**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**




**FORM
      10-KSB**




**x** **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934**




**For
      the fiscal year ended MARCH 31, 2008**




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




**Commission
      File Number: 000-254888**




**RG
      GLOBAL LIFESTYLES, INC.**


(Name
      of
      small business issuer in its charter)





California
            33-0230641(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)





1200
                N. Van Buren St., Suite A, Anaheim, CA
            92807(Address
                of principal executive offices)
            (Zip
                Code)





Issuer’s
      telephone number: **(949)
      888-9500**




Securities
      registered under Section 12(b) of the Act: **None**




Securities
      registered under Section 12(g) of the Act:




**Common
      Stock $.001 par value**


(Title
      of
      Class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months, and
      (2) has been subject to such filing requirements for the past 90 days. Yes
x No
o




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B contained in this form, and no disclosure will be contained, to the best
      of
      issuer’s knowledge, in definitive proxy or information statements incorporated
      by reference in Part III of this Form 10-KSB, or any amendment to this
      Form 10-KSB. o









Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




The
      issuer’s revenues for the most recent fiscal year were
      $981,218.





The
      aggregate market value of the voting and non-voting common stock held by
      non-affiliates as of June 30, 2008 was approximately $5,840,000.




APPLICABLE
      ONLY TO CORPORATE REGISTRANTS





The
      number of shares outstanding of the issuer’s Common Stock as of June 30, 2008
      was 44,307,792





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Certain
      information contained in the Proxy Statement to be filed for the 2008 Annual
      Meeting of Stockholders of the issuer is also hereby incorporated by reference
      into certain Items of Part III of this Form 10-KSB.







**TABLE
      OF CONTENTS**





PAGECautionary
                Statement Regarding Forward-Looking Information
            1PART
                IITEM
                1. DESCRIPTION OF BUSINESS
            2ITEM
                2. DESCRIPTION OF PROPERTY
            8ITEM
                3. LEGAL PROCEEDINGS
            8ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            8PART
                IIITEM
                5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
                BUSINESS ISSUER PURCHASE OF SECURITIES
            8ITEM
                6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            10ITEM
                7. FINANCIAL STATEMENTS
            14ITEM
                8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            14ITEM
                8A(T). CONTROLS AND PROCEDURES
            15ITEM
                8B. OTHER INFORMATION
            15PART
                IIIITEM
                9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
                CORPORATE
                GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT
            16ITEM
                10. EXECUTIVE COMPENSATION
            16ITEM
                11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                AND
                RELATED STOCKHOLDERS MATTERS
            16ITEM
                12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE
            16ITEM
                13. EXHIBITS
            16ITEM
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            16




i




**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING INFORMATION**




All
      statements contained in this Form 10-KSB, other than statements of historical
      facts, that address future activities, events or developments are
      forward-looking statements, including, but not limited to, statements containing
      the words "believe", "anticipate", "expect" and words of similar import. These
      statements are based on certain assumptions and analyses made by us in light
      of
      our experience and our assessment of historical trends, current conditions
      and
      expected future developments as well as other factors we believe are appropriate
      under the circumstances. However, whether actual results will conform to the
      expectations and predictions of management is subject to a number of risks
      and
      uncertainties that may cause actual results to differ materially. Consequently,
      all of the forward-looking statements made in this Form 10-KSB are qualified
      by
      these cautionary statements and there can be no assurance that the actual
      results anticipated by management will be realized or, even if substantially
      realized, that they will have the expected consequences to or effects on our
      business operations. These forward-looking statements are made only as of the
      date hereof, and we undertake no obligation to update or revise the
      forward-looking statements, whether as a result of new information, future
      events or otherwise.




The
      safe
      harbors of forward-looking statements provided by Section 21E of the Securities
      Exchange Act of 1934 are unavailable to issuers of penny stock. Our shares
      may
      be considered penny stock and such safe harbors set forth under the Private
      Securities Litigation Reform Act of 1995 may not be available to
      us.




As
      used
      in this Form 10-KSB, unless the context requires otherwise, "we", "us" or the
      "Company" means RG Global Lifestyles, Inc. and its divisions and
      subsidiaries.




1


**PART I**




**ITEM
      1.  DESCRIPTION OF BUSINESS**




**Company
      History**





RG
      Global
      Lifestyles, Inc. (the “Company”), was originally incorporated in California on
      July 12, 1985 as International Beauty Supply Ltd. The name of the corporation
      was changed on May 28, 1993 to L.L. Knickerbocker Co., Inc., and thereafter
      on
      January 9, 2003 to the present name, RG Global Lifestyles, Inc.




