UNITED
      STATES


SECURITIES
      AND
      EXCHANGE COMMISSION


WASHINGTON,
      D.C.
      20549





**FORM
      10-QSB**





[X]
      Quarterly
      Report pursuant to Section 13 or 15(d) of the Securities Exchange


Act
      of
      1934.





For
      t he
      period ended:
      September 30, 2006





[
      ] 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 **33-16820-D**







**ARETE
      INDUSTRIES,
      INC.**


(Exact
      name of
      registrant as specified in its charter)





**Colorado**                       
      **84-1508638**


State
      or other
      jurisdiction
      of            (I.R.S.
      Employer


incorporation
      or
      organization         Identification
      No.)






**P. O. Box 141 Westminster,
      CO                         
80036**


(Address
      of
      principal executive
      offices)                      (Zip Code)






**(303)
      652-3113**


(Registrant's
      telephone number, including area code)





______________________________________


(Former
      name,
      former address and former


fiscal
      year, if
      changed since last report.)





Indicate
      by check
      mark whether the registrant (1) has filed all reports required to be filed
      by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
      12 months (or for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days.   Yes [ ]    **No
      [X]**





APPLICABLE
      ONLY TO
      CORPORATE ISSUERS:





State
      the number of
      shares outstanding of each of the issuer’s classes of common equity, as of the
      latest practicable date:





As
      of November 10,
      2006, Registrant had 307,155,754 shares of common stock, No par value,
      outstanding.





Indicate
      by check
      mark whether the registrant is a shell company (as defined in Rule 12b-2 of
      the
      Exchange Act): Yes [ ]  No
      [X]





Transitional
      Small
      Business Disclosure Format (check one): Yes [ ]    
**No [****X]**




















**ARÊTE
      INDUSTRIES, INC. AND SUBSIDIARIES**








**INDEX**






Page
                No.Consolidated
                Financial Statements:Index
                to
                Consolidated Financial Statements
            1Consolidated
                Balance Sheet at December 31, 2005 and September 30, 2006
                (unaudited)
            2Consolidated
                Statements of Operations for the Three Months Ended September
                30,
                2005 and 2006 (unaudited)
            3Consolidated
              Statements of Operations for the Three Months Ended September
              30,
              2005 and 2006 (unaudited)
            4Consolidated
                Statement of Stockholders’ Deficit for the Six Months Ended September 30,
                2006 (unaudited)
            5Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2005 and
                2006 (unaudited)
            6-7Notes
                to
                Unaudited Consolidated Financial Statements at September 30,
                2006
            8-10Item
                2Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            12-16Part
                II -
                Other Information
            17Signatures
            18














1










**ARETE
      INDUSTRIES, INC. AND SUBSIDIARIES**


**(A
      Development Stage Entity)**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2005 and September 30, 2006**


**(Unaudited)**








2005
              
              2006ASSETSCurrent
                  assets:Cash
                  and cash
                  equivalents
              
              $
              224
              
              $
              13,098Prepaid
                  expenses
              
              
              3,000
              
              
              -Total
                  current
                  assets
              
              
              3,224
              
              
              13,098Furniture
                  and
                  equipment, at cost net of accumulateddepreciation
                  of $17,747 (2005) and $19,379 (2006)
              
              
              1,925
              
              
              330,293Other
                  AssetsInvestments
                  held for sale
              
              
              -
              
              
              -$
              5,149
              
              $
              343,391LIABILITIES
                  AND STOCKHOLDERS' DEFICITCurrent
                  liabilities:Accounts
                  payable
              
              $
              185,202
              
              $
              26,982Accrued
                  expenses
              
              
              366,464
              
              
              129,721Accrued
                  payroll taxes
              
              
              289,363
              
              
              167,312Settlement
                  due
              
              
              18,650
              
              
              18,650Notes
                  payable
              
              
              -
              
              
              226,284Notes
                  payable
                  - related parties
              
              
              31,704
              
              
              197,823Total
                  current
                  liabilities
              
              
              891,383
              
              
              766,771Commitments
                  and contingencies
              
              
              -
              
              
              -Stockholders'
                  deficit:Common
                  stock,
                  no par value; 499,000,000 sharesauthorized,
                  262,156,754 (2005) and 289,155,754 (2006)shares
                  issued
                  and outstanding
              
              
              12,462,975
              
              
              12,576,775Accumulated
                  deficit (including $1,388,977 accumulatedduring
                  the
                  development stage)
              
              
              (13,126,389
              )
              
              (12,935,821
              )Notes
                  receivable from sale of stock
              
              
              (222,820
              )
              
              (64,334
              )Total
                  stockholders' deficit
              
              
              (886,234
              )
              
              (423,380
              )$
              5,149
              
              $
              343,391


See
      accompanying
      notes




2







**ARÊTE
        INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
        Development Stage Entity)**
 **CONSOLIDATED
        STATEMENT OF OPERATIONS**
 **For
        the
        three months ended Sept 30, 2005 and 2006**
 **(unaudited)**


