      InputsDescription
                          
                          Total
                          
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      2)Derivative
      securities
                          
                          $
                          200
                          
                          
                          $
                          -
                          
                          
                          $
                          200
                          
                          
                          $
                          -
  Derivative
warrant and conversion liabilities have generally been valued using the
Black-Scholes method using as inputs: a) expected life of one-half to eight
years, b) 0% expected dividend yield, c) 4.83% bond equivalent yield, and d)
expected future volatility of 179%.


F-13


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





The following discussion of our
financial condition and results of operationfor the three months
and six months ended June 30, 2009 and 2008 should be read in conjunction with
the financial statements and the notes to those statements that are included
elsewhere in this report. Our discussion includes forward-looking statements
based upon current expectations that involve risks and uncertainties, such as
our plans, objectives, expectations and intentions. Actual results and the
timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those
set forth under the Item 1A. Risk Factors, Cautionary Notice Regarding
Forward-Looking Statements and Business sections appearing in our Form 10-K for
the year ended December 31, 2008 as filed with the Securities and Exchange
Commission.  We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,”
“will,” “should,” “could,” and similar expressions to identify forward-looking
statements.





Plan
of Operations





Our
current business objective is to investigate and, if such investigation
warrants, acquire a target company or business seeking the perceived advantages
of being a publicly held corporation. Our principal business objective is to
achieve long-term growth potential through a combination with a business rather
than immediate, short-term earnings. We will not restrict our potential
candidate target companies to any specific business, industry or geographical
location and, thus, may acquire any type of business.





We do not currently engage in any
business activities and do not have any cash resources. As such, the costs of
investigating and analyzing business combinations will be paid through either
funds advanced by Mr. Ken Page, our sole officer and director, or funds borrowed
from his father, an existing debt holder of our company.  We also
anticipate incurring costs related to the filing of quarterly, annual and other
reports with the Securities and Exchange Commission and costs relating to
consummating an acquisition.  We do not have any firm commitments,
however, for the provision of any additional capital to our company to fund
these costs.





We may consider a business which has
recently commenced operations, is a developing company in need of additional
funds for expansion into new products or markets, is seeking to develop a new
product or service, or is an established business which may be experiencing
financial or operating difficulties and is in need of additional capital. In the
alternative, a business combination may involve the acquisition of, or merger
with, a company which does not need substantial additional capital, but which
desires to establish a public trading market for its shares, while avoiding,
among other things, the time delays, significant expense, and loss of voting
control which may occur in a public offering.





Any target business that is selected
may be a financially unstable company or an entity in its early stages of
development or growth, including entities without established records of sales
or earnings. In that event, we will be subject to numerous risks inherent in the
business and operations of financially unstable and early stage or potential
emerging growth companies. In addition, we may effect a business combination
with an entity in an industry characterized by a high level of risk, and,
although our management will endeavor to evaluate the risks inherent in a
particular target business, there can be no assurance that we will properly
ascertain or assess all significant risks.





Our management anticipates that it will
likely be able to effect only one business combination, due primarily to our
limited financing, and the dilution of interest for present and prospective
stockholders, which is likely to occur as a result of our management’s plan to
offer a controlling interest to a target business in order to achieve a tax free
reorganization. This lack of diversification should be considered a substantial
risk in investing in us, because it will not permit us to offset potential
losses from one venture against gains from another.





We anticipate that the selection of a
business combination will be complex and extremely risky. Because of general
economic conditions, rapid technological advances being made in some industries
and shortages of available capital, our management believes that there are
numerous firms seeking even the limited additional capital which we will have
and/or the perceived benefits of becoming a publicly traded corporation. Such
perceived benefits include, among other things, facilitating or improving the
terms on which additional equity financing may be obtained, providing liquidity
for the principals of and investors in a business, creating a means for
providing incentive stock options or similar benefits to key employees, and
offering greater flexibility in structuring acquisitions, joint ventures and the
like through the issuance of stock. Potentially available business combinations
may occur in many different industries and at various stages of development, all
of which will make the task of comparative investigation and analysis of such
business opportunities extremely difficult and complex.





