FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


                                  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 the period ended:   June 30, 2001
                            -------------
or

[ ]  Transition  Report  Pursuance  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.)


    2955 Valmont Road, Suite 310, Boulder, CO                80301
    ------------------------------------------            -------------
    (Address of principal executive offices)               (Zip Code)


                                 (303) 247-1313
                -------------------------------------------------
              (Registrant's telephone number, including area code)


                                 Not Applicable
                  --------------------------------------------
                    (Former name, former address and former
                  fiscal year, if changed since last report.)


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


          APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS:

Indicated  by check mark  whether the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.  [X] Yes     [ ] No

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 15, 2001, Registrant had 470,825,562 shares of common stock, No par
value, outstanding.

<PAGE>

                                TABLE OF CONTENTS


                                                                       Page No.

Consolidated Financial Statements:

Consolidated Balance Sheet at June 30, 2001 and June 30, 2000
(unaudited)                                                               2

Consolidated Statements of Operations for the Three Months Ended
June 30, 2001 and 2000 (unaudited)                                        3

Consolidated Statements of Operations for the Six Months Ended
June 30, 2001 and 2000 (unaudited)                                        4

Consolidated Statement of Stockholders' Deficit for the Six Months
Ended June 30, 2001 (unaudited)                                           5

Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000                                                  6-7

Notes to Unaudited Consolidated Financial Statements at
June 30, 2001                                                          8-10

Management's Discussion and Analysis of Financial Condition
and Results of Operations                                             11-13

Financial Condition                                                      14

Signatures                                                               17




<PAGE>


<TABLE>

                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                       June 30, 2001 and December 31, 2000
                                   (Unaudited)
<CAPTION>

                                     ASSETS
                                     ------
                                                                  2001             2000
                                                              ------------     ------------

<S>                                                           <C>             <C>
Current assets:
    Cash and cash equivalents                                 $         45    $     13,376
    Certificate of deposit                                               -          52,387
    Prepaid expenses                                                22,148          26,031
                                                              ------------    ------------

      Total current assets                                          22,193          91,794

Furniture and equipment, at cost net of accumulated
    depreciation of $9,318 (2001) and $5,478 (2000)                 15,155          18,995

Security deposit                                                     5,409           5,954

Investment in and advances to Applied Behavior Systems,
    LLC (Note 2)                                                         -               -

Investment in and advances to Aggression Sports
    (Note 2)                                                       102,000          89,222
                                                              ------------    ------------

                                                              $    144,757    $    205,965
                                                              ============    ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT
                      -------------------------------------

Current liabilities:
    Accounts payable (Note 3)                                 $    306,088    $    201,979
    Accrued expenses                                               711,692         508,462
    Accrued payroll taxes (Note 3)                                 198,445         191,755
    Settlement due                                                  30,000               -
    Notes payable (Note 4)                                         100,000          50,000
    Notes payable - related parties (Note 4)                       178,459         201,561
                                                              ------------    ------------

      Total current liabilities                                  1,524,684       1,153,757

Commitments and contingencies (Notes 1, 3 and 6)

Stockholders' deficit (Note 4):
    Convertible Class A preferred stock; $10 face
      value,  100,000 shares authorized, no shares issued
      and outstanding                                                    -               -
    Common stock, no par value; 499,900,000 shares
      authorized, 453,163,302 (2001) and 372,422,912 (2000)
      shares issued and outstanding                              9,018,455       8,515,871
    Accumulated deficit                                        (10,184,357)     (9,346,413)
    Notes receivable from sale of stock                           (214,025)       (117,250)
                                                              ------------    ------------

      Total stockholders' deficit                               (1,379,927)       (947,792)
                                                              ------------    ------------

                                                              $    144,757    $    205,965
                                                              ============    ============
</TABLE>

                             See accompanying notes.