2005
              
              2006Revenue:Consulting
                  revenue
              
              $
              72,500
              
              $
              -Operating
                  expenses:Depreciation
              
              
              423
              
              
              544Rent
              
              
              2,390
              
              
              475Other
                  operating expenses
              
              
              50,675
              
              
              55,960Total
                  operating expenses
              
              
              53,488
              
              
              56,979Total
                  operating loss
              
              
              19,012
              
              
              (56,979
              )Other
                  income
                  (expense):Loss
                  on sale
                  of investments
              
              
              -
              
              
              -Interest
                  expense
              
              
              -
              
              
              (1,583
              )Interest
                  and
                  miscellaneous income
              
              
              -
              
              
              -Total
                  other
                  income (expense)
              
              
              -
              
              
              (1,583
              )Net
                  income(loss) from continuing operations
              
              
              19,012
              
              
              (58,562
              )Minority
                  Interest
              
              
              -
              
              
              -Extingusihment
                  of Debt
              
              
              8,815
              
              
              6,105Net
                  income
              
              $
              27,827
              
              $
              (52,457
              )Basic
                  and
                  diluted loss per share from continuing operations
              
              $
              *
              
              $
              *Basic
                  and
                  diluted loss per share
              
              $
              *
              
              $
              *Weighted
                  average common shares outstanding
              
              
              241,800,000
              
              
              289,150,000*
                  Less than
                  $.01 per share





See
      accompanying
      notes





3





**ARÊTE
        INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
        Development Stage Entity)**
 **CONSOLIDATED
        STATEMENT OF OPERATIONS**
 **For
        the
        nine months ended Sept 30, 2005 and 2006**
 **and
        from
        inception (August 1, 2003 to Sept 30, 2006)**
 **(unaudited)**


Inception
                  to2005
              
              2006
              
              Sept
                  30,
                  2006Revenue:Consulting
                  revenue
              
              $
              72,500
              
              
              28,000
              
              $
              100,500Operating
                  expenses:Depreciation
              
              
              1,621
              
              
              1,632
              
              
              5,829Rent
              
              
              8,935
              
              
              1,200
              
              
              32,713Other
                  operating expenses
              
              
              284,349
              
              
              176,334
              
              
              1,841,823Total
                  operating expenses
              
              
              294,905
              
              
              179,166
              
              
              1,880,365Total
                  operating loss
              
              
              (222,405
              )
              
              (151,166
              )
              
              (1,779,865
              )Other
                  income
                  (expense):Gain
                  (Loss)
                  on Sale of Investments
              
              
              -
              
              
              -
              
              
              (10,502
              )Interest
                  expense
              
              
              (903
              )
              
              (1,583
              )
              
              (38,897
              )Interest
                  and
                  miscellaneous income
              
              
              10,365
              
              
              40
              
              
              23,534Total
                  other
                  income (expense)
              
              
              9,462
              
              
              (1,543
              )
              
              (25,865
              )Net
                  loss from
                  continuing operations
              
              
              (212,943
              )
              
              (152,709
              )
              
              (1,805,730
              )Minority
                  Interest
              
              
              -
              
              
              7,608
              
              
              7,608Extingusihment
                  of Debt
              
              
              8,815
              
              
              346,276
              
              
              409,145Net
                  Income
                  (loss)
              
              $
              (204,128
              )
              $
              201,175
              
              $
              (1,388,977
              )Basic
                  and
                  diluted loss per share from continuing operations
              
              $
              *
              
              $
              *
              
              $
              (0.01
              )Basic
                  and
                  diluted loss per share
              
              $
              *
              
              $
              *
              
              $
              (0.01
              )Weighted
                  average common shares outstanding
              
              
              217,900,000
              
              
              281,844,000
              
              
              200,615,000*
                  Less than
                  $.01 per share




See
      accompanying
      notes





4





**ARÊTE
          INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
          Development Stage Entity)**
 **CONSOLIDATED
          STATEMENT OF STOCKHOLDERS' DEFICIT**
 **For
          the
          nine months ended September 30, 2006**
 **(Unaudited)**


Common
                  stock
              
              
              
              AccumulatedShares
              
              Amount
              
              deficitBalance,
                  December 31, 2005
              
              
              262,155,754
              
              $
              12,462,975
              
              $
              (13,126,389
              )Issuance
                  of
                  common stock to employeesand
                  consultants for services
              
              
              27,000,000
              
              
              113,800
              
              
              -with
                  granted
                  purchase rights
              
              
              
              
              
              
              
              
              -Dividend
                  of
                  Subsidiary Stock
              
              
              
              
              
              
              
              
              (10,607
              )Net
                  loss for
                  the nine months endedSeptember
                  30,
                  2006
              
              
              -
              
              
              -
              
              
              201,175Balance,
                  September 30, 2006
              
              
              289,155,754
              
              $
              12,576,775
              
              $
              (12,935,821
              )





