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

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

                                       OR



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

           FOR THE TRANSITION PERIOD FROM ____________ TO ____________

                        COMMISSION FILE NUMBER 333-113140

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

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

            727 BREA CANYON ROAD #6
              WALNUT, CALIFORNIA                                 91789
   (Address of Principal Executive Offices)                   (Zip Code)

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

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

Yes [ ]           No [X]

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

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

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

Yes [X]           No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 14, 2006 there
were 32,865,975 shares of common stock, par value $0.03 per share, outstanding
and no shares of preferred stock, par value $0.01 per share.


<PAGE>



                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                      FOR THE QUARTER ENDED MARCH 31, 2006



                                      INDEX

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

              Consolidated Balance Sheets as of
              March 31, 2006 (unaudited) and December 31, 2005.........................................................1

              Consolidated Statements of Operations for Each of the Three-Month
              Periods Ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)..................................2

              Consolidated Statement of Stockholders' Deficit for the Three-Month
              Period Ended March 31, 2006 (unaudited)..................................................................3

              Consolidated Statements of Cash Flows for Each of the Three-Month
              Periods Ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)..................................4

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

   Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations.....................................................................21

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

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

PART II.      OTHER INFORMATION

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

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

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

   Item 3.    Defaults Upon Senior Securities.........................................................................34

   Item 4.    Submission of Matters to a Vote of Security Holders.....................................................34

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

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

</TABLE>



<PAGE>

<TABLE>
<CAPTION>

PART I            FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

                 DIGITAL LIFESTYLES GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)
                                                                              As of                    As of
                                                                          March 31, 2006         December 31, 2005
                                                                       ---------------------    ---------------------
                                                                           (unaudited)
<S>                                                                            <C>                      <C>
                              ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                    $       165              $        62
  Accounts receivable                                                                    -                      116
                                                                       ---------------------    ---------------------
      Total assets                                                             $       165              $       178
                                                                       =====================    =====================

              LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable                                                             $                        $     6,502
                                                                                     6,444
  Accrued expenses                                                                     285                      252
  Convertible notes payable, net of debt discount                                    3,227                    3,032
                                                                       ---------------------    ---------------------
      Total current liabilities                                                      9,956                    9,786

  Derivative and warrant liabilities                                                 9,189                    6,186
                                                                       ---------------------    ---------------------
      Total liabilities                                                             19,145                   15,972
                                                                       ---------------------    ---------------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
  Preferred stock, $0.01 par value; 5,000 shares authorized, 0                           -                         -
       shares issued and outstanding, liquidation preference of $0
  Common stock, $0.03 par value; 50,000 shares authorized, 32,866
       shares issued and outstanding                                                   986                      986
  Additional paid-in capital                                                        15,536                   15,388
  Accumulated deficit                                                              (29,295)                 (25,961)
                                                                       ---------------------    ---------------------
                                                                                   (12,773)                  (9,587)

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

      Total stockholders' deficit                                                  (18,980)                 (15,794)
                                                                       ---------------------    ---------------------

      Total liabilities and stockholders' deficit                              $       165              $       178
                                                                       =====================    =====================


      See accompanying notes to condensed consolidated financial statements

</TABLE>

                                       1
<PAGE>

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

                                                                                    For the Three Months Ended
                                                                               March 31, 2006        March 31, 2005
                                                                              ------------------    ------------------
<S>                                                                                  <C>                  <C>
Net sales                                                                            $       -            $    1,210
Cost of sales                                                                                -                (1,155)
                                                                              ------------------    ------------------
     Gross profit                                                                            -                    55

Operating expenses                                                                         320                 1,476
                                                                              ------------------    ------------------
     Operating loss                                                                       (320)               (1,421)
                                                                              ------------------    ------------------

Other (income) expense:
  Interest expense                                                                         112                   203
  Change in fair value of derivative and warrant liabilities                             2,958                (1,647)
  Gain on debt settlement                                                                  (52)                    -
  Loss on disposal of assets                                                                 -                 1,532
  Other, net                                                                                (4)                   (4)
                                                                              ------------------    ------------------
     Total other expense, net                                                            3,014                    84
                                                                              ------------------    ------------------

Loss before provision for income taxes                                                  (3,334)               (1,505)

Provision for income taxes                                                                   -                     -
                                                                              ------------------    ------------------

Net loss                                                                           $    (3,334)          $    (1,505)
                                                                              ==================    ==================

Basic loss per share                                                               $     (0.10)          $     (0.04)
                                                                              ==================    ==================

Diluted loss per share                                                             $     (0.10)          $     (0.04)
                                                                              ==================    ==================

Weighted average shares of common stock outstanding:
  Basic                                                                                  32,866                37,648
                                                                              ==================    ==================
  Diluted                                                                                32,866                37,648
                                                                              ==================    ==================

      See accompanying notes to condensed consolidated financial statements

</TABLE>


                                       2
<PAGE>

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

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

                                     Shares      Amount
                                     --------    ---------
<S>                                  <C>           <C>          <C>            <C>             <C>                <C>
Balance,                             32,866        $986         $15,388        $(6,207)        $(25,961)          $(15,794)
January 1, 2006

Issuance of options to employees        -           -               148           -                -                   148

Net income                              -           -              -              -              (3,334)            (3,334)
                                     --------    ---------    ------------    -----------    ---------------    ---------------

Balance, March 31, 2006              32,866        $986         $15,536        $(6,207)        $(29,295)          $(18,980)
                                     ========    =========    ============    ===========    ===============    ===============