Bankruptcy




Since
      its
      inception, the Company, under prior management teams, was involved in several
      businesses and engaged in various consumer, retail and commercial ventures,
      which ultimately proved unsuccessful. On August 15, 2002, the Company's Chapter
      11 Debtor in Possession reorganization plan with the US Bankruptcy Court,
      Central District of California was approved after an involuntary petition was
      filed by certain of the Company's creditors. The Company liquidated its assets
      in full satisfaction of its creditors' claims and was discharged from the
      bankruptcy on September 6, 2002. The Company ceased filing reports with the
      Securities and Exchange Commission in 2001 and became delinquent in its filing
      obligations after its September 30, 2001 quarterly financial
      report.




Reverse
      Merger




Subsequent
      to its discharge from bankruptcy, the Company sought alternative business
      opportunities and developed a new business plan through a merger and
      consolidation with other entities. In furtherance of this plan, in July of
      2004,
      the Company entered into an Agreement and Plan of Reorganization, (the “Plan of
      Reorganization”), among Amerikal International Holding, Inc. (“AIH”), the
      Company, Horst Geicke, and the shareholders of Amerikal International Holding,
      Inc. (the “AIH Shareholders”). Pursuant to the Plan of Reorganization, the
      Company acquired all of the outstanding shares of AIH from the AIH Shareholders
      in exchange for the issuance by the Company to the AIH Shareholders of 1,934,880
      shares of the Company's Common Stock (“Common Stock”). The Plan of
      Reorganization also provided for the transfer by an entity controlled by Horst
      Geicke to the AIH Shareholders of 16,630,607 shares of the Company's Common
      Stock held by the entity in exchange for nominal consideration. Prior to the
      consummation of the transactions contemplated by the Plan of Reorganization,
      Horst Geicke beneficially held 90% of the outstanding Common Stock of the
      Company. Immediately following the transactions, the Company had 21,462,000
      shares of Common Stock issued and outstanding, and the AIH Shareholders held
      18,530,607 shares, or 86.34%, of the Company's Common Stock issued and
      outstanding. Thus, at the close of the transactions, the former shareholders
      of
      AIH controlled the voting power of a majority of the Company's Common Stock.
      As
      a result of the reverse merger, the Company caused AIH to be acquired by the
      Company pursuant to a Certificate of Ownership filed with the California
      Secretary of State on August 12, 2004 and Articles of Merger filed with the
      Nevada Secretary of State on August 17, 2004. The Company continued as the
      surviving entity in the reverse merger, and held AIH as a wholly owned
      subsidiary (“Amerikal”).





Aquair





In
      October 2004, the Company formed Aquair as a wholly-owned subsidiary and
      California corporation. Aquair was formed to distribute environmentally friendly
      water generating equipment that creates purified drinking water from air for
      residential and commercial uses, distribute anti-microbial and anti-scaling
      technology worldwide, and to pursue other water-related technologies and
      opportunities. The Company has suspended the operations of this
      subsisidiary.




Reinstatement
      on OTC Bulletin Board




In
      January 2005, the Company received clearance for quotation of its Common Stock
      on the over-the counter Bulletin Board (“OTC Bulletin Board”), under the symbol
“RGBL.”




2




Distribution
      of Amerikal





On
      October 1, 2005, the Company distributed its wholly-owned subsidiary Amerikal
      to
      a group of founding AIH shareholders in exchange for approximately 7,500,000
      million shares of Common Stock of the Company. The distribution reduced the
      outstanding shares of common stock of the Company from approximately 25 million
      to about 17 million, and allowed management to concentrate its efforts on
      implementing and executing its Aquair business plan.





Purchase
      and Sale of Assets of On Line Surgery, Inc.





In
      January 2005, the Company issued 200,000 shares of its restricted Common Stock
      to acquire rights to an Internet portal known as On Line Surgery. Subsequently,
      in the quarter ended December 31, 2005, the Company formed On Line Surgery,
      Inc.
      as a wholly-owned subsidiary and California corporation (“On Line Surgery”), to
      develop the advertising potential of this web portal for the Company's then
      existing nutraceutical product line, as well as to generate advertising revenue
      from physicians and other potential customers. During the quarter ending
      December 31, 2005, the Company sold its rights to the url
“www.onlinesurgery.com”, the sole asset related to On Line Surgery, for $20,000.
      On Line Surgery never commenced operations.