See
      accompanying
      notes





5





**ARÊTE
        INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
        Development Stage Entity)**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
 **For
        the
        nine months ended Sept 30, 2005 and 2006**
 **and
        from
        inception (August 1, 2003 to Sept 30, 2006)**
 **(Unaudited)**
   Inception
                  to2005
              
              2006
              
              September
                  30,
                  2006Cash
                  flows
                  from operating activities:Net
                  loss
              
              $
              (204,128
              )
              $
              201,175
              
              $
              (1,388,977
              )Adjustments
                  to reconcile net loss to netcash
                  used in
                  operating activities:Depreciation
                  and amortization
              
              
              1,621
              
              
              1,632
              
              
              5,829Stock
                  and
                  options issued for services,accounts
                  payable, and interest on notes
              
              
              192,454
              
              
              113,800
              
              
              1,740,596Changes
                  in
                  assets and liabilities:Interest
                  receivable
              
              
              -
              
              
              -
              
              
              44,325Inventory
              
              
              -
              
              
              -
              
              
              25,243Prepaid
                  expenses
              
              
              -
              
              
              3,000
              
              
              -Accounts
                  payable
              
              
              (40,826
              )
              
              (158,219
              )
              
              (252,296
              )Accrued
                  expenses
              
              
              400
              
              
              (358,795
              )
              
              (566,785
              )Total
                  adjustments
              
              
              153,649
              
              
              (398,582
              )
              
              996,912Net
                  cash used
                  in operating activities
              
              
              (50,479
              )
              
              (197,407
              )
              
              (392,065
              )Cash
                  flows
                  from investing activities:Purchase
                  of
                  property and equipment
              
              
              -
              
              
              (330,000
              )
              
              (335,072
              )Purchase
                  of
                  Investment held for sale
              
              
              (3,816
              )
              
              -
              
              
              (3,816
              )Net
                  cash
                  provided (used) by investing activities
              
              
              (3,816
              )
              
              (330,000
              )
              
              (338,888
              )Cash
                  flows
                  from financing activities:Proceeds
                  from
                  issuance of preferred stock
              
              
              -
              
              
              -
              
              
              6,713Proceeds
                  from
                  issuance of common stock
              
              
              7,727
              
              
              -
              
              
              17,727Proceeds
                  from
                  exercise of stock options
              
              
              121,500
              
              
              -
              
              
              246,750Proceeds
                  from
                  notes payable
              
              
              -
              
              
              226,284
              
              
              226,284Note
                  Receivable from sale of stock
              
              
              (33,927
              )
              
              158,486
              
              
              140,559Pyament
                  of
                  dividend of subsidary stock
              
              
              (68,684
              )
              
              (10,608
              )
              
              (79,292
              )Payment
                  of
                  note payable - related parties
              
              
              28,224
              
              
              166,119
              
              
              185,192Net
                  cash
                  provided by financing activities
              
              
              54,840
              
              
              540,281
              
              
              743,933Net
                  increase
                  in cash and cash equivalents
              
              
              545
              
              
              12,874
              
              
              12,980Cash
                  and cash
                  equivalents at beginning of period
              
              
              121
              
              
              224
              
              
              118Cash
                  and cash
                  equivalents at end of period
              
              $
              666
              
              $
              13,098
              
              $
              13,098







(Continued
      on
      following page)


See
      accompanying
      notes




6




**ARÊTE
        INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
        Development Stage Entity)**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
 **For
        the
        nine months ended Sept 30, 2005 and 2006**
 **and
        from
        inception (August 1, 2003 to Sept 30, 2006)**
 **(Unaudited)**
  (Continued
        from
        preceding page)
  Inception
                  toSupplemental
                  disclosure of cash flow information:
              
              2005
              
              2006
              
              September
                  30,
                  2006Interest
                  paid
                  during the period
              
              $
              -
              
              $
              -
              
              $
              -Income
                  taxes
                  paid during the period
              
              $
              -
              
              $
              -
              
              $
              -Supplemental
                  disclosure of non-cash investing and financing activities:During
                  the
                  quarter ended March 31, 2006 wages to officers and directors and
                  fees to
                  consultants
                  of $62,050 were paid by the issuance of common
                  stockDuring
                  the
                  quarter ended June 30, 2006 wages to officers and directors and
                  fees to
                  consultants
                  of $78,800 were paid by the issuance of common
                  stockDuring
                  the
                  quarter ended September 30, 2006 wages to officers and directors
                  and fees
                  to consultants
                  of $35,000 were paid by the issuance of common
                  stockDuring
                  the
                  quarter ended March 31, 2005 wages to officers and directors and
                  fees to
                  consultants
                  of $81,592 were paid by the issuance of common
                  stock.During
                  the
                  quarter ended June 30, 2005 wages to officers and directors and
                  fees to
                  consultants
                  of $65,595 were paid by the issuance of common
                  stock.During
                  the
                  quarter ended September 30, 2005 wages to officers and directors
                  and fees
                  to consultants
                  of $41,267 were paid by the issuance of common
                  stock.
  See
        accompanying
        notes