4


Going
Concern





We are a shell company.  We
do not have any revenue generating operations and have incurred net losses of
approximately $22.5 million since inception through December 31,
2008.  At December 31, 2008 we had minimal cash, no other assets and
our total liabilities were approximately $11.4 million, all of which are past
due.  The report of our independent registered public accounting firm
on our financial statements for the year ended December 31, 2008 contains an
explanatory paragraph regarding our ability to continue as a going concern based
upon  recurring operating losses and our need to obtain additional
financing to sustain operations.  Our ability to continue as a going
concern is dependent upon our ability to obtain the necessary financing to meet
our obligations and repay our liabilities when they become due and to consummate
a business combination with an operating company.  There are no
assurances that we will continue as a going concern.





Results
of Operations





Three
months and six months ended June 30, 2009 compared to three months and six
months ended June 30, 2008





Net
sales





For each of the 2009 and 2008 periods
we had no revenues from operations which reflects an April 2005 decision by our
then management to discontinue all revenue producing operations.





Operating
expenses





Our operating expenses include rent,
insurance, payroll and professional fees.  Operating expenses
decreased approximately 78% and approximately 74% for three and six months ended
June 30 2009, respectively, as compared to comparable periods in
2008.  In the three and six months ended 2008 period our operating
expenses included approximately $166,000 related to the value of compensatory
options vesting during that period for which there was no comparable expense in
the 2009 period.





Total
other income (expense)





During each of the three months and six
months ended June 30, 2009 our interest expense decreased approximately 10% from
the comparable period in 2008 which reflects the reclassification of certain
debt to equity.





During the three and six months ended
June 30, 2008 we recognized a one-time $10,000 gain on relief of debt for which
there were no comparable events in the 2009 periods.





Change in fair value of derivative and
warrant liabilities expense consist of income or expense associated with the
change in the fair value of derivative liabilities associated with the various
outstanding warrants primarily as a result of the application of EITF Issue No.
00-19 to our financial statements.  The difference in fair value of
the derivative liabilities between the date of their issuance and their
measurement date amounted to a decrease of approximately $106,000 and
approximately $100,000 for the three and six months ended June 30, 2009,
respectively, as compared to an increase of approximately $13,000 and
approximately $94,000, respectively, for the comparable periods in 2008. While
these are non-cash items, the application of EITF 00-19 has a significant impact
on our financial statements.





Other income totaling approximately
$6,000, net,  in the 2009 periods, is primarily attributable to
royalties received for the use of our name under a marketing and license
agreement which expired in January 2009.  During the six months ended
June 30, 2008, we had received approximately $36,000 from a marketing and
licensing agreement for which there was no comparable income in the 2009
periods.





5


Liquidity
and Capital Resources





As of June 30, 2009, we had
approximately $10,000 in cash and a working capital deficit of approximately
$11.6 million.  At June 30, 2009 we had no assets other than cash and
approximately $11.6 million of liabilities, of which all but approximately
$396,000 are past due, and we do not have the funds necessary to settle these
obligations.  Included in our liabilities at June 30, 2009 are the
following:





•           approximately
$6.4 million of accounts payable which represents obligations to various vendors
including approximately $1 million due Advanced Micro Devices, approximately
$1.2 million due American Express and approximately $1.3 due Microsoft
Licensing, Inc.,





•           approximately
$2.436 million of liquidated damages due Laurus and Alloy Marketing and
Promotions,





•           approximately
$1.1 million of accrued expenses which represents approximately $596,000 of
interest on the convertible notes, approximately $308,000 of accrued payables,
approximately $125,000 of accrued wages, approximately $31,000 of accrued
royalties, and unpaid payroll taxes of approximately $10,000,





•           approximately
$396,000 of principal and accrued interest due Mr. Dan Page, a principal
shareholder and the father of our CEO, under the terms of 7.5% convertible
promissory notes which are due on December 31, 2009,





•           approximately
$1.5 million principal amount of convertible notes payable are described below
under “Past Due Notes”, and





•           approximately
$200,000 of non-cash derivative and warrant liabilities.