Aquair
        Asia
 
 In
        2006,
        the Company formed two subsidiaries in Asia in anticipation of Asian operations
        and sales of its Aquair products. Specifically, it organized Aquair Hong
        Kong
        Ltd, a company organized under the laws of Hong Kong, and Aquair Asia Company
        Limited, a company organized under the laws of Thailand.


The
      Company operates primarily in two (2) segments as follows:





OC
      Energy Drinks





In
      late
      2006, the Company commenced operations in the bottled energy drink and
      oxygenated water industry as OC Energy Drinks, as a division of the Company
      (“OC
      Energy”), and later transferred operations to a majority owned subsidiary of the
      Company (previously named On Line Surgery, Inc.).





Catalyx
      Fluid Solutions, a division of RGBL (“CFS”)





In
      February 2007, with the technology it purchased from Catalyx Fluid Solutions,
      Inc., the Company commenced operations in the water reclamation industry
      specifically associated with coal-bed mining as Catalyx Fluid Solutions, a
      division of RGBL.




3


**Business
      of Issuer**





OVERVIEW





CFS
      TECHNOLOGY





The
      Company operates CFS as a division. CFS manufactures plants that utilize its
      proprietary wastewater treatment technology ("CFS Technology") based on an
      ion-exchange process for the treatment and reclamation of wastewater associated
      with the production of methane in coal bed applications. The CFS Technology
      removes sodium and other pollutants from such wastewater allowing it to be
      returned to the environment within local, state and federal environmental
      compliance regulations. The successful removal of the treated wastewater in
      turn
      allows energy companies to harvest and sell methane associated with coal beds.
      The Company receives a royalty from the customer for every barrel of water
      treated and purified.





In
      April
      of 2008, CFS has constructed and successfully tested its first CFS Technology
      plant in Wyoming in connection with an agreement with Yates Petroleum, Inc.
      This
      agreement is structured on a “build, own and operate” economic model whereby CFS
      provides a “turnkey” plant to Yates Petroleum and charges a royalty per barrel
      of cleaned wastewater. The Company receives a fixed royalty for every barrel
      of
      water treated and purified and maintains ownership of the equipment under
      a five year contract. Previously, CFS had commenced the manufacturing
      process of a CFS Technology plant for direct sale to Black Diamond Energy,
      Inc.,
      another methane producer in Wyoming. Under the contract, the Company was
      responsible for the manufacture and installation of the equipment. However
      this
      project has halted due to a suspension in payment by the customer.





CFS
      is
      currently pursuing additional opportunities with other energy companies in
      the
      US and internationally, for the lease or sale, construction, use and/or support
      of the CFS Technology.





OC
      ENERGY DRINKS





The
      Company operates OC Energy Drink, Inc. as a majority owned subsidiary. OC Energy
      Drink has launched its line of "OC ENERGY" caffeinated energy drinks and
      oxygenated water fashioned for the Orange County lifestyle. Presently there
      are
      three Energy Drinks and one Highly Oxygenated Water. The Energy Drinks consist
      of a 2-oz high-powered "shot" energy drink ("Insane"), a 10-oz energy drink
      ("KIK-IT") and a 10-oz diet energy drink ("KIK-IT Diet") in addition to a 17-oz
      ("O2") bottle of 100% pure oxygenated structured water. The energy drinks are
      low in natural sugar and high in vitamins and minerals, and come in
      custom-designed bottles.





Because
      the Company has a controlling interest in OC Energy Drink, Inc., its results
      of
      operations are included in the Company’s consolidated financial statements. The
      percentage of equity interest that is not owned by the Company is shown as “Minority interest
      in subsidiary” in the consolidated balance sheets and consolidated statements of
      operations. The change in value of the minority interest in subsidiary is
      reflected as other income in the attached consolidated statements of
      operations.





**Principal
      Products and Services, and Distribution Methods**





CFS





CFS
      currently offers its CFS Technology “for sale” or on a “build, own, operate”
model to the methane energy industry primarily in Wyoming, although the CFS
      Technology has applications and utility worldwide. The build, own and operate
      model is structured so that the Company is responsible for the construction
      of
      the plant, installation and maintenance of the equipment and the day-to-day
      operations of the plant in exchange for a royalty payment for each barrel of
      water purified. The Company currently has one contract under this model which
      was constructed for Yates Petroleum Inc., located in Gillette, WY.