                                        2
<PAGE>

<TABLE>

                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF OPERATIONS
                For the three months ended June 30, 2001 and 2000
                                   (Unaudited)
<CAPTION>
                                                                   2001              2000
                                                              -------------    -------------

Revenues:
<S>                                                           <C>              <C>
    Management fees - Aggression Sports (Note 2)              $      10,000    $      30,000
    Other income                                                     30,324                -
                                                              -------------    -------------

      Total revenues                                                 40,324           30,000

Operating expenses:
    Depreciation                                                          -              849
    Research and development (Note 2)                                10,324                -
    Rent                                                             19,692            6,931
    Salaries (Note 4)                                                     -          159,731
    Other operating expenses                                        302,960          114,203
                                                              -------------    -------------

      Total costs and expenses                                      332,976          281,714
                                                              -------------    -------------

        Total operating income (loss)                              (292,652)        (251,714)

Other income (expense):
    Equity in loss of Aggression Sports (Note 2)                    (10,423)         (75,005)
    Impairment of investment in Aggression Sports (Note 2)         (141,711)               -
    Interest expense                                                (27,085)          (1,847)
    Interest and miscellaneous income                                 5,570            9,863
                                                              -------------    -------------

      Total other income (expense)                                 (173,649)         (66,989)
                                                              -------------    -------------

Net loss from continuing operations                                (466,301)        (318,703)

Net loss from discontinued operations (Note 1)                            -                -
                                                              -------------    -------------

Net loss applicable to common shareholders                    $    (466,301)   $    (318,703)
                                                              =============    =============


Basic and diluted loss per share from continuing operations   $          *     $          *
                                                              =============    =============

Basic and diluted loss per share                              $          *     $          *
                                                              =============    =============


Weighted average common shares outstanding                      427,694,000      265,404,922
                                                              =============    =============
</TABLE>

* - Less than $.01 per share

                             See accompanying notes.

                                        3
<PAGE>

<TABLE>
                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF OPERATIONS
                 For the six months ended June 30, 2001 and 2000
                                   (Unaudited)
<CAPTION>


                                                                  2001             2000
                                                              -------------    -------------
Revenues:
<S>                                                           <C>              <C>
    Management fees - Aggression Sports (Note 2)              $      33,400    $      30,000
    Other income                                                     48,564                -
                                                              -------------    -------------
      Total revenues                                                 81,964           30,000

Operating expenses:
    Depreciation                                                      3,840              849
    Research and development (Note 2)                               121,936                -
    Rent                                                             40,651            6,931
    Salaries (Note 4)                                                     -          159,731
    Other operating expenses                                        519,401          114,203
                                                              -------------    -------------

      Total costs and expenses                                      685,828          281,714
                                                              -------------    -------------

        Total operating income (loss)                              (603,864)        (251,714)

Other income (expense):
    Equity in loss of Aggression Sports (Note 2)                    (44,013)         (77,005)
    Impairment of investment in Aggression Sports (Note 2)         (141,711)               -
    Interest expense                                                (56,898)          (8,604)
    Interest and miscellaneous income                                 8,542           10,426
                                                              -------------    -------------

      Total other income (expense)                                 (234,080)         (75,183)
                                                              -------------    -------------

Net loss from continuing operations                                (837,944)        (326,897)

Net loss from discontinued operations (Note 1)                            -          (70,520)
                                                              -------------    -------------

Net loss applicable to common shareholders                    $    (837,944)   $    (397,417)
                                                              =============    =============


Basic and diluted loss per share from continuing operations   $          *     $          *
                                                              =============    =============

Basic and diluted loss per share                              $          *     $          *
                                                              =============    =============


Weighted average common shares outstanding                      416,495,000      265,404,922
                                                              =============    =============
</TABLE>

* - Less than $.01 per share

                             See accompanying notes.

                                        4

<PAGE>

<TABLE>

                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                     For the six months ended June 30, 2001
                                   (Unaudited)
<CAPTION>

                                                 Common stock
                                                 ------------                  Accumulated
                                                    Shares         Amount        deficit
                                                 ------------   ------------   ------------

<S>                                               <C>           <C>            <C>
Balance, December 31, 2000                        372,422,912   $  8,515,871   $ (9,346,413)

    Issuance of common stock for
      services (Note 4)                            23,591,023        111,182              -

    Issuance of common stock upon conversion
      of note payable - related party (Note 4)     36,649,367        158,912              -

    Issuance of common stock in payment of
      interest on notes payable (Note 4)            2,000,000         30,000

    Common stock issued upon exercise
      of options (Note 4)                          11,500,000         88,000              -

    Interest in sale of Arete common stock
      by equity-method investee (Note 2)            2,000,000         34,490              -

    Common stock issued upon exercise
      of options paid for by a note
      receivable (Note 4)                           5,000,000         80,000
    Net loss for the six months ended
      June 30, 2001                                         -              -       (837,944)
                                                 ------------   ------------   ------------

Balance, June 30, 2001                            453,163,302   $  9,018,455   $(10,184,357)
                                                 ============   ============   ============
</TABLE>
                             See accompanying notes.

