**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:
**June 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**
 
 **ARÊTE
                      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)
 
 7102
                      La
                      Vista Place, Suite 100, Niwot, CO  80503
 (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    [**X**] No
 
 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 August 20,
                      2006, Registrant had 284,155,754 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
                      [**X**]     No [ ]
  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 June 30,
                                  2006(unaudited)
                            2Consolidated
                                  Statements of Operations for the Three Months and
                                  Six Months
                                  EndedJune
                                30, 2005
                                and 2006 (unaudited)
                            3Consolidated
                                  Statement of Stockholders’ Deficit for the Six Months EndedJune
                                  30, 2006
                                  (unaudited)
                            4Consolidated
                                  Statements of Cash Flows for the Six Months Ended
                                  June 30, 2005and
                                2006
                                (unaudited)
                            5-6Notes
                                to
                                Unaudited Consolidated Financial Statements at June
                                30,
                                2006
                            7-9Item
                                    2 -
                                     Management's Discussion and Analysis of Financial
                                    Condition and
                                    Results of Operations
                            10-15Item 3
                              -  Controls and Procedures
                            15Part
                                II -
                                Other Information
                            16Signatures
                            17
 
  1
  **ARÊTE INDUSTRIES,
                      INC. AND SUBSIDIARIES**
 **(A
                      Development Stage Entity)**
 **CONSOLIDATED
                      BALANCE SHEET**
 **December
                      31, 2005 and June 30, 2006**
 **(Unaudited)**
 
 
 2005
                              
                              2006ASSETSCurrent
                                  assets:Cash
                                  and cash
                                  equivalents
                              
                              $
                              224
                              
                              $
                              2,244Prepaid
                                  expenses
                              
                              
                              3,000
                              
                              
                              3,900Total
                                  current
                                  assets
                              
                              
                              3,224
                              
                              
                              6,144Furniture
                                  and
                                  equipment, at cost net of accumulateddepreciation
                                  of $17,747 (2005) and $18,835 (2006)
                              
                              
                              1,925
                              
                              
                              837$
                              5,149
                              
                              $
                              6,981LIABILITIES
                                  AND STOCKHOLDERS' DEFICITCurrent
                                  liabilities:Accounts
                                  payable
                              
                              $
                              185,202
                              
                              $
                              39,369Accrued
                                  expenses
                              
                              
                              366,464
                              
                              
                              128,136Accrued
                                  payroll taxes
                              
                              
                              289,363
                              
                              
                              165,455Settlement
                                  due
                              
                              
                              18,650
                              
                              
                              18,650Notes
                                  payable
                                  - related parties
                              
                              
                              31,704
                              
                              
                              56,794Total
                                  current
                                  liabilities
                              
                              
                              891,383
                              
                              
                              408,404Minority
                                  interest liability
                              
                              
                              -
                              
                              
                              (6,107
                              )Stockholders'
                                  deficit:Common
                                  stock,
                                  no par value; 499,000,000 sharesauthorized,
                                  262,156,438 (2005) and 284,155,754 (2006)shares
                                  issued
                                  and outstanding
                              
                              
                              12,462,975
                              
                              
                              12,541,775Accumulated
                                  deficit (including $1,131,603 accumulatedduring
                                  the
                                  development stage)
                              
                              
                              (13,126,389
                              )
                              
                              (12,872,757
                              )Notes
                                  receivable from sale of stock
                              
                              
                              (222,820
                              )
                              
                              (64,334
                              )Total
                                  stockholders' deficit
                              
                              
                              (886,234
                              )
                              
                              (395,316
                              )$
                              5,149
                              
                              $
                              6,981
 See
                      accompanying
                      notes
  2
 
 **ARÊTE INDUSTRIES,
                      INC. AND SUBSIDIARIES**
 **(A
                      Development Stage Entity)**
 **CONSOLIDATED
                      STATEMENT OF OPERATIONS**
 **For
                      the
                      three and six months ended June 30, 2005 and 2006**
 **and
                      from
                      inception (August 1, 2003 to June 30, 2006)**
 **(Unaudited)**
   Three
                                  Months
                                  Ended
                                June
                                  30,
                              