4




The
      for
      sale model is structured so that the Company sells and installs the equipment
      at
      a fixed contract price. The Company currently has one contract under this model
      which has been placed on hold by the customer due to lack of funds.





To
      date,
      CFS has used RIMON LTD., an Israeli company, to manufacture the equipment used
      in the water treatment plants.





OC
      Energy





OC
      Energy
      distributes its three Energy Drinks and Highly Oxygenated Water directly to
      retail stores and through a network of regional and national distributors
      domestically, and to international distributors. OC Energy designed the
      packaging, but does not manufacture the OC Energy products. All of OC Energy’s
      products are bottled and packed by a third party.





Pursuant
      to our instructions, the bottler purchases concentrates, juices, flavors,
      vitamins, minerals, nutrients, herbs, supplements, caps, labels, trays, boxes
      and other ingredients for our beverage products. Depending on the product,
      the
      bottler adds water and/or high fructose corn syrup, or sucrose, or cane sugar
      or
      an artificial sweetener, and/or citric acid or other ingredients and supplements
      for the manufacture of the finished products for packaging into approved
      containers.





**Status
      of Publicly Announced New Products and Services**





In
      the
      past, the Company had announced its sale of atmospheric water generators as
      its
      main business focus. The Company is no longer pursuing this line of business
      and
      is focusing primarily on its CFS division and its sale of wastewater treatment
      plants.





**Competition**





CFS





The
      CFS
      Technology currently has direct competition from AMF Cuno, Ionics, GE Water,
      Water Factory, Harmon Systems International, EMIT Water Discharge Technology,
      and Universal Systems.





Many
      of
      these competitors have established histories of operation and greater financial
      resources than the Company, enabling them to finance acquisitions and
      development opportunities, to pay higher prices for the same opportunities,
      and
      to develop and support their own operations. In addition, many of these
      companies have greater name recognition. These companies might be willing to
      sacrifice profitability to capture a greater portion of the market for products
      similar to those manufactured or distributed by the Company or pay higher prices
      than the Company would for the same expansion and development opportunities.
      Consequently, the Company may encounter significant competition in its efforts
      to achieve its growth objectives.





OC
      Energy Drinks





The
      beverage industry for energy drinks is highly competitive. The principal areas
      of competition are pricing, packaging, development of new products and flavors
      and marketing campaigns. Our products compete with a wide range of drinks
      produced by a relatively large number of manufacturers, most of which have
      substantially greater financial, marketing and distribution resources than
      we
      do.





Important
      factors affecting our ability to compete successfully include taste and flavor
      of products, trade and consumer promotions, rapid and effective development
      of
      new, unique cutting edge products, attractive and different packaging, branded
      product advertising and pricing. We also compete for distributors who will
      concentrate on marketing our products over those of our competitors, provide
      stable and reliable distribution and secure adequate shelf space in retail
      outlets. Competitive pressures in the energy and bottled water industry could
      cause our products to fail to gain market share which could have a material
      adverse affect on our business and results.




5




Our
      energy drinks compete directly with Red Bull, Monster, Adrenaline Rush, Amp,
      180, KMX, Venom, Extreme Energy Shot, Rockstar, No Fear, US energy, Red Devil,
      Lipovitan, MET-Rx, Hype, XTC, and many other brands.





Our
      oxygenated bottled water competes directly with E2O Energy Water, Vitamin Water,
      Reebok, Propel, Dasani, Aquafina, Evian, Crystal Geyser, Naya, Palomar Mountain,
      Sahara, Arrowhead, Dannon and other brands of still water, especially store
      brands.





**Principal
      Suppliers**





CFS





CFS
      has
      contracted RIMON Ltd. to construct the equipment used in the water
      treatment plants using the CFS Technology. CFS contracts with a third party
      to supply the appropriate resins for use in its CFS Technology
      systems.





OC
      Energy





OC
      Energy
      utilizes Sunsation, Inc., a third party bottler, to supply it with its
      products.





**Dependence
      on One or a Few Major Customers**





For
      the
      fiscal year ended March 31, 2008, 100% of water treatment revenues were
      generated from one customer. The loss of this customer had a significant impact
      on the Company’s financial statements.