      See accompanying notes to condensed consolidated financial statements

</TABLE>

                                       3
<PAGE>

<TABLE>
<CAPTION>

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

                                                                                    For the Three Months Ended
                                                                               March 31, 2006        March 31, 2005
                                                                              ------------------    ------------------
Cash flows from operating activities
<S>                                                                               <C>                   <C>
   Net loss                                                                       $     (3,334)         $     (1,505)
   Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:
      Depreciation and amortization                                                          -                    76
      Gain on settlement of debt                                                           (52)                    -
      Change in fair value of derivates and warrant liabilities                          2,958                (1,647)
      Amortization of debt discount                                                         20                   108
      Loss on disposal of assets                                                             -                 1,532
      Fair  value of  options  issued to  consultants  and  employees  for                 192                     -
      services
      Changes in operating assets and liabilities:
         Accounts receivable                                                               116                 1,241
         Inventories                                                                         -                   803
         Prepaid expenses and other current assets                                           -                    42
         Accounts payable                                                                   (5)                 (169)
         Accrued expenses                                                                   33                   (67)
                                                                              ------------------    ------------------

Net cash provided by (used in) operating activities                                        (72)                  414
                                                                              ------------------    ------------------

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

Cash flows from financing activities:
   Payments on note payable                                                                  -                  (615)
   Borrowings under short-term financing, net                                              175                     -
                                                                              ------------------    ------------------

Net cash  provided by (used in) financing activities                                       175                  (615)
                                                                              ------------------    ------------------

Net increase (decrease) in cash and cash equivalents                                       103                  (349)

Cash and cash equivalents, beginning of period                                              62                   466
                                                                              ------------------    ------------------

Cash and cash equivalents, end of period                                             $     165           $       117
                                                                              ==================    ==================

      See accompanying notes to condensed consolidated financial statements

</TABLE>
                                       4
<PAGE>


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

                 FOR THE QUARTERS ENDED MARCH 31, 2006 AND 2005

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, 2005.

In the opinion of our management, the accompanying financial statements contain
all adjustments necessary to present fairly our financial position at March 31,
2006, and the results of operations and cash flows for the three months ended
March 31, 2006 and 2005. Certain reclassifications have been made to prior year
amounts in order to conform to the current year presentation. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year.

ORGANIZATION

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

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

BASIS OF PRESENTATION

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

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


                                       5
<PAGE>


NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED

As of June 30, 2006, we have no business operations other than to assist our
secured creditor, Laurus, liquidate its collateral. As of August 14, 2006, we
have approximately $40,000 of cash and as of June 30, 2006, $2.1 million of
secured debt and approximately $7.6 million in unsecured debt, virtually all of
which is past due. During the fiscal year ending December 31, 2006, we expect to
incur costs of approximately $800,000 primarily related to operating costs, such
as rent for office space, utilities, employee compensation, costs of maintaining
the business as a public entity, professional expenses (including legal and
accounting fees) related to negotiating a business combination and bringing the
Company current in its SEC filings, and insurance.

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

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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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



                                       6
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

INVENTORIES

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

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

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

EQUIPMENT

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

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

SOFTWARE DEVELOPMENT COSTS

We reviewed the unamortized software development costs in the second quarter of
2005 upon the Company's shut-down of operations and wrote down the balance to $0
(see Note 1).

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


                                       7
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

LONG-LIVED ASSETS

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

CONCENTRATIONS

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

For the quarter ended March 31, 2005, major customers accounted for
approximately 14% of total sales.

For the quarter ended March 31, 2005, major suppliers accounted for 11% of total
purchases.

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

DERIVATIVE FINANCIAL INSTRUMENTS

Our derivative financial instruments consist primarily of embedded derivatives
related to Laurus notes entered into on November 30, 2004 (see Note 4). The
embedded derivatives include the conversion feature, variable interest features,
and liquidated damages clauses in the registration rights agreement and certain
default provisions. The accounting treatment of derivative financial instruments
requires that the Company record the derivatives and related warrants at their
fair values as of the inception date of the agreement and at fair value as of
each subsequent balance sheet date. In addition, under the provisions of EITF
Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock," the Company is required to
classify all other non-employee stock options and warrants as derivative
liabilities and mark them to market at each reporting date. The fair value of
all derivatives at March 31, 2006 totaled approximately $9.19 million. Any
change in fair value of these instruments will be recorded as non-operating,
non-cash income or expense at each reporting date. If the fair value of the
derivatives is higher at the subsequent balance sheet date, the Company will
record a non-operating, non-cash charge. If the fair value of the derivatives is
lower at the subsequent balance sheet date, the Company will record
non-operating, non-cash income. Derivatives were valued primarily using the
Black-Scholes Option Pricing Model with the following assumptions: dividend
yield of 0%, annual volatility of 212%-364%, risk free interest rate of 2.11% -
4.39%, and expected life of 3-10 years.

The derivatives are classified as long-term liabilities (see Note 4).

For the quarter ended March 31, 2006, the net increase in derivative and warrant
liabilities was approximately $2.96 million, which is recorded as a component of
other expense in the accompanying consolidated statements of operations.



                                       8
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

REVENUE RECOGNITION

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

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

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

ACCOUNTING FOR SHIPPING AND HANDLING REVENUE, FEES AND COSTS

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

MERCHANDISE RETURN AND WARRANTY POLICY

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

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

ADVERTISING REVENUE AND COSTS

Advertising revenue is recognized upon receipt of income. Advertising costs are
charged to expense as incurred. Net advertising expense was $0 and $80,000 for
the quarters ended March 31, 2006 and 2005, respectively, and is included in
operating expenses.

INCOME TAXES

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


                                       9
<PAGE>



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

STOCK-BASED COMPENSATION

At March 31, 2006, we had one stock-based compensation plan. Prior to January 1,
2006, we accounted for options granted to employees under this and previous
plans under the recognition and measurement provisions of Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations, as permitted by SFAS No. 123, ACCOUNTING FOR STOCK
BASED COMPENSATION. No stock-based employee compensation cost was recognized in
the statement of operations for the three months ended March 31, 2005, as all
options granted under this plan had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, on the first day of our fiscal year 2006, we adopted
the fair value recognition provisions of SFAS No. 123(R), SHARE BASED PAYMENT,
using the modified-prospective transition method. Under this transition method,
compensation cost recognized in the three months ended March 31, 2006 includes:
(a) compensation cost for all share-based payments granted and not yet vested
prior to January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to December 31, 2005 based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). Results for prior periods have not been restated. Since stock-based
compensation expense recognized in the statement of operations for the three
months ended March 31, 2006 is based on awards ultimately expected to vest, the
compensation expense has been reduced for estimated forfeitures. SFAS No. 123(R)
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.