                              Six
                                  Months
                                  Ended June 30,
                              
                              Inception
                                  to2005
                              
                              2006
                              
                              2005
                              
                              2006
                              
                              June
                                  30,
                                  2006Revenues:Sales
                              
                              $
                              -
                              
                              $
                              500
                              
                              
                              -
                              
                              $
                              3,500
                              
                              $
                              3,500Other
                                  income
                              
                              
                              -
                              
                              
                              25,040
                              
                              
                              -
                              
                              
                              25,040
                              
                              
                              25,829Total
                                  revenues
                              
                              
                              -
                              
                              
                              25,540
                              
                              
                              -
                              
                              
                              28,540
                              
                              
                              29,329Operating
                                  expenses:Depreciation
                              
                              
                              607
                              
                              $
                              544
                              
                              $
                              1,198
                              
                              
                              1,088
                              
                              $
                              3,664Rent
                              
                              
                              3,375
                              
                              
                              725
                              
                              
                              6,745
                              
                              
                              725
                              
                              
                              23,303Other
                                  operating expenses
                              
                              
                              127,392
                              
                              
                              51,171
                              
                              
                              237,389
                              
                              
                              120,874
                              
                              
                              1,502,014Total
                                  operating expenses
                              
                              
                              131,374
                              
                              
                              52,440
                              
                              
                              245,332
                              
                              
                              122,687
                              
                              
                              1,528,981Total
                                  operating loss
                              
                              
                              (131,374
                              )
                              
                              (26,900
                              )
                              
                              (245,332
                              )
                              
                              (94,147
                              )
                              
                              (1,499,652
                              )Other
                                  income
                                  (expense):Gain
                                  (Loss)
                                  on Sale of Investments
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -
                              
                              
                              (10,502
                              )Interest
                                  expense
                              
                              
                              (260
                              )
                              
                              -
                              
                              
                              (903
                              )
                              
                              -
                              
                              
                              (36,411
                              )Interest
                                  and
                                  miscellaneous income
                              
                              
                              10,410
                              
                              
                              -
                              
                              
                              10,365
                              
                              
                              -
                              
                              
                              13,129Total
                                  other
                                  income (expense)
                              
                              
                              10,150
                              
                              
                              -
                              
                              
                              9,462
                              
                              
                              -
                              
                              
                              (33,784
                              )Net
                                  loss from
                                  continuing operations
                              
                              $
                              (121,224
                              )
                              $
                              221,036
                              
                              
                              (235,870
                              )
                              
                              (94,147
                              )
                              
                              (1,533,436
                              )Minority
                                  interest
                              
                              
                              -
                              
                              
                              5,624
                              
                              
                              -
                              
                              
                              7,608
                              
                              
                              7,608Extinguishment
                                  of Debt
                              
                              
                              -
                              
                              
                              242,312
                              
                              
                              -
                              
                              
                              340,171
                              
                              
                              394,225Net
                                  income
                                  (loss)
                              
                              $
                              -
                              
                              $
                              247,936
                              
                              $
                              (235,870
                              )
                              $
                              253,632
                              
                              $
                              (1,131,603
                              )Basic
                                  and
                                  diluted income (loss) per share from continuing
                                  operations
                              
                              $
                              *
                              
                              $
                              *
                              
                              $
                              *
                              
                              $
                              *
                              
                              $
                              (0.01
                              )Basic
                                  and
                                  diluted income (loss) per share
                              
                              $
                              *
                              
                              $
                              *
                              
                              $
                              *
                              
                              $
                              *
                              
                              $
                              (0.01
                              )Weighted
                                  average common shares outstanding
                              
                              
                              220,750,000
                              
                              
                              280,100,000
                              
                              
                              220,750,000
                              
                              
                              278,290,000
                              
                              
                              192,510,000*
                                  Less than
                                  $.01 per share
  See
                        accompanying
                        notes
 3
 