**Intellectual
      Property**





We
      own
      numerous trademarks that are very important to our business. Depending upon
      the
      jurisdiction, trademarks are valid as long as they are in use and/or their
      registrations are properly maintained and they have not been found to have
      become generic. Registrations of trademarks can generally be renewed as long
      as
      the trademarks are in use. We also own the copyright in and to numerous
      statements made and content appearing on the packaging of our
      products.





OC
      Energy
      owns, or has been assigned, the following trademarks: Aquair, OC Energy, KIK-IT,
      KIK-IT Diet, Insane, and 02.





As
      part
      of the Technology Transfer Agreement effective January 2007 between the Company
      and Catalyx Fluid Solutions, Inc., the Company purchased US patent 6776913
      and
      proprietary know how which is expected to form the basis for further patents
      based on the fundamentals in the issued patent. The Company intends to file
      multiple patents for the CFS Technology utilized to treat coal bed methane
      gas
      wastewater. The Company also intends to file patents in Australia for a unique
      technology to condense water from humidity in the air.





**Government
      Approval**





CFS





The
      plant
      in Wyoming using the CFS Technology (currently the only location
      contracted for) requires a permit issued by the Wyoming Department of
      Environment Services (WYPDES permits) that regulate and allow the clean water
      discharge into the environment.





OC
      Energy





The
      production, distribution and sale in the United States of many of our products
      is subject to the Federal Food, Drug and Cosmetic Act; the Dietary Supplement
      Health and Education Act of 1994; the Occupational Safety and Health Act;
      various environmental statutes; and various other federal, state and local
      statutes and regulations applicable to the production, transportation, sale,
      safety, advertising, labeling and ingredients of such products. California
      law
      requires that a specific warning appear on any product that contains a component
      listed by the State as having been found to cause cancer or birth defects.
      The
      law exposes all food and beverage producers to the possibility of having to
      provide warnings on their products because the law recognizes no generally
      applicable quantitative thresholds below which a warning is not required.
      Consequently, even trace amounts of listed components can expose affected
      products to the prospect of warning labels. Products containing listed
      substances that occur naturally in the product or that are contributed to the
      product solely by a municipal water supply are generally exempt from the warning
      requirement. While none of our beverage products are required to display
      warnings under this law, we cannot predict whether an important component of
      any
      of our products might be added to the California list in the future. We also
      are
      unable to predict whether or to what extent a warning under this law would
      have
      an impact on costs or sales of our products.




6




Measures
      have been enacted in various localities and states that require that a deposit
      be charged for certain non-refillable beverage containers. The precise
      requirements imposed by these measures vary. Other deposit, recycling or product
      stewardship proposals have been introduced in certain states and localities
      and
      in Congress, and we anticipate that similar legislation or regulations may
      be
      proposed in the future at the local, state and federal levels, both in the
      United States and elsewhere.





Our
      facilities in the United States are subject to federal, state and local
      environmental laws and regulations. Compliance with these provisions has not
      had, and we do not expect such compliance to have, any material adverse effect
      upon our capital expenditures, net income or competitive position.





**Cost
      and Effects of Compliance with Environmental Laws and
      Regulations**





CFS





The
      CFS
      Technology for plants in Wyoming (currently the only location contracted for)
      requires permits issued by the Wyoming Department of Environment Services
      (WYPDES permits) that regulate and allow the clean water discharge into the
      environment. The effect of this compliance is that Wyoming issues only a certain
      number of the WYPDES permits until a technology is proven by their standards,
      which may limit our initial sales. Additionally, if Wyoming increases its
      thresholds for effluent limits, the CFS Technology may become more expensive
      and
      therefore, less cost effective for methane production.





OC
      Energy





In
      California, we are required to collect redemption values from our customers
      and
      to remit such redemption values to the State of California Department of
      Conservation based upon the number of cans and bottles of certain carbonated
      and
      non-carbonated products sold. In certain other states and Canada where OC Energy
      products are sold, we are also required to collect deposits from our customers
      and to remit such deposits to the respective state agencies based upon the
      number of cans and bottles of certain carbonated and non-carbonated products
      sold in such states.





**Employees**





As
      of
      June 30, 2008, the Company employed five full time employees and no part time
      employees. The Company’s CEO also serves as President of its Asian subsidiaries.
      The Company retains consultants on an as needed basis, including its principal
      accounting officer.




7




**ITEM
      2. DESCRIPTION OF PROPERTY**




The
      Company rents office space of approximately 6,950 square feet in Anaheim,
      California for $7,200 per month. OC Energy rents approximately 1,100
      square feet of office space in Upland, California for $2,063 per month. The
      Company has just constructed and is operating a water treatment facility in
      Gillette, Wyoming.