                                        5
<PAGE>

<TABLE>
                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                 For the six months ended June 30, 2001 and 2000
                                   (Unaudited)
<CAPTION>

                                                               2001         2000
                                                             ---------    ---------
<S>                                                          <C>          <C>
Cash flows from operating activities:
   Net loss                                                  $(837,944)   $(397,417)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation and amortization                             3,840          965
       Equity in loss of Aggression Sports                      44,013       77,005
       Impairment of investment in Aggression Sports           141,711            -
       Stock issued for services and interest on notes         146,182       93,910
       Changes in assets and liabilities:
         Accounts receivable                                         -      (12,120)
         Prepaid expenses                                        3,526        1,200
         Accounts payable                                      104,109         (869)
         Accrued expenses                                      239,920       81,722
                                                             ---------    ---------

           Total adjustments                                   683,301      241,813
                                                             ---------    ---------

       Net cash used in operating activities                  (154,643)    (155,604)

Cash flows from investing activities:
   Purchase of property and equipment                                -            -
   Security deposit                                                545       (5,664)
   Investments in and advances to Aggression Sports           (169,012)     106,692
   Maturity (purchase) of certificate of deposit                52,387       25,000
                                                             ---------    ---------

       Net cash provided by (used in) investing activities    (116,080)     126,028

Cash flows from financing activities:
   Proceeds from issuance of common stock                            -       67,152
   Proceeds from exercise of stock options                      88,000       66,000
   Proceeds from note payable - related parties                119,392            -
   Proceeds from note payable                                   50,000            -
   Payments on long term debt                                        -      (19,500)
                                                             ---------    ---------

     Net cash provided by financing activities                 257,392      113,652
                                                             ---------    ---------

Net increase in cash and cash equivalents                      (13,331)      84,076
Cash and cash equivalents at beginning of period                13,376       15,844
                                                             ---------    ---------

Cash and cash equivalents at end of period                   $      45    $  99,920
                                                             =========    =========
</TABLE>
                             See accompanying notes.

                                        6
<PAGE>

<TABLE>
                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                 For the six months ended June 30, 2001 and 2000
                                   (Unaudited)
                         (Continued from preceding page)
<CAPTION>



Supplemental disclosure of cash flow information:               2001         2000
                                                             ---------    ---------
<S>                                                          <C>          <C>
    Interest paid during the period                          $       -    $   8,604
                                                             =========    =========
    Income taxes paid during the period                      $       -    $       -
                                                             =========    =========

Supplemental disclosure of non-cash investing and financing activities:

    During the quarter  ended March 31, 2000,  the Company  issued  common stock
    valued at  $15,548 to  employees  of  Aggression  Sports  and  treated  such
    issuance as an advance

    During the six months  ended June 30, 2001,  notes  payable from two related
    parties with  outstanding  balances of $158,912 were  converted  into common
    stock
</TABLE>


                             See accompanying notes.

                                        7
<PAGE>


                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001

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,  2000 and June 30,  2001,  and the results of
     operations and cash flows for the periods ended June 30, 2000 and 2001.

     Discontinued operations:

     During  March  2000,  the  Company  abandoned  the  direct  mail and coupon
     business and shifted its focus toward Aggression Sports,  Inc.  (Aggression
     Sports) (see Note 2). The direct mail coupon business continued until March
     2000. The Company provided  executive support to help Aggression Sports get
     prepared to start its own operations.  Aggression  Sports is in the process
     of developing a web site to market its proprietary outdoor products.