 **ARÊTE
                      INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
                      Development Stage Entity)**
 **CONSOLIDATED
                      STATEMENT OF STOCKHOLDERS’ DEFICIT**
 **For
                      the six
                      months ended June 30, 2006**
 **(Unaudited)**
 
 Common
                                  stock
                              
                              AccumulatedShares
                              
                              Amount
                              
                              deficitBalance,
                                  December 31, 2005
                              
                              
                              262,155,754
                              
                              $
                              12,462,975
                              
                              $
                              (13,126,389
                              )Exercise
                                  of
                                  stock options
                              
                              
                              
                              
                              
                              
                              
                              
                              -Issuance
                                  of
                                  common stock to employees,directors,
                                  and consultants for services
                              
                              
                              22,000,000
                              
                              
                              78,800
                              
                              
                              -Purchase
                                  of
                                  stock by directors in connectionwith
                                  granted
                                  purchase rights
                              
                              
                              
                              
                              
                              
                              
                              
                              -Net
                                  income
                                  for the six months endedJune
                                  30,
                                  2006
                              
                              
                              -
                              
                              
                              -
                              
                              
                              253,632Balance,
                                  June
                                  30, 2006
                              
                              
                              284,155,754
                              
                              $
                              12,541,775
                              
                              $
                              (12,872,757
                              )
 See
                      accompanying
                      notes
  4
   
 
 **ARÊTE
                      INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
                      Development Stage Entity)**
 **CONSOLIDATED
                      STATEMENT OF CASH FLOWS**
 **For
                      the six
                      months ended June 30, 2005 and 2006**
 **and
                      from
                      inception (August 1, 2003 to June 30, 2006)**
 **(Unaudited)**
 
 As
                                  restatedInception
                                  to2005
                              
                              2006
                              
                              June
                                  30,
                                  2006Cash
                                  flows
                                  from operating activities:Net
                                  loss
                              
                              $
                              (235,870
                              )
                              $
                              253,632
                              
                              $
                              (1,132,392
                              )Adjustments
                                  to reconcile net loss to netcash
                                  used in
                                  operating activities:Depreciation
                                  and amortization
                              
                              
                              1,199
                              
                              
                              1,199
                              
                              
                              3,775Stock
                                  and
                                  options issued for services,accounts
                                  payable, and interest on notes
                              
                              
                              151,187
                              
                              
                              -
                              
                              
                              1,585,529Changes
                                  in
                                  assets and liabilities:Interest
                                  receivable
                              
                              
                              -
                              
                              
                              -
                              
                              
                              44,325Inventory
                              
                              
                              -
                              
                              
                              -
                              
                              
                              25,243Prepaid
                                  expenses
                              
                              
                              3,100
                              
                              
                              (900
                              )
                              
                              (3,900
                              )Deposits
                              
                              
                              (50,000
                              )
                              
                              -
                              
                              
                              (50,000
                              )Accounts
                                  payable
                              
                              
                              -
                              
                              
                              (151,099
                              )
                              
                              (204,350
                              )Accrued
                                  expenses
                              
                              
                              (356
                              )
                              
                              (125,902
                              )
                              
                              (498,957
                              )Total
                                  adjustments
                              
                              
                              105,130
                              
                              
                              (276,702
                              )
                              
                              901,665Net
                                  cash used
                                  in operating activities
                              
                              
                              (130,740
                              )
                              
                              (23,070
                              )
                              
                              (230,727
                              )Cash
                                  flows
                                  from investing activities:Purchase
                                  of
                                  property and equipment
                              
                              
                              -
                              
                              
                              -
                              
                              
                              (5,072
                              )Purchase
                                  of
                                  Stock Investments
                              
                              
                              -
                              
                              
                              -
                              
                              
                              -Net
                                  cash
                                  provided (used) by investing activities
                              
                              
                              -
                              
                              
                              -
                              
                              
                              (5,072
                              )Cash
                                  flows
                                  from financing activities:Proceeds
                                  from
                                  issuance of preferred stock
                              
                              
                              -
                              
                              
                              -
                              
                              
                              6,713Proceeds
                                  from
                                  issuance of common stock
                              