**ITEM
      3. LEGAL PROCEEDINGS**




On
      June
      11, 2008, a complaint was filed in the US District Court in the Northern
      District of Illinois against the Company and Grant King as defendants by
      plaintiffs Wilke Trust and Howard Wilke, as Trustee. The complaint had not
      been
      properly served upon defendants as of July 7, 2008. However the defendants
      anticipate waiving formal service. The complaint alleges one cause of action
      for
      the Company’s default on an 8% unsecured convertible promissory note dated
      January 12, 2007 between the parties and asks for damages of the principal
      amount of the note for $350,000, plus interest and fees.





On
      July
      11, 2008, the Company received notice that one of the Company’s vendors filed a
      lien against the Company’s water treatment plant for past due amounts due to the
      vendor. As of March 31, 2008, the vendor is due $140,310, which is included
      in
      accounts payable





Other
      than the foregoing lawsuits, the Company is not aware of any litigation, either
      pending or threatened.




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




No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year covered by this report.





**PART II**




**ITEM
      5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




**Market
      Information**





The
      Company's Common Stock trades on the OTC Bulletin Board under the symbol “RGBL.”
The following tables set forth the high and low bid information for the Common
      Stock for each quarter within the last two fiscal years:




QUARTERLY
      COMMON STOCK PRICE RANGES




Quarter
                Ended
            
            High
            
            LowJune
                30, 2006
            
            $
            1.59
            
            $
            0.65September
                30, 2006
            
            $
            1.01
            
            $
            0.33December
                31, 2006
            
            $
            1.02
            
            $
            0.17March
                31, 2007
            
            $
            2.55
            
            $
            0.57June
                30, 2007
            
            $
            1.68
            
            $
            0.60September
                30, 2007
            
            $
            1.32
            
            $
            0.39December
                31, 2007
            
            $
            0.70
            
            $
            0.38March
                31, 2008
            
            $
            0.85
            
            $
            0.36




8




These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not represent actual transactions.





**Holders**




There
      were approximately 316 holders of record of the Company’s Common Stock as of
      June 30, 2008.




**Dividends**




The
      Company does not anticipate paying dividends in the foreseeable future.
 There are no restrictions on the Company’s present ability to pay
      dividends to shareholders of its Common Stock, other than those prescribed
      by
      California law.




**Securities
      authorized for issuance under equity compensation plans**




In
      order
      to compensate our officers, directors, employees and/or consultants, our Board
      and stockholders adopted the 2006 Incentive and Non-Statutory Stock Option
      Plan
      (the "2006 Plan") and the 2007 Incentive and Non-Statutory Stock Option Plan
      (“2007 Plan”).





The
      2006
      Plan has a total of 10,000,000 shares reserved for issuance, and the 2007 Plan
      has a total of 6,000,000 shares reserved for issuance.





As
      of the
      end of the fiscal year ended March 31, 2008, we have issued the following stock
      options under the Plans:





**Equity
      Compensation Plan Information**





Plan category
            
            Number of securities
              remaining to be issued
              upon exercise of
              outstanding options,
              warrants and rights
            
            Weighted average
              exercise price of
              outstanding options,
              warrants and rights
            
            Number of securities
              remaining available for
              future issuance(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders: 2006 Plan
            
            
            5,576,270
            
            $
            0.30
            
            
            2,229,973Equity
                compensation plans not approved by security holders: 2007
                Plan
            
            
            2,227,300
            
            $
            0.43
            
            
            3,872,700Equity
                compensation not pursuant to a plan
            
            
            100,000
            
            $
            0.40
            
            
            -Total
            
            
            7,903,579
            
            $
            0.33
            
            
            6,102,673




9




**Recent
      Sales of Unregistered Securities**





During
      the third and fourth quarters of the fiscal year ended March 31, 2008, the
      Company raised investor money through a private sale of unregistered common
      stock and common stock warrants (“Offering”). The terms of this Offering are a
      sale of common stock for $0.30 per share with the investor additionally
      receiving a warrant to purchase one share of common stock at $0.40 for every
      dollar invested. As of March 31, 2008, the Company raised an aggregate of
      $977,500 in this Offering from 24 accredited investors, and, therefore, issued
      3,258,333 shares of common stock and warrants to purchase 977,500 shares of
      common stock. The shares sold and the shares underlying the warrants have
      standard piggyback registration rights. The securities were offered and sold
      to
      the accredited investors in reliance on the exemptions for sales of securities
      not involving a public offering, as set forth in Sections 4(2) and Section
      4(6)
      of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D
      adopted thereunder.