We calculate stock-based compensation by estimating the fair value of each
option using the Black-Scholes option-pricing model. Our determination of fair
value of share-based payment awards are made as of their respective dates of
grant using that option-pricing model and are affected by our stock price as
well as assumptions regarding a number of subjective variables. These variables
include, but are not limited to, our expected stock price volatility over the
term of the awards and actual and projected employee stock option exercise
behavior. The Black-Scholes option pricing model was developed for use in
estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because our employee stock options have
certain characteristics that are significantly different from traded options,
the existing valuation models may not provide an accurate measure of the fair
value of our employee stock options. Although the fair value of employee stock
options is determined in accordance with SFAS No. 123(R) using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. The calculated compensation cost is
recognized on a straight-line basis over the vesting period of the option.

We have issued stock options to employees whose only condition for vesting are
continued employment or service during the related vesting period. The vesting
period for all outstanding options is either one year or immediate.

For the three months ended March 31, 2006, the Company recognized compensation
cost of $148,500 as a result of the adoption of SFAS 123(R). The effect of the
change in applying the provisions of SFAS 123(R) resulted in lowering income
from continuing operations, income before taxes, net income and basic and
diluted earnings per share are as follows:

                                          For the Three Months Ended
                                              March 31, 2006
                                  ----------------------------------------
                                     SFAS 123(R)             APB 25
                                  ------------------    ------------------

Net loss                               $    (3,334)          $    (3,215)
                                  ==================    ==================
Basic and diluted loss per share       $     (0.10)          $     (0.10)
                                  ==================    ==================

                                       10
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

The following table illustrates the effect on net income and net income per
share for the three months ended March 31, 2005 as if the Company had applied
the fair value recognition provisions of SFAS 123(R) to options granted under
the Company's stock option plans. For purposes of this pro forma disclosure, the
fair value of the options is estimated using the Black Scholes option-pricing
model and amortized on a straight-line basis to expense over the options'
vesting period (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                               For the Three Months
                                                                                               Ended March 31, 2005
                                                                                             -------------------------

<C>                                                                                     <C>                       <C>
Net loss, as reported                                                                                $        (1,505)
Add: Share-based employee compensation
     expense included in net income, net of
     related tax effects, as reported                                                                               -
Deduct: Share-based employee compensation
     expense determined under the fair value
     method, net of related tax effects - pro forma                                                                 -
                                                                                             -------------------------
Net loss - pro forma                                                                                 $        (1,505)
                                                                                             =========================

Net loss per common share, as reported
Basic and diluted                                                                                    $         (0.04)
                                                                                             =========================
Net loss per common share, pro forma
Basic and  diluted                                                                                   $         (0.04)
                                                                                             =========================

The Board of Directors determines eligibility, vesting schedules and exercise
prices for awards granted under the stock plans. We issue new shares to satisfy
stock option exercises under our stock plans.

A summary of the shares reserved for grant and awards available for grant under
the stock plan is as follows:

                                                                                   For the Three Months Ended
                                                                                         March 31, 2006
                                                                            ------------------------------------------
                                                                             Shares Reserved       Awards Available
                                                                                for Grant             for Grant
                                                                            ------------------   ---------------------

2004 Stock Plan                                                                         3,500                     300

The fair value of each stock-based award is estimated on the grant date using
the Black Scholes option-pricing model. Expected volatilities are based on the
historical volatility of the Company's stock price. The expected term of options
granted subsequent to the adoption of SFAS 123(R) is derived using the
simplified method as defined in the SEC's Staff Accounting Bulletin 107,
IMPLEMENTATION OF FASB 123(R). The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury interest rates in
effect at the time of grant. The fair value of options granted was estimated
using the following weighted-average assumptions:

                                                                                    For the Three Months Ended
                                    March 31,
                                    2006 2005
                                                                              ------------------    ------------------

Expected term (in years)                                                                     3                     -
Expected volatility                                                                        254%                    -
Risk free interest rate                                                                   4.38%                    -
Dividend yield                                                                               -                     -

</TABLE>



                                       11
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

A summary of option activity under the stock plans and changes during the
quarter ended March 31, 2006 is presented below (amounts in thousands except per
share data and years):

<TABLE>
<CAPTION>

                                                                               Weighted Average
                                                                      -----------------------------------

                                                                                          Remaining
                                                                        Exercise       Contractual Term         Aggregate
                                                        Shares           Price             (Years)           Intrinsic Value
                                                      ------------    -------------   -------------------    ----------------
<S>                                                        <C>           <C>            <C>                    <C>
    Outstanding at beginning of period                     3,000         $   0.20
    Granted                                                  200             0.50
    Cancelled/forfeited                                        -                -
    Exercised                                                  -                -
                                                      ------------    -------------

    Outstanding at end of period                           3,200         $   0.22            2.3                 1,380
                                                      ============    =============   ===================    ================

    Options exercisable at end of period                   1,950         $   0.23            2.3                   818
                                                      ============    =============   ===================    ================

A summary of the activity of the Company's nonvested shares is presented below
for the quarter ended March 31, 2006 (amounts in thousands except per share data
and years):

                                                                                      Weighted-Average
                                                                    ------------------------------------------------------
                                                                                                             Remaining
                                                                    Grant-Date                             Unrecognized
                                                                    Fair Value       Remaining Years       Compensation
                                                     Shares                              to Vest               Cost
                                                 ---------------    ------------    ------------------    ----------------

Nonvested outstanding at beginning of period             2,000            0.03
Granted                                                      -               -
Vested                                                    (750)           0.03
                                                 ---------------    ------------
Forfeited                                                    -               -
Nonvested outstanding at end of period                   1,250         $  0.03             2.4                 $      37
                                                 ===============    ============    ==================    ================
</TABLE>

401(K) PLAN

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

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

NET LOSS PER SHARE

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

Since we reported losses for 2006 and 2005, basic and diluted weighted average
shares are the same for that quarter, as the effect of potentially diluted
shares are anti-dilutive and thus not included in the diluted loss per share
calculation. Additional potential dilutive shares are approximately 13.5 million
and 11.9 million for the three months ended March 31, 2006 and 2005,
respectively.