                              
                              7,727
                              
                              
                              -
                              
                              
                              9,997Proceeds
                                  from
                                  exercise of stock options
                              
                              
                              121,500
                              
                              
                              -
                              
                              
                              125,250Note
                                  Receivable from sale of stock
                              
                              
                              (19,000
                              )
                              
                              -
                              
                              
                              16,000Payment
                                  of
                                  note payable - related parties
                              
                              
                              (38,312
                              )
                              
                              25,090
                              
                              
                              16,381Net
                                  cash
                                  provided by financing activities
                              
                              
                              71,915
                              
                              
                              25,090
                              
                              
                              174,341Net
                                  increase
                                  in cash and cash equivalents
                              
                              
                              (58,825
                              )
                              
                              2,020
                              
                              
                              (61,458
                              )Cash
                                  and cash
                                  equivalents at beginning of period
                              
                              
                              63,702
                              
                              
                              224
                              
                              
                              63,702Cash
                                  and cash
                                  equivalents at end of period
                              
                              $
                              4,877
                              
                              $
                              2,244
                              
                              $
                              2,244
 (Continued
                      on
                      following page)
 See
                      accompanying
                      notes
  5
 **ARÊTE
                        INDUSTRIES, INC. AND SUBSIDIARIES**
 **(A
                        Development Stage Entity)**
 **CONSOLIDATED
                        STATEMENT OF CASH FLOWS**
 **For
                        the six
                        months ended June 30, 2005 and 2006**
 **and
                        from
                        inception (August 1, 2003 to June 30, 2006)**
 **(Unaudited)**
 (Continued
                          from
                          preceding page)
 Inception
                                  toSupplemental
                                  disclosure of cash flow information:
                              
                              2005
                              
                              2006
                              
                              June
                                  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, 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 March 31, 2006 wages to officers
                                  and directors and fees to
                                  consultants
                                  of $62,050 were paid by the issuance of common
                                  stock.During
                                  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
                                  stock.
 
 See
                      accompanying
                      notes
  6
  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 June 30,
                      2006, and the results of operations and cash flows for the
                      periods ended June
                      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.
 
 The
                      Company has
                      incurred significant losses and at June 30, 2006, the Company
                      has a working
                      capital deficit of $402,260 and a stockholders’ deficit of $395,316. 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.
 
 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.
  7
  2. Delinquent
                      amounts payable
 
 As
                      of June 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 at June 30, 2006, the remaining
                      liabilities of this
                      division were written-off to extinguishment of debt income.
                      As of the six months
                      ended June 30, 2006, $340,171 of debt was reclassified as extinguishment
                      of debt
                      income. During 2003, the Company abandoned the development
                      of Aggression Sports
                      Inc., a subsidiary. At June 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.
 
 5.  Stock
                      transactions
 
 During
                      the six
                      months ended June 30, 2006, the Company issued a total of 22,000,000
                      common
                      shares for compensation of officers, directors and consultants,
                      valued at an
                      aggregate of $78,800.
  8
  5. Stock
                      transactions (continued)
 
 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
                            
                            $
                            (110,720
                            )
                            $
                            253,632Net
                                income
                                (loss) - pro forma
                            
                            
                            (121,250
                            )
                            
                            243,102Loss
                                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. Subsequent
                      Events
  The
                        Company’s
                        subsidiary, Avatar Technology Group (ATG), continued through
                        out the quarter to
                        receive revenue and contracts for its business and are operating
                        their business
                        plan. On the record date of July 3, 2006, Arête completed a dividend of ATG
                        shares for its shareholders of record. These shares will
                        be distributed to
                        shareholders at a rate of 1 share of Avatar for each 975
                        shares of Arete shares
                        owned.
 
 In
                        May 2006, the
                        Company received a letter of intent for due diligence rights
                        to pursue a merger.
                        The letter of intent included a $25,000 non-refundable deposit.
                        The due
                        diligence period expired before an agreement could be reached
                        between the two
                        parties. The Company’s management currently is continuing discussions with the
                        merger candidate.
 