Our yearly cash overhead costs are
approximately $134,000, which include rent, utilities, employee compensation,
costs to maintain the company as a public entity including legal, accounting and
EDGAR filing fees and professional expenses associated with our search for a
suitable business combination.  We do not have any internal or
external sources of capital and are dependent upon advances from our sole
officer and director or his father, Mr. Dan Page, an existing debt holder, for
funds necessary to pay our operating expenses.  Effective May 2009 Mr.
Dan Page amended his existing convertible notes with our company to increase our
borrowing ability by an additional $50,000 to a total of $400,000 and extended
the due dates of the notes to December 31, 2009.  As of the date of
this report we owe Mr. Page approximately $379,000 in principal under these
notes.  Our ability to continue our company in the next 12 months
depends on our continued ability to obtain sources of capital to fund our
continuing operations and to seek out potential merger and acquisition
partners.  There are no assurances, however, that either party will
advance any funds to us as needed.  If we are not able to access
capital as necessary it is possible we will be unable to close an acquisition
which will provide operating revenues to our company.  In that event,
the likelihood that we can continue as a going concern is doubtful and investors
could lose their entire investment in our company.





Cash
Flow from Operating Activities





For the six months ended June 30, 2009,
net cash used by operating activities was approximately $22,000 as compared to
approximately $32,000 in the six months ended June 30, 2008.  In the
period 2009, we offset our loss from operations with increases in accrued
expenses and derivative liabilities.  In the period 2008, we offset
our loss with an increase in accrued expenses and stock compensation
expense.  These increases were offset by a decrease in our derivative
liabilities, a one-time gain on debt relieve and a decrease in our accounts
payable..





Cash
Flow from Financing Activities





In the six months ended June 30, 2008
we received approximately $10,000 from the proceeds on notes payable as compared
to approximately $38,000 during the 2009 period.





Past
Due Notes at June 30, 2009





•           $600,000
principal amount due Alloy Marketing and Promotions, LLC under the terms of an
unsecured convertible promissory note issued to it in April 2005 in payment to
Alloy for marketing and promotional services rendered to us.  Under
the terms of this demand note which originally bore interest at the rate of 10%
per annum, the principal and interest could be converted into shares of our
common stock at any time after April 1, 2005 at a conversion price equal to 75%
of the fair market value of our common stock providing that the underlying
shares were covered by an effective registration statement.  In
connection with the issuance of the note we entered into a registration rights
agreement with Alloy whereby we agreed to file a registration statement with the
SEC to cover the resale of the shares of common stock into which the note could
be converted.  We agreed to pay Alloy liquidated damages if we did not
file the registration statement within a specified period, if we failed to
maintain an effective registration statement or if our common stock was
suspended from trading on any market.  We have not filed the
registration statement and at June 30, 2009 we have accrued liquidated damages
in the amount of $351,000 which were due Alloy.  This note remains
outstanding and interest is now being accrued at the default rate of 15% per
annum, with a late payment fee of 6% per month.  At June 30, 2009 we
owed Alloy an aggregate of approximately $870,000 under this note, which
includes principal, accrued but unpaid interest and late fees;





6


•           $500,000
principal amount due Mr. L.E. Smith under the terms of a convertible promissory
note issued in September 2005.  This note, which bears interest at 7%
per annum and is convertible into shares of our common stock at a conversion
price of $0.25 per share, was due in September 2006.  This note is in
default.  At June 30, 2009 we owed Mr. Smith an aggregate of
approximately $627,000 under this note, which includes principal and accrued but
unpaid interest; and