                                       12
<PAGE>



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

PRODUCT LICENSES

From time to time, we receive notices from companies and individuals asserting
exclusive patent, copyright, trademark or other intellectual property rights to
technologies or marks that are important to the technology industry and/or our
business. We evaluate each claim relating to its products and, if appropriate,
seek a license to use the protected technology. The licensing agreements
generally do not require the licensor to assist us in duplicating its patented
technology nor do these agreements protect us from trade secret, copyright or
other violations by us, or our suppliers in developing or selling these
products. Liabilities are recorded when claims asserted are probable and such
costs to the Company can be estimated. No such costs have been recorded during
the quarters ended March 31, 2006 and 2005.

COMPREHENSIVE INCOME

We have adopted SFAS No. 130, "Reporting Comprehensive Income." This statement
established standards for the reporting of comprehensive income and its
components. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. There was no difference
between net loss and comprehensive loss for the quarters ended March 31, 2006
and 2005.

NEW ACCOUNTING PRONOUNCEMENTS

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

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



                                       13
<PAGE>


NOTE 3  -  NOTES PAYABLE

At March 31, 2006, we had a $0 note payable to an individual. Interest on the
note was payable monthly at 9% and the note was due January 1, 2005. In the
third quarter of 2005, this note was settled for $70,000 resulting in a gain on
settlement of debt of approximately $1,115,000.

NOTE 4 - CONVERTIBLE NOTES PAYABLE

At March 31, 2006, we had $100,000 of convertible notes payable to an
individual, dated June 18, 1999. Interest was payable at 10% per annum through
December 18, 2000 and is payable at 12% thereafter. The note and accrued
interest were due December 18, 2000. The note is convertible at $20.00 per share
and is currently in default. Management has held settlement discussions with the
note holder but has been unable to reach a settlement for payment.

On November 30, 2004, we entered into a $7,500,000 secured credit facility with
Laurus. The facility consisted of a $4,750,000 convertible revolving note and a
$2,750,000 convertible term note. We initially borrowed approximately $3,255,000
under this facility, net of issuance costs of $287,000, which represented
$2,750,000 under the convertible term note and $792,000 under the convertible
revolving note. The outstanding balance of the revolving note and the principal
balance of the term note are convertible into shares of our common stock,
subject to certain limitations set forth in the agreement based upon the stock's
trading volume and Laurus' ownership position. The conversion price of the notes
is $0.39 per share, which is a premium over the average closing price of our
common stock over the ten trading days preceding the execution of the agreement,
with conversion reset rights if we issue any shares for less than the initial
conversion price. In connection with the facility, we also issued to Laurus
warrants to purchase up to 3,846,154 shares of our common stock at $0.44 per
share (70% of these warrants were vested at December 31, 2004). We agreed to
file a registration statement with the Securities and Exchange Commission
registering the resale of the shares of our common stock issuable to Laurus upon
conversion of the term note and exercise of the warrants. Failure to file such a
registration statement timely and to maintain its effectiveness will subject us
to liquidated damages as defined in the registration rights agreement. The notes
are due on November 29, 2007 and bear interest at the default interest rate of
12%, subject to downward adjustment based on our common stock price. Our
obligations to Laurus under the credit facility are secured by substantially all
of our assets (other than intellectual property rights), including our ownership
interests in our operating subsidiaries.

The convertible revolving note balance was $0 at March 31, 2006. The convertible
term note balance at March 31, 2006, was $2,018,000, and is classified as part
of convertible notes in the accompanying consolidated balance sheet (see below).

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

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

At March 31, 2006, we have shown all of the convertible note balance as a
current liability because of the default in the second quarter of 2005 (see
below).



                                       14
<PAGE>


NOTE 4 - CONVERTIBLE NOTES PAYABLE, CONTINUED

On April 1, 2005, we issued to Alloy Marketing and Promotions, LLC a
subordinated convertible promissory note in the principal amount of
approximately $600,000. The note was issued in payment of a similar amount due
to Alloy for services provided to us by Alloy in 2004. The note is unsecured and
matures upon demand by Alloy. Alloy may convert the note into shares of our
common stock at any time at a conversion price equal to 75% of fair market value
of the common stock, defined as the lesser of (i) the average of the closing
prices of the common stock for the five trading days immediately prior to the
first to occur of (A) the date on which we include the registration of the
resale of the common stock issuable upon conversion of the note in a
registration statement filed with the SEC and (B) any date on which Alloy
delivers to us a notice of conversion, or (ii) the closing price of the common
stock for the trading day immediately prior to the first to occur of such dates.
We may prepay the note at any time without penalty or premium. In connection
with the subordinated convertible promissory note we entered into a registration
rights agreement with Alloy, pursuant to which we agreed to use our commercially
reasonable efforts to file with the SEC a registration statement for offerings
to be made on a continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, with respect to the resale of the shares of common stock
issuable upon the conversion of the note. We are obligated to pay Alloy a cash
fee, as liquidated damages, equal to 1.50% of the original principal amount of
the note for each thirty day period, beginning April 1, 2005, until the
registration statement is declared effective. We would also have to make similar
payments if the registration statement, after it is declared effective, ceases
to be effective for more than twenty consecutive calendar days or more than
thirty days in the aggregate during a year, or the common stock is not listed or
quoted or is suspended from trading on any trading market for three consecutive
trading days, and such suspension shall not have been lifted within thirty days
or the common stock is not listed on another trading market. Through March 31,
2006, we have accrued $108,000 in liquidated damage under this agreement.