     Basis of presentation:

     The financial  statements have been prepared on a going concern basis which
     contemplates  the  realization of assets and  liquidation of liabilities in
     the ordinary  course of business.  As shown in the  accompanying  financial
     statements,  the Company has  incurred  significant  losses and at June 30,
     2001,  the  Company  has a working  capital  deficit  of  $1,502,491  and a
     stockholders' deficit of $1,397,927. In addition, the Company is delinquent
     on payment of payroll taxes and creditor  liabilities  pursuant to the plan
     of reorganization, and is being investigated by the Securities and Exchange
     Commission for alleged securities law violations (see Note 6). As a result,
     substantial  doubt exists about the  Company's  ability to continue to fund
     future operations using its existing resources.

2.   Investment in and advances to affiliates
     ----------------------------------------

     In prior years, the Company acquired a 31% ownership interest in Aggression
     Sports in exchange  for  30,000,000  shares of the  Company's  common stock
     valued at  $150,000.  During the three  months  ended June 30 and March 31,
     2001, Aggression Sports sold 550,000 and 5,690,000 shares,  respectively of
     Arete for gross  proceeds of $82,362.  Arete's 31% interest in the proceeds
     of $34,490 has been recorded as additional paid-in capital.

     During May 2001,  the Company agreed to buy out the 30% share of Aggression
     Sports owned by the creator of  Aggression's  products for $40,000 worth of
     the Company's stock to be issued over a four-month  period.  As of June 30,
     2001,  2,000,000  shares of common  stock  were  issued  and an  additional
     6,000,000 shares of common stock are being held in escrow.  The Company has
     recorded an impairment in the value of this investment.

                                        8
<PAGE>


                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


2.   Investment in and advances to affiliates (continued)
     ----------------------------------------------------

     Applied Behavior Systems, LLC:

     The Company has an agreement to provide new venture management  services to
     assist in the  formation of a new company and product  development  process
     concerning  several unique  applications  of a patented  neural-networking,
     intelligent  agent  software  engine in conjunction  with Applied  Behavior
     Systems,  LLC (ABS),  an  unaffiliated  company.  Under the agreement,  the
     Company was entitled to fees for management  services and was to receive an
     equity interest in this new application  development company.  Through June
     30,  2001,  the Company has  advanced  $260,672 as a bridge loan to finance
     operations.  As these advances have been used for research and  development
     by ABS,  these  amounts  have been  recorded  as research  and  development
     expenses in the accompanying financial statements. During 2001, the Company
     charged  management fees of $80,000 to ABS. These  management fees have not
     been  recorded  as  revenue  at  this  time  since  collectibility  is  not
     reasonably  assured.  During May 2001,  the Company  ceased  funding  ABS's
     operations.

3.   Delinquent amounts payable
     --------------------------

     As of June 30,  2001,  the  Company is  delinquent  on  payments of various
     amounts to  creditors  including  payroll  taxes and  $62,316 to  creditors
     required to be paid under the terms of its plan of reorganization.  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.

4.   Stockholders' equity
     --------------------
     During the six months ended June 30, 2001,  (1) two officers of the Company
     converted $158,912 of notes payable into 36,649,367 shares of the Company's
     common stock, (2) the Company issued  23,591,023 shares of common stock for
     services  valued at $111,182,  (3) the Company issued  2,000,000  shares of
     common  stock in  exchange  for a $30,000  of  accrued  interest  on a note
     payable (4) the Company issued  11,500,000  shares of common stock upon the
     exercise of stock options and (5) the Company  issued  2,000,000  shares of
     common  stock  as  part  of the  settlement  price  for an  additional  30%
     investment in Aggression  Sports. The Company also issued 10,000,000 shares
     of its common stock to be held as  collateral  for the payment of two notes
     payable with a principal balance of $100,000 in the aggregate and 6,000,000
     shares of its common  stock held in escrow to be issued for the  settlement
     price for an additional 30% investment in Aggression  Sports.  These shares
     have not been  reflected as  outstanding  as they are  considered  Treasury
     shares.  As of June 30,  2001,  the  10,000,000  shares of common  stock as
     collateral  for the  payment of two notes  payable  may be kept by the note
     holders  upon  conversion  of the  notes  into  stock at the note  holders'
     option.

     In January 2001, the board of directors  authorized the issuance of options
     to purchase  5,000,000 and  6,500,000  shares of common stock for $.015 and
     $.010 per share,  respectively,  to one individual.  The 5,000,000  options
     were  exercised  in  exchange  for a note  receivable  of  $75,000  and the
     6,500,000  options were  exercised by reducing the balance of accrued wages
     payable to the individual.