7


**ARÊTE
        INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
        Development Stage Entity)**
 **Consolidated
        Notes to Financial Statements**





1. Summary
      of
      significant accounting policies




Basis
      of
      presentation:





The
      accompanying
      financial statements have been prepared by the Company, without audit. In the
      opinion of management, the accompanying unaudited financial statements contain
      all adjustments (consisting of only normal recurring accruals) necessary for
      a
      fair presentation of the financial position as of December 31, 2005 and
      September 30, 2006, and the results of operations and cash flows for the periods
      ended September 30, 2005 and 2006. The Company is currently considered to be
      in
      the development stage as more fully defined in Financial Accounting Standards
      Board Statement No. 7. The Company has not generated any revenues from its
      activities in the oil and gas business, but has revenues from a subsidiary
      Avatar Technology Group, Inc. and revenues from a non refundable deposit related
      to the proposed merger and consulting fees generated.





Since
      August 1,
      2003, the Company’s financial statements have been prepared on the basis of the
      Company being a development stage entity, having discontinued several
      unsuccessful ventures including cessation of operations of its subsidiary,
      Aggression Sports, Inc., having discontinued operations as a business
      development company focused on developing certain bond and other funding
      vehicles for growth stage companies, and having embarked on an entirely new
      business of developing opportunities in the traditional and alternative and
      renewable energy sectors, and which contemplates the formation of capital and
      management resources to pursue development of new business opportunities. The
      recast of the Company as development stage is intended to more correctly and
      accurately reflect the current status of the Company and to properly record
      results of operations and changes in financial condition as it pursues its
      new
      business plan. As shown in the accompanying financial statements, the Company
      has recast its financial statements to reflect this divergence from its past
      business endeavors including losses from write down of assets and valuation
      of
      assets held for disposal from discontinued operations. (See: Note 4 -
      Discontinued Operations) During the six months ended June 30, 2006 the results
      from operations and balance sheet of its subsidiary Avatar Technology Group,
      Inc. has been consolidated in these financial statements and Avatar Technology
      Group, Inc. was spun-off on July 5, 2006 to the shareholders of the Company
      at
      rate of 1 share for every 950 shares of Arete Industries, Inc.
      owned.





The
      Company has
      incurred significant losses and at September 30, 2006, the Company has a working
      capital deficit of $753,673 and a stockholders’ deficit of $423,380. In
      addition, the Company is delinquent on payment of payroll taxes and creditor
      liabilities. As a result, substantial doubt exists about the Company’s ability
      to continue to fund future operations using its existing resources.








8




**ARÊTE
          INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
          Development Stage Entity)**
 **Consolidated
          Notes to Financial Statements**


As
      a development
      stage company, the Company continues to rely on infusions of debt and equity
      capital to fund operations. The Company relies principally on cash infusions
      from its directors and affiliates, deferred compensation and expenses from
      the
      executive officers, and paid a significant amount of personal services, salaries
      and incentives in the form of common stock and common stock
      options.





2. Delinquent
      amounts payable





As
      of September 30,
      2006, the Company is delinquent on payments of various amounts to creditors
      including payroll taxes. Failure to pay these liabilities could result in liens
      being filed on the Company’s assets and may result in assets being attached by
      creditors resulting in the Company’s inability to continue
      operations.




3.  Income
      taxes





The
      book to tax
      temporary differences resulting in deferred tax assets and liabilities are
      primarily net operating loss carryforwards of $ 6,063,000 which expire in years
      through 2025.





100%
      valuation
      allowance has been established against the deferred tax assets, as utilization
      of the loss carryforwards and realization of other deferred tax assets cannot
      be
      reasonably assured.





The
      Company's net
      operating losses are restricted as to the amount which may be utilized in any
      one year.





4.  Discontinued
      Operations





The
      Company’s
      decision to pursue projects and investments in traditional oil and gas as well
      as the ‘New’ alternative and renewable Energy business is an entirely new
      business direction that required that it take the decisive step to formally
      discontinue its former operations beginning August 1, 2003. This decision is
      reflected by a change in the presentation of the Company’s financial statements
      to segregate discontinued operating results in previous periods from continuing
      operations going forward. There is no effect in the current three month period
      of this reclassification. During March 2000, the Company abandoned the direct
      mail and coupon business and during the current fiscal 2006 the remaining
      liabilities of this division were written-off to extinguishment of debt income.
      As of the nine months ended September 30, 2006, $346,276 of debt was
      reclassified as extinguishment of debt income. During 2003, the Company
      abandoned the development of Aggression Sports Inc., a subsidiary. At September
      30, 2006, the remaining liabilities of this division was $38,644 in trade
      payables and that has been reclassified as extinguishment of debt income and
      $85,322 in unpaid payroll taxes that are in process of being settled. During
      the
      current quarter, the company has initiated procedures to close out all
      inter-company accounts related to and consolidating accounts related to these
      subsidiaries.