•           $50,000
principal amount due Mr. Robert Wood under the terms of a convertible promissory
note issued in October 2005.  This note, which bears interest at 7%
per annum and is convertible into shares of our common stock at a conversion
price of $0.25 per share, was due in October 2006.  The purchaser was
also issued corresponding five warrants to purchase 40,000 shares of our common
stock common stock at an exercise price of $0.25 per share.  In
connection with both the convertible note and the warrants, we entered into a
registration rights agreement with the purchaser whereby we agreed to register
for resale the shares underlying the convertible note and
warrants.  This note is in default and we did not register the shares
underlying either the note or the warrant.  At June 30, 2009 we owed
Mr. Wood an aggregate of approximately $68,000 under this note, which includes
principal and accrued but unpaid interest.





Recent
Accounting Pronouncements





In September 2006, the FASB issued SFAS
No. 157, Fair Value
Measurements (SFAS No. 157). In the first quarter of fiscal year 2009, we
adopted the recognition and disclosure requirements of SFAS No. 157 for all
financial assets and financial liabilities recognized or disclosed at fair value
in the financial statements on a recurring basis (at least annually). SFAS No.
157 defines fair value, establishes a framework for measuring fair value, and
enhances fair value measurement disclosure. The adoption of this part of SFAS
No. 157 did not have a material impact on our consolidated financial statements,
and the resulting fair values of our financial assets and financial liabilities
calculated under SFAS No. 157 after adoption were not significantly different
than the fair values that would have been calculated under previous guidance.
See Note 10 of the financial statements included elsewhere herein for further
details on our fair value measurements. With respect to the recognition and
disclosure requirements of SFAS No. 157 related to non-financial assets and
non-financial liabilities, we will adopt these requirements beginning in the
first quarter of our fiscal year 2010.





In February 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13 (FSP FAS 152-1) and FSP No. FAS 157-2, Effective Date
of FASB Statement No. 157 (FSP FAS 152-2). Collectively, the Staff Positions
defer the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities except
for items that are recognized or disclosed at fair value on a recurring basis at
least annually, and amend the scope of SFAS No. 157. As described in Note 8 of
our financial statements appearing elsewhere here, we have has adopted SFAS No.
157 and the related FASB staff positions except for those items specifically
deferred under FSP FAS 157-2.  We are currently evaluating the impact
of the full adoption of SFAS No. 157 on our fiscal year 2010 consolidated
results of operations and financial condition.





In February 2007, the FASB issued SFAS
159, The Fair Value Option for
Financial Assets and Financial Liabilities- including an amendment of
FAS 115 (“SFAS 159”).  SFAS 159 allows companies to choose, at
specified election dates, to measure eligible financial assets and liabilities
at fair value that are not otherwise required to be measured at fair
value.  Unrealized gains and losses shall be reported on items for
which the fair value option has been elected in earnings at each subsequent
reporting date.  SFAS 159 also establishes presentation and disclosure
requirements.  We are continuing to evaluate the desirability of
adopting SFAS 159.  SFAS 159 was effective for fiscal years beginning
after November 15, 2007 and will be applied prospectively.  We elected
not to adopt SFAS 159.





7


In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations” (SFAS
141(R)), which replaces SFAS No. 141, “Business Combinations” (SFAS
141). SFAS 141(R) retains the underlying concepts of SFAS 141 in that all
business combinations are still required to be accounted for at fair value under
the acquisition method of accounting but SFAS 141(R) changed the method of
applying the acquisition method in a number of significant aspects. Acquisition
costs will generally be expensed as incurred; noncontrolling interests will be
valued at fair value at the acquisition date; in-process research and
development will be recorded at fair value as an indefinite-lived intangible
asset at the acquisition date, until either abandoned or completed, at which
point the useful lives will be determined; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS 141(R) is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008, with the exception of the
accounting for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes”
(SFAS 109) such that adjustments made to valuation allowances on deferred taxes
and acquired tax contingencies associated with acquisitions that closed prior to
the effective date of SFAS 141(R) would also apply the provisions of SFAS
141(R). Early adoption is not permitted. Upon adoption, SFAS 141(R) did not have
a significant impact on our consolidated financial position and results of
operations; however, any business combination entered into after the adoption
may significantly impact our financial position and results of operations when
compared to acquisitions accounted for under existing U.S. Generally Accepted
Accounting Principles (GAAP).