                                        9
<PAGE>


                      ARETE INDUSTRIES, INC. AND SUBSIDIARY
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


5.   Income taxes
     ------------
     The book to tax temporary  differences resulting in deferred tax assets and
     liabilities  are primarily net operating loss  carryforwards  of $3,670,000
     which expire in years through 2021.

     A 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 reasonable assured.

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

6.   Commitments and contingencies
     -----------------------------

     Securities and Exchange Commission investigation:

     In  August  1999,  the  U.S.   Securities  and  Exchange   Commission  (the
     "Commission")  instituted a civil action in the Federal  District  Court in
     Colorado for the District of Colorado instituting an injunctive  proceeding
     against the Company,  its current CEO and former  officers  and  directors,
     under Section 17(a) of the  Securities Act of 1933 and Section 10(b) of the
     Securities  Exchange Act of 1934 and Rule 10b-5  thereunder,  alleging that
     false and/or misleading information was contained in certain press releases
     issued by the Company in February 1998,  and further  citing  violations of
     Section  15(d) of the  Exchange  Act and rules 15d-1 and 15d-3 for late and
     missing filings of periodic  reports under the Exchange Act. As of the date
     of this report, a final order approving a consent to entry of an injunction
     has been entered as to the two former  officers and directors in which they
     consented to the entry of an injunction  against them without  admitting or
     denying the factual findings of the commissions contained in the settlement
     offer and order and agreeing to payment of civil penalties.

     Under provisions of the Company's  Articles and By-laws and pursuant to the
     Change in Control  Agreement  dated April 30, 1998, in which the two former
     officers and directors  resigned,  the Company  agreed to indemnify and pay
     legal  fees and the  civil  penalties  of these  two  former  officers  and
     directors  which  agreement  has  been  finalized  in the  form  of a final
     settlement   agreement  between  the  Company,   the  former  officers  and
     directors,  their attorney and the current CEO,  entered into in the fourth
     quarter of 2000.

     The Company and the current CEO are presently defending this action through
     separate  counsel,  have filed  responsive  pleadings  and have  engaged in
     serious  settlement  discussions  independently  with the  Commission.  The
     Company has executed a settlement offer and the regional  enforcement staff
     has  transmitted it to the Commission in Washington for approval,  of which
     there are no guarantees it will do so. The CEO and the regional enforcement
     staff have had serious  settlement  discussions and a verbal offer has been
     tendered  for referral to and approval by the  Commission,  also,  of which
     there is no assurance that the offer will be accepted. Case preparation and
     discovery  have been put on hold pending a response from the  Commission in
     Washington D.C.

     As authorized in the Company's  corporate  charter,  the board of directors
     has agreed to  indemnify  and advance  fees and expenses to the CEO for his
     costs of defending this action.

                                       10
<PAGE>


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

Forward Looking Statements

This Quarterly Report on Form 10-QSB includes forward-looking  statements within
the meaning of the Private  Securities  Litigation  Reform Act of 1995. This Act
provides a "safe harbor" for  forward-looking  statements to encourage companies
to provide  prospective  information  about  themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected  results.  All statements  other than  statements of historical  fact,
including   statements  regarding  industry  prospects  and  future  results  of
operations of financial  position,  made in this Quarterly Report on Form 10-QSB
are forward looking. We use words such as "anticipates,"  "believes," "expects,"
"future"  and  "intends"  and similar  expressions  to identify  forward-looking
statements. Forward-looking statements reflect management's current expectations
and are inherently  uncertain.  Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially and adversely
from  those  set forth in the  forward-looking  statements,  including,  without
limitation,  the Company has been unprofitable since inception to the end of the
2nd Quarter,  2001. This may affect the stock price and public float and further
reducing liquidity.  The Company's actual results may differ  significantly from
management's  expectations.  The following  discussion includes  forward-looking
statements regarding expectations of future profitability of our business, gross
margin,  improvement  in operating  loss and sales,  all of which are inherently
difficult to predict. Actual results could differ significantly for a variety of
reasons,  including the accessibility to additional capital,  the rate of growth
and consumer acceptance of the Internet and online commerce, the amount that the
Company  invests  in  new  business   opportunities  and  the  timing  of  those
investments,  customer-spending patterns, the mix of products sold to customers,
the mix of revenues  derived  from product  sales as compared to  services,  and
risks of fulfillment throughout and productivity. These risks and uncertainties,
as well as other  risks and  uncertainties,  could  cause the  Company's  actual
results to differ significantly from management's statements.