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

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



                                       15
<PAGE>


NOTE 4 - CONVERTIBLE NOTES PAYABLE, CONTINUED

On October 28, 2005, we issued a convertible promissory note to an investor in
exchange for $50,000 in immediately available funds. The convertible promissory
note bears interest at a rate of 7% per annum and has an initial maturity date
of October 28, 2006. The convertible promissory note is convertible at any time
into shares of our common stock at a conversion price of $0.25. We are obligated
to make interest only payments until the maturity date or until the note is
converted or prepaid in full. We have an option to make one prepayment of the
note, in whole or in part, without penalty at any time beginning six months
after the date of the note. In the event that we elect to prepay the note, the
noteholder may elect within three business days to convert all or a portion of
the note into shares of our common stock and prevent prepayment of the note. In
connection with the issuance of the note, the investor was also issued warrants
to purchase an aggregate of 40,000 shares of our common stock. The warrant is
exercisable at $0.25 per share, is exercisable immediately and expires five
years from the date of issuance. We have also granted certain registration
rights related to the shares of our common stock underlying the convertible note
and warrants issued to the investor. The value of these warrants have been
recorded as debt discount of $16,000 and amortized to interest expense on the
effective interest method over the life of the promissory note. Approximately
$4,000 of amortization expense has been recorded during March 31, 2006, for this
debt discount.

Convertible notes payable are summarized as follows:
<TABLE>
<CAPTION>
                                                                          March 31, 2006          December 31, 2005
                                                                       ---------------------    ----------------------
<S>                                                                           <C>                      <C>
Convertible note payable to a third party with an interest rate of 7% per annum,
due September 19, 2006, net of unamortized debt
discount of $32,000 and $48,000, respectively                                 $     468,000            $      277,000

Convertible note payable to a third party with an interest rate of 7% per annum,
due October 27, 2006, net of unamortized debt
discount of $9,000 and $13,000, respectively                                         41,000                    37,000

Convertible note payable to a third party with an interest rate of 10% per
annum, matured in December 2000, currently in default. Default interest rate is
15%. Late payments also incur
a late fee of 6% per month                                                          100,000                   100,000

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

Convertible credit facility with a third party, with an interest
rate of 12%, currently in default.  Payment is due upon
completion of a merger with another company.                                      2,018,000                 2,018,000
                                                                       ---------------------    ----------------------

                                                                             $    3,227,000           $     3,032,000
                                                                       =====================    ======================

</TABLE>


                                       16
<PAGE>


NOTE 5 - RELATED PARTY TRANSACTIONS

During 2003, we received advances of approximately $3,306,000 from Andy Teng,
our chairman of the board, chief executive officer and chief financial officer.
We repaid approximately $2,306,000 of these advances during 2003. During January
2004, we recorded an additional $500,000 in repayments to Mr. Teng. Mr. Teng
returned the $500,000 on February 2, 2004. The advances from Mr. Teng recorded
by us and the payments to Mr. Teng on the recorded advances were not approved by
our board of directors. In 2004, we received a demand from Mr. Teng, for
repayment of $1,210,000 in advances, including $210,000 discussed below. In
April 2004, Mr. Teng filed suit to collect this amount. We paid interest on the
outstanding advances during the year at 3.5%. Total interest expense related to
these advances was approximately $0 in the quarter ended March 31, 2006.

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

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

NOTE 6 - STOCKHOLDERS' EQUITY

During the third quarter of 2005, we issued 1,000,000 shares of common stock for
the settlement of a $1,004,000 related party note payable (see Note 5).

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

NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN

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

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

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



                                       17
<PAGE>



NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN

We make annual contributions to the ESOP equal to a minimum of the ESOP's
required debt service less dividends received by the ESOP. The ESOP shares
initially were pledged as collateral for its debt. As the debt is repaid, shares
are released from collateral and allocated to active employees, based on the
proportion of debt service paid in the year. As shares are released from
collateral, we report compensation expense equal to the current market price of
the shares and the released shares become outstanding for earnings-per-share
computations. We recognized no compensation expense for the quarters ended March
31, 2006 and 2005. In the fourth quarter of 2004, we recognized $16,000 of
non-cash compensation expense related to the value of the 47,991 additional
shares of our common stock allocated to the ESOP participants as a result of the
DOL audit (see below). Dividends on released ESOP shares are recorded as a
reduction of retained earnings; dividends on unreleased ESOP shares are recorded
as a reduction of debt and accrued interest when paid. ESOP interest expense
related to the ESOP note was $0 for the quarters ended March 31, 2006 and 2005.

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

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

In December 2003, Mr. Teng agreed to release the ESOP from its obligations under
the $10.0 million promissory note, thereby releasing us from our guarantee of
the ESOP debt. In connection with Mr. Teng's release of the ESOP from its
obligations under the promissory note, we eliminated the guarantee of ESOP loan
payable and ESOP interest payable balances against additional paid-in capital,
totaling $9,114,000, as this debt release is considered a contribution of
capital to us by Mr. Teng.

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


                                       18
<PAGE>



NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN

Common shares held by the ESOP are as follows:
<TABLE>
<CAPTION>
                                                                                         (in thousands)
                                                                                --------------- -- ----------------
                                                                                  March 31,         December 31,
                                                                                     2006               2005
                                                                                ---------------    ----------------
<S>                                                                                      <C>                 <C>
Allocated shares                                                                         1,613               1,613
Shares released for allocation                                                               -                   -
Unreleased (unearned) shares
                                                                                ---------------    ----------------
                                                                                         2,641               2,641
                                                                                ---------------    ----------------

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

Fair value of unreleased (unearned) shares (based on closing price of our            $   1,717          $    1,162
stock)                                                                          ==============     ===============
</TABLE>

In the event a terminated ESOP participant desires to sell his or her shares of
our common stock, or for certain employees who elect to diversify their account
balances, we may be required to purchase the shares from the participant at
their fair market value. During the quarters ended March 31, 2006 and 2005, we
did not purchase any stock from ESOP participants nor did we have any obligation
to do so at any time during this period.