In
June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-5,
“Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.”
EITF Issue No. 07-5 clarifies the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which would qualify as a
scope exception under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” EITF Issue No. 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Early adoption for an existing instrument is not permitted.  EITF
Issue No. 07-5 did not have a significant impact on our financial
statements.




In
May 2009, the FASB issued Statement No. 165, "Subsequent Events" which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In particular, this Statement sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. In
accordance with this Statement, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009.  The
Company evaluated subsequent events for recognition or disclosure through August
31, 2009, which is the date the financial statements were issued.








Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do
not require adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption.





Item
3.                         Quantitative
and Qualitative Disclosures About Market Risk.





Not applicable for a smaller reporting
company.





Item
4T.                      Controls
and Procedures.





Evaluation of Disclosure Controls
and Procedures.  We maintain “disclosure controls and
procedures” as such term is defined in Rule 13a-15(e) under the Exchange
Act.  In designing and evaluating our disclosure controls and
procedures, our management recognized that disclosure controls and procedures,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of disclosure controls and procedures
are met.  Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures.  The design of any disclosure controls and procedures also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.  Based on his
evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our Chief Executive Officer who also serves as our principal financial and
accounting officer has concluded that our disclosure controls and procedures
were not effective such that the information relating to our company, required
to be disclosed in our Securities and Exchange Commission reports (i) is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure.





8


Our management concluded that our
disclosure controls and procedures were not effective as a result of a material
weakness in our disclosure controls and procedures. The material weakness
identified was that our accounting resources are not adequate to allow
sufficient time to (i) perform a review of the consolidation and supporting
financial statement disclosure schedules independent of the preparer (ii)
adequately prepare for our quarterly reviews and annual audit and (iii) research
all applicable accounting pronouncements as they relate to our financial
statements and underlying disclosures. Inadequate levels of accounting personnel
have also caused us difficulty in filing our quarterly and annual reports with
the Securities and Exchange Commission within the required time
frame.  Due to this material weakness, in preparing our financial
statements for the period ended June 30, 2009 we performed additional analysis
and other post close procedures to ensure that such financial statements were
stated fairly in all material respects in accordance with U.S. generally
accepted accounting principles.  We do not expect our disclosure
controls and procedures to be effective until such time as we complete an
acquisition of an operating company and even then there are no assurances that
our disclosure controls and procedures will be adequate in future
periods.





Changes in Internal Control over
Financial Reporting.There have been no changes in our
internal control over financial reporting during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.





PART
II - OTHER INFORMATION





Item
1.                                Legal
Proceedings.





None.





Item
1A.                          
  Risk Factors.





Not applicable for a smaller reporting
company.





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





None.


Item
3.                                Defaults
Upon Senior Securities.





None.





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





None.





Item
5.                                Other
Information.





None.





Item
6.                                Exhibits.





No.
                Description31.1
                Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive
    Officer31.2
                Rule
      13a-14(a)/ 15d-14(a) Certification of principal financial and accounting
      officer32.1
                Section
      1350 Certification of Chief Executive Officer and principal financial and
      accounting officer




9


SIGNATURES


Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.


DIGITAL
      LIFESTYLES GROUP, INC.August
      31, 2009
              By:
              /s/ Ken
      PageKen
      Page, Chief Executive Officer, principal financial and accounting
      officer





10