9




**ARÊTE
          INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
          Development Stage Entity)**
 **Consolidated
          Notes to Financial Statements**


5.  Stock
      transactions





During
      the six
      months ended September 30, 2006, the Company issued a total of 27,000,000 common
      shares for compensation of officers, directors and consultants, valued at an
      aggregate of $113,800.





The
      Company has
      adopted the disclosure-only provisions of Statement of Financial Accounting
      Standards No. 123, *Accounting
      for
      Stock-Based Compensation* .
      Accordingly, no
      compensation cost has been recognized for the stock option plans. Had
      compensation costs for the Company's stock option plans been determined based
      on
      the fair value at the grant date for awards during the quarter ended March
      31,
      2005 in accordance with the provisions of SFAS No. 123, the Company's net loss
      and loss per share would have been increased to the pro forma amounts indicated
      below:





2005
            2006Net
                income
                (loss) - as reported
            $
                (128,128)
            $
                201,175Net
                income
                (loss) - pro forma
            (242,250)
            201,175Loss
                per
                share - as reported
            *
            *Loss
                per
                share - pro forma
            *
            *





*
      - Less than $0.01
      per share





The
      fair value of
      each option grant is estimated on the date of grant using the Black-Scholes
      option-pricing model with the following weighted-average assumptions used for
      grants in 2005 and 2006, dividend yield of 0%; expected volatility of 100%,
      risk-free interest rate of 1.45% to 1.75%; and expected life of .5 to 2
      years.





6. Spin-off
      of
      Avatar





The
      Company’s
      subsidiary Avatar has received revenue and contracts for its business. They
      are
      pursuing their direction and continuing of their operating plan in light of
      merger plans of the parent Company. Arete’s share in Avatar are going to be paid
      out as a dividend on to shareholders of record. The record date was set for
      July
      3, 2006. These shares will be distributed to shareholders at a rate of 1 share
      of Avatar for each 950 shares of Arete shares owned.





7.  Purchase
      of
      Pipeline





The
      Company entered
      into an agreement to acquire a pipeline for gas distribution in Wyoming. The
      Company closed on the transaction on September 12, 2006 and is in the process
      of
      putting the line into operation. All of the agreements for gas transmission
      are
      signed and the Company expects to be operational in November 2006. In addition
      the Company has an agreement to acquire two working interests from the seller
      of
      the gas for the pipeline.








10





**Item
      2-Management’s Discussion and Analysis/Plan of Operation**





The
      Company has
      identified the accounting policies described below as critical to its business
      operations and the understanding of the Company’s results of operations. The
      impact and any associated risks related to these policies on the Company’s
      business operations is discussed throughout this section where such policies
      affect the Company’s reported and expected financial results. The preparation of
      this Report requires the Company to make estimates and assumptions that affect
      the reported amount of assets and liabilities of the Company, revenues and
      expenses of the Company during the reporting period and contingent assets and
      liabilities as of the date of the Company’s financial statements. There can be
      no assurance that the actual results will not differ from those
      estimates.





Stock
      issuances:





The
      Company has
      relied upon the issuance of shares of its common and preferred stock, and
      options to purchase its common stock and preferred stock to fund much of the
      Company’s operations. The following describes the methods used to record various
      stock related transactions.





Stock
      issued for
      services is valued at the market price of the Company’s stock at the date of
      grant.





Compensation
      related to the issuance of stock options to employees and directors is recorded
      at the intrinsic value of the options, which is the market price of the
      Company’s common stock less the exercise price of the option at the measurement
      date. The Company’s common stock issued to consultants is recorded at the market
      price of the Company’s common stock at the measurement date. The Company’s
      common stock options issued to consultants are recorded at the fair value of
      the
      Company’s options computed using the Black-Scholes Model.





**Plan
      of
      Operation.**





In
      the third
      quarter of 2003 we discontinued our previous business development activities
      to
      focus on traditional and alternative energy. As a result, we entered the
      development stage. This required us to recast our former operations as
      discontinued, write down certain fixed assets and inventory from discontinued
      operations, and, as well, recast operating results into discontinued operations
      and continuing operations, respectively, beginning August 1, 2003 and continuing
      through the current period. As a result, operating results, including losses,
      expenses and revenues attributed to discontinued operations are stated
      separately from these same items from continuing operations. Therefore, since
      the current and past business operations relate to entirely different
      businesses, the financial statements now provide two separate comparisons of
      the
      current and comparable prior period for continuing operations, and the same
      for
      discontinued operations.