NOTE 8 - NON-EMPLOYEE STOCK OPTIONS

During the first quarter of 2006, 80,000 options were issued to service
providers valued at $43,000.

NOTE 9 - SEGMENT INFORMATION

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

NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                                                Quarters Ended March 31,
                                         ---------------------------------------
                                               2006                  2005
                                         -----------------     -----------------
(In thousands)

Cash paid during quarter:

     Interest                            $            53      $           66

     Income taxes                        $             -      $            -



                                       19
<PAGE>


NOTE 11 - COMMITMENTS AND CONTINGENCIES

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

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

NOTE 12 - SUBSEQUENT EVENTS

In August 2006, we issued a promissory note to Mr. Teng in exchange for $40,000
in immediately available funds. The promissory note bears interest at a rate of
6% per annum and has a maturity date of September 7, 2006.



                                       20
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     REFERENCE IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS "FORM 10-Q" OR THIS
"REPORT") TO "DIGITAL," THE "COMPANY," "WE," "OUR," AND "US" REFERS TO DIGITAL
LIFESTYLES GROUP, INC., A DELAWARE CORPORATION, AND OUR WHOLLY OWNED
SUBSIDIARIES.

FORWARD-LOOKING STATEMENTS

     THIS FORM 10-Q CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 AND SECTION 27A OF THE SECURITIES ACT OF 1933. THE WORDS "EXPECT,"
"ESTIMATE," "ANTICIPATE," "PREDICT," "BELIEVE" AND SIMILAR EXPRESSIONS AND
VARIATIONS THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FILING AND INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF DIGITAL, OUR DIRECTORS
OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS (A) TRENDS AFFECTING OUR
FINANCIAL CONDITION OR RESULTS OF OPERATION (B) OUR ABILITY TO MEET OUR DEBT
SERVICE OBLIGATIONS, (C) OUR ABILITY TO CONSUMMATE A STRATEGIC MERGER AND (D)
OUR BUSINESS AND GROWTH STRATEGIES. OUR STOCKHOLDERS ARE CAUTIONED NOT TO PUT
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN
THIS REPORT, FOR THE REASONS, AMONG OTHERS, DISCUSSED IN THE SECTIONS --
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN OUR FORWARD-LOOKING STATEMENTS ARE REASONABLE, ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED OR ASSUMED. OUR FUTURE FINANCIAL
CONDITION, AS WELL AS ANY FORWARD-LOOKING STATEMENTS, ARE SUBJECT TO CHANGE AND
TO INHERENT RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCLOSED IN THIS REPORT.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS
TO REFLECT EVENTS OR CIRCUMSTANCES THAT ARISE AFTER THE DATE HEREOF.

EXECUTIVE OVERVIEW

OVERVIEW

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

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

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


                                       21
<PAGE>



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

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

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

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

     As of June 30, 2006, we have no business operations other than to assist
our secured creditor, Laurus, liquidate its collateral. As of August 14, 2006,
we have approximately $40,000 of cash and as of June 30, 2006 approximately $2.1
million of secured debt and approximately $7.6 million in unsecured debt,
virtually all of which is past due. During the fiscal year ending December 31,
2006, we expect to incur operating costs of approximately $800,000, primarily
related to operating costs, such as rent for office space, utilities, employee
compensation, costs of maintaining the business as a public entity, professional
expenses (including legal and accounting fees) related to negotiating a business
combination and bringing us current in our filings with the Securities Exchange
Commission, and insurance. We estimate our existing capital resources are
sufficient to meet our operating and capital needs until August 31, 2006.
However, as we have no current sales or other sources of revenue, we depend upon
our ability to arrange for additional equity or debt financing to meet our
liquidity requirements beyond August 31, 2006. Due to our lack of operations and
inability to generate sales, severe shortage of capital, significant debt, and
our default under existing credit and loan agreements, described under the
section titled "Recent Sales of Unregistered Securities" above, as well as the
other factors described under the section titled "Cautionary Statements and Risk
Factors," we may not be able to arrange for debt or equity financing from third
parties on favorable terms, or at all.

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

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



                                       22
<PAGE>


BASIS OF PRESENTATION, CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

BASIS OF ACCOUNTING

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

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

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

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

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


                                       23
<PAGE>



     IMPAIRMENT OF LONG-LIVED ASSETS. We evaluate the recoverability of our
long-lived assets and review these assets for recoverability when events or
circumstances indicate a potential impairment. Factors we consider important
that could trigger an impairment review include the following:

     o    significant underperformance relative to historical or projected
          operating results;

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

     o    significant negative industry or economic trends.

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

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

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

     ACCOUNTING FOR STOCK-BASED INCENTIVE PROGRAMS. In accordance with SFAS No.
123(R), "Share Based Payment" ("SFAS 123(R)"), in our first quarter of fiscal
2006 we started to recognize compensation expense related to stock options and
restricted stock purchase rights, which are equivalent to options granted to
employees based on: (1) compensation costs for all share-based payments granted
prior to, but not yet vested as of December 31, 2005, based on the grant date
fair value estimated in accordance with SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," ("SFAS 123"), adjusted for an estimated future
forfeiture rate, and (b) compensation cost for all share-based payments granted
subsequent to December 31, 2005, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R).