General Summary

During  the  current  quarter,  the  Company  was  forced  to  cease  supporting
operations of its two incubation  projects,  new product  development of leading
edge outdoor sports products  designed by Mike Lowe at Arete  Outdoors,  and its
software  development  program including  SpeechTeach,  a computer program which
teaches speech to developmentally disabled and brain damaged individuals, plus a
voice driven email project and a robot operating  system or digital brain, via a
core artificial  intelligence  software program designed by William Hutchison of

                                       11
<PAGE>


Applied Behavioral Systems, LLC ("ABS").  While these were promising businesses,
inability  to generate  revenue  from the outdoor  products in the  introductory
season and the  evaporation  of interest of venture  capitalists  in  start-ups,
forced  the  Company  to  sharply  cut back its  overhead,  stop  funding  these
projects,  and to  critically  re-evaluate  its business  model.  The Company is
acting to preserve  the value of its  investments  in these two  projects to the
extent possible and to find other means of development of these products through
third party relationships or new investors.

The  Company has  initiated  strong  measures  to promote  short and medium term
survival and is preparing to pursue opportunities that have existing operations,
revenues and credible upside. Secondly, the Company is seeking a means to share,
in  the  near  term,  the  value  of  its  past  investments  with  its  current
shareholders while evaluating  effective measures to recapitalize the company to
make it  attractive  as both an  acquisition  vehicle for more  mature  business
entities and as an investment  for  professional  investors and small  investors
alike.

The following describes events and transactions in the past period.

Outdoors Equipment: Arete Outdoors.
-----------------------------------
The Company spent significant  financial and management resources developing the
first two Mike Lowe designs, which were ultimately introduced late in the winter
season of 2001.  Due to late  completion  of final  designs of both the SnowFang
snow  shoes  and the Rush  Downhiller,  and the  complexity  we  encountered  in
introducing the Rush Downhiller snow scooter into ski areas,  market penetration
during that season was a  disappointment.  Without at least  nominal  revenue to
sustain  operations,  the Company could not justify  maintaining the overhead of
its  facilities  and  employees  or new product  development.  As a result,  the
previous agreement with Mike Lowe has been terminated. As part of the settlement
with Mr.  Lowe,  he returned  all of his shares of stock in Arete  Outdoors.  In
addition,  Arete  Outdoors  retained  all  title,  right  and  interest  in  the
Downhiller  and  SnowFang  designs,  while Mr. Lowe  retained  the rights to the
product  designs the Company  determined  were not  patentable  or  commercially
viable.  Arete  Outdoors  stock will be issued  to Arete  Industries,  Inc.,  as
consideration  for compensating  Mr. Lowe pursuant to the settlement  agreement.
Mr. Lowe remains available as a consultant and a designer for the future, but he
is pursuing other career opportunities at this time.

Arete Outdoors is correcting course and is developing a plan to create near term
revenue  in  a  low  overhead,   multi-season   business  of  representing   and
distributing  high margin  products and  accessories in multiple  outdoor sports
categories  manufactured by third parties,  including European companies seeking
access to US markets. We will undertake to import,  market and open distribution
channels  for these types of products in the US and then build  channels to sell
US made products into Europe, Asia and Australia.  Another key area of refocused
energy is the development of direct marketing channels  including  catalogue and
e-business.  The current vision is to create marketing expertise and fulfillment
capacity  as  needed  and  to  minimize  or  avoid   manufacturing  and  product
development.  In turn,  we will try to find  manufacturers  with  interests  and
resources to properly  market the  SnowFangs  snowshoe  and the Rush  Downhiller
products, as a licensing or joint venture project.