 On
                        August 15, 2006,
                        the Company executed a Letter of Intent to acquire two working
                        interests in gas
                        producing wells located in Toole County, Montana. On August
                        23, 2006, the
                        Company signed a definitive Purchase Agreement to acquire
                        a 4.5 mile pipeline in
                        Campbell County, Wyoming from PRB Energy, Inc. The Company
                        has arranged
                        short-term financing to enable it to close on both the Montana
                        wells and the
                        Wyoming pipeline. The proposed acquisitions of the working
                        interests and
                        pipeline will provide cash flow to service the acquisition
                        debt and allow the
                        Company to hire management who will oversee the growth of
                        the Company. After the
                        filing of the Company’s second fiscal quarter report for 2006, the Company will
                        file an 8-K with information regarding the acquisition of
                        the pipeline. It will
                        file an 8-K with the details of the definitive agreement
                        for the purchase of the
                        two Montana gas wells once it is signed.
  The
                        Company is
                        continuing to evaluate opportunities for its subsidiary Aggression
                        Sports LTD.
  9
  **Item
                      2 -
                      Management’s Discussion and Analysis/Plan of Operation**
 
 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.
 
  10
  During
                        the Third
                        Quarter of 2003, we began to pursue acquiring direct participation
                        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
                        with whom 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 975 shares of Arete shares owned. The Company expects
                        to file a form
                        14C and a registration statement in the fourth quarter of
                        2006. The ATG shares
                        will be made available to its shareholders in September 2006.
 
 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 alterative 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.
  11
  
 12
  **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 June 30,
                      2005, the Company had $6,981 in total assets. This compares
                      to total assets of
                      $5,149 as of the fiscal year ended December 31, 2005. Total
                      liabilities were
                      $408,404 as of June 30, 2006 compared to $891,383 as of the
                      fiscal year ended
                      December 31, 2005. During the six months ended June 30, 2006,
                      total liabilities
                      were decreased by $482,979. Net income was $253,632 reducing
                      the accumulated
                      deficit as of June 30, 2006 to $12,872,757 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 June 30, 2006, the Company continued to rely upon infusions
                      of cash from
                      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 six months
                      ended June 30,
                      2006, the Company paid $33,000 in compensation to officers
                      and directors, paid
                      $45,650 to consultants and professionals.
 
 As
                      of June 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
                      $28,540 revenues from operations during the six months ended
                      June 30, 2006, and
                      no revenues during the comparable period ended June 30, 2005.
                      Net loss from
                      continuing operations for the six months ended June 30, 2006
                      was $94,147 as
                      compared to a net loss from continuing operations of $245,332
                      for the six months
                      ended June 30, 2005. The net income during the six months ended
                      June 30, 2006
                      included $304,171 in extinguishment of debt. Net loss from
                      continuing operations
                      for the quarter ended June 30, 2006 was $26,900 as compared
                      to a net loss from
                      continuing operations of $121,224 for the quarter ended June
                      30, 2005. The net
                      income during the quarter ended June 30, 2006 included $242,312
                      in
                      extinguishment of debt.
  13
  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 June 30, 2006 of $402,260. This
                      compares to a
                      working capital deficit of $888,159 as of December 31, 2005.
                      During the six
                      months ended June 30, 2006 an aggregate of 22,000,000  shares
                      of common
                      stock were issued for aggregate consideration of $77,050 (for
                      an average of
                      $0.0035 per share).
 
 The
                      Company had a
                      stockholder's deficit at June 30, 2006 of $395,316. 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
                      June 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.
 
 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
  14
  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 June 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.
 
  15
  
 **PART
                      II.
                      OTHER INFORMATION**
 
 Item
                      1. Legal
                      Proceedings.
 
 During
                      the six
                      months ended June 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
 
 Exhibit
                      31.1 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.
  16
  **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.
 
 ARÊTE
                      INDUSTRIES,
                      INC.
 
 
 Date:
                      August 22,
                      2006
 
 By:
                      /s/ Charles
                      Gamber, CEO
 Principal
                      Executive
                      Officer
 
 By:
                      /s/ John
                      Herzog, Interim CFO
 Interim
                      Principal
                      Financial and Accounting Officer