     Our assessment of the estimated fair value of the stock options granted is
affected by our stock price as well as assumptions regarding a number of complex
and subjective variables and the related tax impact. We utilize the
Black-Scholes model to estimate the fair value of stock options granted.
Generally, our calculation of the fair value for options granted under SFAS
123(R) is similar to the calculation of fair value under SFAS 123 with the
exception of the treatment of forfeitures. The fair value of restricted stock
units granted is based on the grant date price of our common stock.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. This model also requires the input of highly
subjective assumptions including:

     o    significant underperformance relative to historical or projected
          operating results;

     o    Expected dividends, which are nil, as we do not anticipate issuing
          dividends;

     o    Expected life of the stock option, which is estimated based on the
          historical stock option exercise behavior of our employees; and


                                       24
<PAGE>



     o    Expected forfeitures of stock options, which is estimated based on the
          historical turnover of our employees and expected turnover in the
          future. Prior to the adoption of SFAS 12R, we recognized forfeitures
          under SFAS 123 as they occurred.

     In the future, we may elect to use different assumptions under the
Black-Scholes valuation model or a different valuation model, which could result
in a significantly different impact on our net income or loss.

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 2006 COMPARED TO QUARTER ENDED MARCH 31, 2005.

     NET SALES. We had no net sales for the quarter ended March 31, 2006
compared with net sales of $1.21 million for the quarter ended March 31, 2005.
The decrease in net sales was attributable to our decision in the May 2005 to
cease all ongoing operations, except for operations related to helping our
secured creditor liquidate its collateral.

     GROSS PROFIT. We had no gross profit for the three months ended March 31,
2006. This represented a decrease of $55,000, or 100%, compared to a gross
profit of $55,000 for the comparable period in 2005. The decrease in gross
profit was attributable to our decision in the May 2005 to cease all ongoing
operations, except for operations related to helping our secured creditor
liquidate its collateral.

     TOTAL OPERATING EXPENSES. Our total operating expenses decreased $1.16
million, or 78.3%, to $320,000 for the quarter ended March 31, 2005 from $1.48
million for the quarter ended March 31, 2005. The decrease in total operating
expenses was attributable to our decision in the May 2005 to cease all ongoing
operations, except for operations related to helping our secured creditor
liquidate its collateral.

     OTHER INCOME (EXPENSES). Our other non-operating expenses increased $2.92
million to $3.0 million for the quarter ended March 31, 2006 from $84,000 for
the comparable period in 2005. The increase is primarily due to the change in
fair market value of derivative liabilities caused by an increase in our share
price.

     NET LOSS. We incurred a net loss of $3.33 million for the quarter ended
March 31, 2006. This represented an increase of $1.82 million, or 120%, compared
to a net loss of $1.51 million for the quarter ended March 31, 2005.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to 2004, we financed our operations and met our capital expenditure
requirements primarily from cash provided by operations, borrowings from private
individuals, and borrowings from financial institutions. As of March 31, 2006,
we had approximately $165,000 in cash and cash equivalents compared to
approximately $117,000 at March 31, 2005. As of August 14, 2006, our principal
sources of liquidity were cash and cash equivalents of approximately $40,000.

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



                                       25
<PAGE>



DEBT OBLIGATIONS

     At August 14, 2006 our cash obligations for short-term and long-term debt
consisted of:


         Convertible note payable - others                 $    650,000
         Convertible note payable - Laurus                    2,019,000
         Convertible note payable - Alloy                       600,000
         Note payable - Teng                                     40,000
                                                      ------------------
         Total debt                                        $  3,309,000
                                                      ==================

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

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

     On September 19, 2005, we executed an agreement with one investor whereby
we received $250,000 in immediately available funds through the issuance of a
convertible promissory note. The investor also committed an



                                       26
<PAGE>


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

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

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

     In August 2006, we issued a promissory note to Mr. Teng in exchange for
$40,000 in immediately available funds. The promissory note bears interest at a
rate of 6% per annum and has an maturity date of September 7, 2006.

                                  RISK FACTORS

     SEVERAL OF THE MATTERS DISCUSSED IN THIS REPORT CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FACTORS ASSOCIATED WITH THE
FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE
PROJECTED OR FORECASTED IN THIS REPORT ARE INCLUDED IN THE STATEMENTS BELOW. IN
ADDITION TO OTHER INFORMATION CONTAINED IN THIS REPORT, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING CAUTIONARY STATEMENTS AND RISK FACTORS. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS AND UNCERTAINTIES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS COULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT IN OUR COMMON
STOCK. THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS AND OUR
ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED IN THESE
FORWARD-LOOKING STATEMENTS.

WE CURRENTLY HAVE NO BUSINESS OPERATIONS OR REVENUE AND WILL BE REQUIRED TO
RAISE ADDITIONAL DEBT OR EQUITY FINANCING TO EXECUTE OUR BUSINESS PLAN.

     In April 2005 we discontinued all business operations, other than assisting
our secured creditor to liquidate its collateral and we currently have no sales
or other sources of revenues to generate the cash flows to meet our operating
and capital needs, which we expect to be $800,000 for the fiscal year ending
December 31, 2006. As of August 14, 2006, our principal sources of liquidity
were cash and cash equivalents of approximately $40,000 and we have no committed
sources of funding. Our current forecast projects that our current cash
resources will only be


                                       27
<PAGE>


sufficient to fund our operations until August 31, 2006. If we do not raise
additional debt or equity financing we may be forced to liquidate our remaining
assets which are insufficient to meet our obligations to our creditors.

OUR LACK OF FINANCIAL RESOURCES AND SIGNIFICANT INDEBTEDNESS COULD MATERIALLY
AFFECT OUR ABILITY TO CONSUMMATE A MERGER OR OTHER STRATEGIC BUSINESS
COMBINATIONS.

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

CONSUMMATION OF THE PROTRON MERGER WILL RESULT IN CHANGE IN OUR VOTING CONTROL.

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

WE HAVE NOT TIMELY FILED QUARTERLY OR ANNUAL REPORTS WITH THE SECURITIES AND
EXCHANGE COMMISSION SINCE NOVEMBER 2004.