11





During
      the Third
      Quarter of 2003, we began to pursue acquiring direct participations in
      traditional oil and gas projects as well as sponsoring and financing alternative
      and renewable energy projects. This included pursuing lower-risk projects
      involving overlooked and by-passed reserves of domestic oil and gas, and seeking
      funding through professional equity funds looking specifically for such
      opportunities. Since inception of our new development stage, we have reviewed
      numerous prospects and pursued funding and acquisition efforts for two specific
      deals through an oil and gas investment banking consultant which we contracted
      in June of 2004. Ultimately, the first deal was terminated without cause by
      the
      seller of that project in April of 2004, and after significant evaluation and
      due diligence on our part, the second group of prospects initiated in May of
      2004 did not qualify for financing, and in the first quarter of 2005, we
      terminated our negotiations with the seller group for this prospect. We were
      able to develop and small oil & gas operation in Arete’s subsidiary Colorado
      Oil & Gas, Inc. In September Arete’s spun-off 95% of its ownership of
      Colorado Oil & Gas, Inc. in the form of a dividend of one share of Colorado
      Oil & Gas, Inc. for every two hundred and fifty shares of Arete shares owned
      on the record date.





Arete
      Energy
      Development Group LTD was originally formed as a Colorado corporation on April
      29, 2004 as a subsidiary of Arete Industries, Inc. for the purpose of pursuing
      a
      joint venture in oil and gas. The joint venture opportunity for Arete Energy
      Development Group LTD was abandoned with no further activity occurring in Arete
      Energy Development Group Ltd. as we were
      unable to develop the business or raise the funds needed to enter into a
      business plan that made sense. The name was changed to Avatar Energy Development
      Group, LTD. in September 2004 in anticipation of developing an alternative
      energy business. The corporation remained dormant until late 2005. The board
      decided to change the direction of Avatar Energy Development Group, LTD to
      pursue a technology related business which was consistent with the expertise
      of
      one of the current directors. The board approved a name change to Avatar
      Technology Group, Inc. The main business focus for Avatar Technology Group
      is
      the delivery of technology solutions for small to medium size businesses as
      well
      as public entities. These solutions include business services, custom software
      development and web design, network security services and IT solutions. Avatar
      has secured reseller/affiliate agreements with major partners in each area
      to
      deliver these services primarily through a website model. Avatar Technology
      Group maintains a website at www.avtekgroup.com .
      Avatar plans to
      market these services to specific vertical markets using advertising in print
      media and targeted opt in email campaigns. Most of the services are based on
      a
      recurring revenue model. All of the technology solution offerings were selected
      to be complimentary to each other. Arete’s
      shares in
      Avatar Technology Group, Inc. are going to be paid out as a dividend to
      shareholders of record. The record date was set for July 3, 2006. These shares
      will be distributed to shareholders at a rate of 1 share of Avatar for each
      950
      shares of Arete shares owned. The Company expects to file a form 14C and
      distribute the shares in December 2006.








12





Arete
      as part of
      its new business plan developed in mid 2005 has began the process of pursuing
      a
      merger candidate for the parent company Arête Industries, Inc. as soon as
      possible. To make a merger an alternative for the future of Arete and its
      shareholders we have begun the task of settling old liabilities including the
      payroll taxes, wages and other related payroll liabilities. The ownership of
      and
      the future of Aggression Sports, Inc. and its related liabilities have added
      to
      the process. We are pursuing a merger or active business for Aggression Sports,
      Inc. and have to be able to settle their debt as part of the
      process.





Due
      to the fact
      that the Company presently relies exclusively upon contributions of time and
      operating cash from its directors and officers to pursue its business plan,
      this
      has been increasingly taxing on these individuals, and has resulted in
      substantial dilution to the Company’s shareholders. It has become the chief
      priority of management to achieve cash flow sufficient to cover our overhead
      as
      soon as possible an we will continue our efforts to compromise or resolve
      outstanding obligations including accrued employee compensation, withholding
      and
      other taxes, operating and trade payables of the Company and its former
      subsidiary operations.





In
      the first
      quarter of 2006 we have begun identifying possible merger candidates and have
      begun discussions on a merger with more than one company. We have asked the
      merger candidates for a non refundable amount of $25,000 and received a
      non-refundable deposit in May 2006. The main requirement for a merger to take
      place will be the resolution of all remaining debt that the company has
      outstanding that would allow for a merger candidate to accept a proposal of
      debt
      liquidation and allow us to move forward with a merger. As a part of the plan
      we
      now have in place we have the following four part plan to take care of the
      old
      debt and taxes, develop revenue, and place sufficient assets in the business
      to
      make it scalable and add value to the shareholders. We have received an offer
      to
      begin the process of financing the existing debt through the issuance of a
      convertible debt that would allow for the pay-off of the taxes and old payables.
      We borrowed $400,000 in debt from a third party and a director to provide
      capital to acquire a gas distribution pipeline that we closed on the acquisition
      agreement for $330,000 with PRB Energy Inc. on September 12, 2006. We have
      a
      letter of intent to acquire two working interests of oil & gas properties
      owned by our merger candidate. The purpose of the acquisition of the working
      interests and pipeline is to provide cash flow for the convertible debt and
      set-up the operations needed to allow for the acquisition of the balance of
      the
      merger candidates properties that include oil and gas properties in Montana,
      Wyoming, Colorado, Kansas, and Oklahoma. These properties include PUD’s and
      off-set opportunities with most of the leases. The plan also includes financing
      for the drilling of these opportunities and development of the
      sites.