                                       12
<PAGE>


Management  has  determined  to cease  all  operating  expenses  in an effort to
preserve  Outdoors'  assets pending its  development  of outside  investment and
e-commerce  operations.  Toward  that  vane  all  expenses,  including  employee
payroll, have ceased. To date the Company has invested approximately $782,000 in
Outdoors, which has generated approximately $22,000 in revenues.

The current financial  statements  contained herein treat subsidiary  Aggression
Sports,  Inc. (d/b/a Arete  Outdoors) on a  non-consolidated  basis,  i.e. as an
investment.


II.  Patented Intelligent Agent Software

During the latter  half of 2000  through  May of this year,  we worked  with our
incubator client,  Applied Behavior Systems,  LLC, ("ABS") and Behavior Systems,
LLC, ("BS") who had developed a patented intelligent agent software program that
has  unique  applications  for  language  learning,  voice  recognition,  vision
recognition  and  intelligent  robotics.  In connection  with these efforts,  we
contributed  senior  management  services and capital in the form of loans,  and
sought  outside  investment  capital to help continue and expand these  programs
toward  commercialization.  Due to a variety of causes,  no outside  capital was
obtained,  forcing  Management to stop incurring  further  expenses in May 2001.
There are no employee  payroll or other  expenses being incurred at this time in
connection with this program.  The sole owner of ABS and BS, William  Hutchison,
has filed a petition  under Chapter 7 of the US Bankruptcy  laws in the District
of Colorado in July 2001. To date Company has expended approximately $485,000 in
the ABS/BS software development program, which has yet to generate any revenues.

On November 16, 2000,  the Company  entered into an agreement with ABS and BH to
form a new  corporation to pursue  applications  of the  technology  beyond that
which was being  employed  by ABS in  connection  with  SpeechTeach,  a language
learning software program for learning delayed  children.  Because ABS could not
continue as a going concern without additional  financial support and because no
financing was obtained for the new venture,  it is highly likely that the intent
of the  November  16,  2000  agreement  will  not be  fulfilled.  Management  is
currently  exploring the  possibility  of pursing the software  opportunity in a
variety of different  structures,  which may be initiated  sometime later during
fall/winter of 2001-2002.

In an effort to  continue  the  business  opportunity  provided  in this  unique
software system a new subsidiary,  called Seventh Generation Technologies,  Inc.
("7GT"),  has  been  formed.  Although  originally  formed  for the  purpose  of
developing and marketing the intelligent robotics aspects of the ABS/BS patented
software it is  anticipated  that it will now be used to obtain a  non-exclusive
license  agreement  from ABS  and/or BS to permit  7GT a right to use their core
technology in certain applications worldwide.

                                       13
<PAGE>


III.   Other Opportunities

In April 2001,  a new company was formed  called  Eagle  Capital  Funding  Corp.
("Eagle") in  conjunction  with a business  opportunity  being  developed by Mr.
Gerald J. Brandimarte of Pueblo,  Colorado. Mr. Brandimarte's new business helps
locate  and  acquire  construction  finance,   bonding  and  permanent  take-out
financing for  commercial  construction  projects.  In addition to locating such
funding for  `credit'  borrowers  in the private  sector,  it will also pursue a
special  niche of  funding  municipal  construction  projects  for  governmental
agencies,  in special  states  including  Colorado,  which have  certain  taxing
limitations  preventing  such entities from  incurring  obligations,  which have
maturities in excess of one year.  Due to explosive  growth and  development  in
these  states,   governmental  entities  face  the  need  to  undertake  capital
improvements, which need is burdened by need to obtain voter approval.

The  original  agreement  with  Mr.  Brandimarte,  dated  April  16,  2001,  and
subsequently  modified whereby Mr.  Brandemarte will be a majority  shareholder.
The  agreement is subject to continuing  modification  and Mr.  Brandimarte  has
contributed  services  but no assets,  and , will  contribute  certain  selected
ongoing and pending funding projects.  Mr.  Brandimarte will also be entitled to
work on other projects  outside the scope of Eagle's  business  model,  and will
continue  independently  until Eagle is properly funded.  It is anticipated that
the Company will provide certain management and administrative services to Eagle
for a monthly management fee.