     The Company has not timely filed its quarterly or annual reports required
to be filed with the SEC since November 2004, which limits the market liquidity
of our common stock and the ability of our stockholders to sell our securities
in the secondary market. The Company filed its annual reports on Form 10-K for
the years ended December 31, 2004 and 2005, on April 7, 2006 and June 21, 2006,
respectively and we filed our quarterly reports on Form 10-Q for the quarters
ended March 31, 2005, June 30, 2005 and September 30, 2005, on August 11, 2006
and August 14, 2006, respectively. The Company is taking action to become
current in its reporting obligations but it cannot guarantee that it will do so.
If the Company continues to remain delinquent in its filing obligations it may
be subject to disciplinarian action by the SEC and may be prevented from trading
on the Pink Sheets, LLC.

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

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

WE HAVE MATERIAL WEAKNESSES IN OUR CONTROLS OVER FINANCIAL REPORTING THAT MAY
PREVENT US FROM BEING ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT
FRAUD, WHICH COULD HARM OUR BUSINESS AND OPERATING RESULTS.

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


                                       28
<PAGE>


have been effective to ensure that our financial statements, and other financial
information included in this Report, have been recorded, processed, summarized
and reported correctly.

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

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

WE FACE STRONG COMPETITION FOR A MERGER PARTNER.

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

WE AND OUR STOCKHOLDERS MAY SUFFER NEGATIVE TAX TREATMENT AS THE RESULT OF ANY
BUSINESS COMBINATION.

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

WE MAY INCUR ADDITIONAL DEBT IN CONNECTION WITH OUR PURSUIT OF A BUSINESS
COMBINATION.

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

AN INVESTMENT IN OUR COMMON STOCK MAY BE LESS ATTRACTIVE BECAUSE IT IS NOT
TRADED ON A RECOGNIZED PUBLIC MARKET.

     In April 2001, our common stock was de-listed from trading on the Nasdaq
SmallCap Market. In May 2005, our common stock was de-listed from trading on the
Over-the-Counter Bulletin Board, and currently trades on the Pink Sheets, LLC.
This is viewed by most investors as a less desirable, and less liquid,
marketplace. As a result,



                                       29
<PAGE>


an investor may find it more difficult to purchase, dispose of and obtain
accurate quotations as to the value of our common stock.

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

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

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

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

OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN A LOSS OF YOUR INVESTMENT.

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

     o    additions or departures of key personnel;

     o    sales of capital stock in the future;

     o    stock liquidity or cash flow constraints;

     o    announcements related to strategic transactions; and

     o    other factors and events beyond our control.

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

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

FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.

     The market price of our common stock could drop as a result of sales of a
large number of shares in the market or in response to the perception that these
sales could occur. In addition these sales might make it more difficult for us
to sell equity or equity-related securities in the future at a time and price
that we deem appropriate. We have 32,865,975 shares of common stock outstanding
as of August 1, 2006. In addition, as of August 14, 2006, we had 29,222,000
shares of our common stock reserved for issuance under warrants, stock options
and convertible notes.


                                       30
<PAGE>



WE DO NOT HAVE SUFFICIENT AUTHORIZED SHARES OF OUR COMMON STOCK

     We have only 50,000,000 shares of common stock authorized for issuance. As
of August 14, 2006, we had 32,865,975 shares of common stock issued and
outstanding and approximately 29,222,000 shares of our common stock are issuable
upon the exercise of warrants and options or the conversion of certain
convertible promissory notes. The number of shares of common stock issuable upon
the exercise of warrants and options or the conversion of certain convertible
promissory notes fluctuates depending upon the current trading price of common
stock. In order to provide us the flexibility to raise additional equity, to
consummate the proposed merger with Protron or even to have sufficient shares
for our existing financial instruments, we will need to amend our certificate of
incorporation to increase the authorized number of shares, which would require
the approval of our existing stockholders. We are uncertain that we could obtain
this approval based on the dilutive effect of the issuance of additional shares
of our common stock. Any failure to obtain this approval could adversely affect
us and the market for our common stock.

WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK, AND THEREFORE OUR
STOCKHOLDERS WILL BE ABLE TO RECOVER THEIR INVESTMENT IN OUR COMMON STOCK, IF AT
ALL, ONLY BY SELLING THE SHARES OF OUR STOCK THAT THEY HOLD.

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


                                       31
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     We do not use derivative financial instruments to hedge interest rate and
foreign currency exposure. We do not believe that we have any material exposure
to interest rate risk. We did not experience a material impact from interest
rate risk during the first quarter of fiscal 2006.

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

ITEM 4. CONTROLS AND PROCEDURES.

DISCLOSURE CONTROLS AND PROCEDURES

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

     As of the end of the period covered by this Report, we conducted an
evaluation, under the supervision and with the participation of our Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that, as a result of the material weaknesses in our internal controls
over financial reporting discussed below, our disclosure controls and procedures
were not effective at the reasonable assurance level designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms. A "material
weakness" is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected.

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

MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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


                                       32
<PAGE>


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

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

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

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

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

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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


                                       33
<PAGE>


PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

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

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

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

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

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

         None.


                                       34
<PAGE>

<TABLE>
<CAPTION>
ITEM 5.  OTHER INFORMATION.

         None.


                                       35
<PAGE>


ITEM 6.  EXHIBITS.

EXHIBIT NO.   DESCRIPTION

<S>           <C>
31.1          Certification of Andy Teng, Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14
              of the Securities Exchange Act of 1934.
31.2          Certification of Andy Teng, Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14
              of the Securities Exchange Act of 1934.
32.1          Certification of Andy Teng, Principal Executive Officer and Principal Financial Officer,
              pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
              Act of 2002.

</TABLE>



                                       36
<PAGE>



                                   SIGNATURES

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

                                DIGITAL LIFESTYLES GROUP, INC.



Dated:   August 16, 2006        By:      /s/ Andy Teng
                                         ---------------------------------------
                                Name:    Andy Teng
                                Title:   Chief Executive Officer, Chief
                                         Financial Officer and Chairman of the
                                         Board