While
      we are very
      optimistic about our progress on this plan to benefit the shareholders of this
      company there are no assurances that we can resolve all of our debt obligations
      meet remaining expenses gain any significant revenue for operations in the
      immediate future. We received a commitment to finance the debt, pipeline and
      working interests. These commitments are from outside parties as well as related
      parties and are more likely then not to happen. We are by working out the debt
      issues and creating cash flow able to move to a final definitive agreement
      on
      the oil and properties during the forth quarter 2006.





13





**Financial
      Condition**




In
      prior periods,
      we wrote off Aggression Sports, Inc.’s fixed assets and inventory and molds held
      for disposal from discontinued. Additionally, we continue to reduce certain
      amounts payable from discontinued operations as extinguishment of debt, through
      the passage of statutes of limitation and settlements. We expect future
      additional write-downs and reclassifications from discontinued operations and
      extinguishment of debt to be nominal and incremental in nature.




As
      of September 30,
      2005, the Company had $343,391 in total assets. This compares to total assets
      of
      $5,149 as of the fiscal year ended December 31, 2005. Total liabilities were
      $766,771, of which $400,000 is new debt directly related to the oil & gas
      business, as of September 30, 2006 compared to $891,383 as of the fiscal year
      ended December 31, 2005. During the nine months ended September 30, 2006, total
      liabilities were decreased by $524,612 before the acquisition debt. Net income
      was $201,175 reducing the accumulated deficit as of September 30, 2006 to
      $12,935,821 as compared to an accumulated deficit as of December 31, 2005 of
      $13,126,389. (See: Note 1 to Financial Statements.)





During
      the quarter
      ended September 30, 2006, the Company continued to rely upon infusions of cash
      borrowing from directors, exercise of stock options by officers, directors
      and
      consultants, and upon payment of compensation to officers, directors and
      consultants in the form of common stock and common stock options. During the
      nine months ended September 30, 2006, the Company paid $68,000 in compensation
      to officers and directors, paid $45,650 to consultants and
      professionals.





As
      of September 30,
      2006, executive salaries and bonuses to former officers of $128,136 were accrued
      and unpaid, and the Company had $60,334 in notes receivable for stock sales
      from
      former management members together with a note receivable for exercise of a
      stock option of $4,000 from a third party for a total of $64,334. This amount
      was reduced by the off-setting amounts owned by certain former officers and
      we
      will pursue the balances as a part of the settlement of the outstanding
      debt.




**Results
      of
      operations**




As
      stated above,
      the Company discontinued former operations and set about pursuing a new business
      plan in the energy industry as a development stage entity and reported results
      of continuing operations and of discontinued operations separately for the
      current period and the comparable period of fiscal 2005.




The
      Company had
      $28,000 revenues from operations during the nine months ended September 30,
      2006, and $72,500 revenues during the comparable period ended September 30,
      2005. Net loss from continuing operations for the nine months ended September
      30, 2006 was $152,709 as compared to a net loss from continuing operations
      of
      $212,943 for the nine months ended September 30, 2005. The net income during
      the
      nine months ended September 30, 2006 included $346,276 in extinguishment of
      debt. Net loss from continuing operations for the quarter ended September 30,
      2006 was $58,562 as compared to a net income from continuing operations of
      $19,012 for the quarter ended September 30, 2005. The net loss during the
      quarter ended September 30, 2006 included $6,105 in extinguishment of debt.





14







The
      Company rents
      space for file storage, furniture and excess equipment for $125 per month.
      The
      Company uses office space provided by one of the directors and pays no
      rent.





As
      stated above, we
      will continue to operate the Company on an austere program of minimum overhead,
      while utilizing skills of its board members, independent contractors as
      administrative staff and individual independent contractors with expertise
      in
      business development, capital acquisition, corporate visibility, oil and gas
      development, geology and operations with the use of our common stock and common
      stock options as incentives during the development stage of our new business
      model. Further as opportunities for participation in profitable revenue
      producing projects come forward, we intend that consultants and advisors will
      be
      offered compensation from revenues or interests, direct participations,
      royalties or other incentives from the specific projects to which they
      contribute. While reducing the amount of variable costs, there is almost no
      way
      to reduce or offset our fixed expenses related to office expense, legal,
      accounting, transfer agent fees, Securities Act reporting, corporate governance,
      and shareholder communications. Our future expectation is that monthly operating
      expenses will remain as low as possible until new opportunities are initiated,
      of which there can be no assurance, in which event, the operating costs of
      the
      Company may increase relative to the need for administrative and executive
      staff
      and overhead to provide support for these new business activities.