Employees:
----------
Arete Industries, Inc. has 4 full time employees, and its subsidiary, Aggression
Sports, Inc. presently has no employees.  Seventh Generation Technologies,  Inc.
presently  has no  operations  and has no  employees.  Effective  June 1,  2001,
Michael  Parsons and Larry Mortimer left the company to pursue other  employment
opportunities. Messrs. Raabe and Gorman remain on a deferred salary basis as the
company's principal officers and directors.

Financial Condition
-------------------
The Company had a working capital deficit as of June 30, 2001, of $1,502,491.
This compares to a working  capital  deficit of $1,061,963 at December 31, 2000.
Losses  were  partially  funded  with  accrued  salaries  and shares  issued for
services. During the 3-month period ended June 30, 2001, the Company issued
  20,540,380 shares of common stock for services.

Results of Operations
---------------------
The company's financial  performance has been significantly  affected by failure
to  generate  sales  revenues  from the  sports  equipment  operations  at Arete
Outdoors and the inability to secure further  development  financing for ABS and
for the intelligent robotics operations at Seventh Generation Technologies, Inc.

                                       14
<PAGE>


The Company's  operating revenues of $40,324 was management fees charged for its
New Venture Management Services for the three months ended June 30, 2001.

For the quarter ended June 30, 2001, the Company incurred  $332,976 in operating
expenses.  We are presently  working to  drastically  reduce  monthly  operating
expenses to a bare  minimum to sustain our  viability  while we seek one or more
new businesses opportunities to start-up or acquire through purchase,  merger or
acquisition.  Our future  expectation  is that monthly  operating  expenses will
remain as low as possible until such 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 entities.

Liquidity and Capital Resources
-------------------------------
We are  refocusing  our efforts on  opportunities  that will generate  immediate
revenue, and this includes continuing to seek revenue generating  activities for
Arete Outdoors including finding manufacturing and/or marketing partners for our
developed products,  finding distribution and marketing opportunities from third
party manufacturers for high-margin sports and leisure product  categories,  and
to arrive at a mutually  agreeable go forward plan for Eagle. This would be done
in  conjunction  with our  development  of an  e-business  and direct  marketing
operation,  which will require little additional capital to develop. The Company
is also  seeking  investors  or a strategic  alliance  for its voice  artificial
intelligence/robotics software development operations as well.

The Company had a stockholders' deficit at June 30, 2001 of $1,397,927 . This is
compared  to a  stockholders'  deficit  at  December 31, 2000 of  $947,792.  The
stockholders' deficit increased due to the Company's operating at a loss.

Management is committed to refocusing its efforts toward generation of immediate
revenues. While we believe the business opportunities presented in both Outdoors
and ABS were sound,  the  extensive  need for  capital  exceeded  our  available
resources,  and current economic  conditions have made it extremely difficult to
raise  capital in a  situation  without a  reasonable  expectation  of near term
revenue from operations.

Failure of the Company to acquire  additional capital in the form of either debt
or equity capital will most likely impair the ability of the Company to meet its
obligations in the near or medium term and will threaten its ability to continue
as a going concern.

Due to its recent  liquidity  issues,  the  company and  subsidiary,  Aggression
Sports, Inc. have delinquent on several short term obligations for its operating
overhead,  trade payables,  and state and federal employment taxes, resulting in
tax liens being imposed on the respective  company's assets,  which will have to
be resolved with an infusion of new capital, of which no assurances can be made.

                                       15
<PAGE>


At  June  30,  2001,  the  Company  had  no  material  commitments  for  capital
expenditures.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

During the Period ended June 30, 2001, there were no material legal  proceedings
initiated  by or  against  the  Company  or any of its  officers,  directors  or
subsidiaries.

Item 2. Changes in Securities

(a) Changes in Instruments Defining Rights of Security Holders. Previously
Reported.

(b) Not Applicable

(c) Item 701 Reg. SB. - The following were the unregistered shares of
common stock sold by the registrant during the period covered by this
report.

None

Item 3. Defaults Upon Senior Securities.

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K

There are no Exhibits filed herewith.

There  were no  Reports  on Form 8-K filed  during  the  period  covered by this
report.

                                       16
<PAGE>


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: August 20, 2001

By: /s/ Thomas Y. Gorman, CFO
------------------------------------------
Thomas Y. Gorman, CFO
Principal Financial and Accounting Officer


                                       17