**Liquidity
      and Capital Resources**




The
      Company had a
      working capital deficit as of September 30, 2006 of $423,380. This compares
      to a
      working capital deficit of $888,159 as of December 31, 2005. During the nine
      months ended September 30, 2006 an aggregate of 27,000,000  shares
      of common
      stock were issued for aggregate consideration of $112,050 (for an average of
      $0.0042 per share).





The
      Company had a
      stockholder's deficit at September 30, 2006 of $423,380. This is compared to
      stockholder's deficit at December 31, 2005 of $891,383. The stockholder's
      deficit decrease was due the Company’s operating income and by the payment of
      services with the issuance of stock and the exercise of stock options for
      cash.





At
      September 30,
      2006, the Company had no material commitments for capital
      expenditures.





Due
      to its ongoing
      liquidity issues, the Company has defaulted on several short term obligations
      including for its operating overhead, trade payables, and state and federal
      employment taxes, resulting in tax liens being imposed on the Company’s assets,
      which will have to be resolved with an infusion of new capital, of which no
      assurances can be made.








15





Management
      believes
      that the Company will experience significant difficulty internally raising
      significant additional equity capital or debt until these matters have been
      resolved and the Company has eliminated a substantial amount of its outstanding
      debt and/or achieves operating revenue from its proposed oil and gas operations.
      The Company looks to earn management fees through its newly formed subsidiary
      and revenue from proposed oil and gas development activities that it can earn-in
      on successful financing and commencement of operations, of which there is no
      assurance.





Unless
      and until it
      achieves success in its proposed activities, of which there is no assurance,
      the
      Company may continue to be required to issue further stock to pay executives,
      consultants and other employees, which may have a continuing dilutive effect
      on
      other shareholders of the Company. Failure of the Company to acquire additional
      capital in the form of either debt or equity capital or revenue from proposed
      operations will most likely impair the ability of the Company to meet its
      obligations in the near-term.







**Item
      3.
      Controls and Procedures**




As
      of September 30,
      2006 ,
      our Chief Executive Officer and Chief Financial Officer (the “Certifying
      Officers”) conducted evaluations of our disclosure controls and procedures. As
      defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term
      “disclosure controls and procedures” means controls and other procedures of an
      issuer that are designed to ensure that information required to be disclosed
      by
      the issuer in the reports that it files or submits under the Exchange Act is
      recorded, processed, summarized and reported, within the time periods specified
      in the SEC’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by an issuer in the reports that it files or submits
      under the Exchange Act is accumulated and communicated to the issuer’s
      management, including the Certifying Officers, to allow timely decisions
      regarding required disclosure. Based on this evaluation, the Certifying Officers
      have concluded that our disclosure controls and procedures were effective to
      ensure that material information is recorded, processed, summarized and reported
      by our management on a timely basis in order to comply with our disclosure
      obligations under the Exchange Act, and the rules and regulations promulgated
      thereunder.





Further,
      there were
      no changes in our internal control over finan cial
      reporting
      during the first fiscal quarter that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting








16








**PART
      II.
      OTHER INFORMATION**





**Item
      1.
      Legal Proceedings.**





During
      the nine
      months ended September 30, 2006, there were no material pending legal
      proceedings initiated by or against the Company or any of its officers,
      directors or subsidiaries.





**Item
      2.
      Changes in Securities**





None





**Item
      3.
      Defaults Upon Senior Securities.**





None.





**Item
      4.
      Submission of Matters to a Vote of Securities Holders**





None.





**Item
      5.
      Other Information.**





None.





**Item
      6.
      Exhibits**





Exhibit31.1
            Certification
                of CEO Pursuant to 18 U.S.C, Section 7241, as adopted and Section
                302 of
                the Sarbanes-Oxley Act of 2002.Exhibit
                31.2
            Certification
                of Interim CFO Pursuant to 18 U.S.C, Section 7241, as adopted and
                Section
                302 of the Sarbanes-Oxley Act of 2002.Exhibit
                32.1
            Certification
                of CEO Pursuant to 18 U.S.C, Section 1350, as adopted and Section
                906 of
                the Sarbanes-Oxley Act of 2002.Exhibit
                32.2
            Certification
                of Interim CFO Pursuant to 18 U.S.C, Section 1350, as adopted and
                Section
                906 of the Sarbanes-Oxley Act of
                2002.











17





**SIGNATURES**





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







**ARETE
      INDUSTRIES, INC.**








Date:
      November 15,
      2006









By:
      /s/ Charles
      Gamber, CEO


Charles
      Gamber


Principal
      Executive
      Officer





By:
      /s/ John
      Herzog, Interim CFO


John
      Herzog


Interim
      Principal
      Financial and Accounting Officer







18