**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**Results
      of Operations for the Fiscal Year Ended March 31, 2008 and March 31,
      2008.**





The
      following discussion compares results of continuing operations of the Company
      only during the periods described.





**2008**
            
            **2007****Income
                Statement Data**Revenue
            
            $
            981,218
            
            $
            891,
                892Gross
                loss
            
            $
            (295,714
            )
            $
            (57,025
            )Loss
                from operations
            
            $
            (7,427,833
            )
            $
            (6,752,003
            )Net
                loss
            
            $
            (3,844,562
            )
            $
            (23,970,710
            )Net
                loss per weighted average common shares
            
            $
            (0.13
            )
            $
            (1.21
            )**Balance
                Sheet Data**Total
                assets
            
            $
            7,758,187
            
            $
            5,489,626Total
                liabilities
            
            $
            2,958,937
            
            $
            14,657,142Stockholders'
                equity (deficit)
            
            $
            4,799,250
            
            $
            (9,167,516
            )





**Revenues**





Increase/(decrease)For
                the fiscal year ended March 31
            
            2008
            
            2007
            
            $
            
            %Revenues
            
            $
            981,218
            
            $
            89,326
            
            $
            891,892
            
            
            998
            %





Revenue
      increased by $891,892 primarily due to an increase in both water treatment
      revenue and energy drink sales as compared to the prior year. 75% of the
      increase in the Company’s sales is from water treatment revenues from a
      construction contract signed in fiscal year 2007 for which most of the work
      was
      done in fiscal 2008. Of this revenue, 100% was earned from on single
      customer.





**Gross
      Profit (Loss)**





Increase/(decrease)For
                the fiscal year ended March 31
            
            2008
            
            2007
            
            $
            
            %Gross
                loss
            
            $
            (295,174
            )
            $
            (57,025
            )
            $
            (238,149
            )
            
            (418
            )%





The
      primary reason for the decrease in gross profits was that the Company has taken
      a charge of $70,250 to write off the value of Aquair’s atmospheric water
      generators and incurred additional costs of $105,000 from its commitments to
      certain production levels with vendors. Additionally, the Company’s effort to
      change focus and diversify its product lines has increased its cost of
      sales.




10




**Total
      Operating Expenses**


(Increase)/decreaseFor
                  the fiscal year ended March 31
              
              2008
              
              2007
              
              $
              
              %Total
                  Operating Expenses
              
              $
              7,132,120
              
              $
              6,694,978
              
              $
              (437,132
              )
              
              6.5
              %




The
      increase in operating expenses during the year ended March 31, 2008, resulted
      primarily from an increase in administrative salaries and benefits of $346,212,
      an adjustment to reduce the value of certain intangible assets of $206,819,
      an
      increase in amortization of intangible assets associated with the Company’s
      water treatment technology of $269, 940, increased costs to bring the water
      treatment facility on line of $560,193, offset by a decrease in stock based
      compensation of $1,937,818.





**Other
      Income (Expense)**




Increase/(decrease)For
                  the fiscal year ended March 31
            
            2008
            
            2007
            
            $
            
            %Other
                Income (Expense)
            
            $
            3,539,368
            
            $
            (17,274,884
            )
            $
            20,814,252
            
            
            120
            %





The
      increase in other income during the year ended March 31, 2008 resulted primarily
      from the difference in the change in the fair value of the beneficial conversion
      feature and warrants issued in connection with convertible notes of $14,169,779,
      and the proceeds on a claim against a key man life insurance policy of
      $3,000,000.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      accompanying consolidated financial statements have been prepared on a
      going-concern basis, which contemplates the realization of assets and
      satisfaction of liabilities and other commitments in the normal course of
      business. The report of our independent auditors contains an explanatory
      paragraph expressing substantial doubt about the Company’s ability to continue
      as a going concern as a result of recurring losses and negative cash flows.
      The
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or the amounts
      and
      classification of liabilities that may be necessary if we are unable to continue
      as a going concern.





The
      Company’s principal sources of liquidity consist of cash and cash equivalents,
      cash generated from product sales and construction contracts, and the issuance
      of equity and/or debt securities. In addition to funding operations, the
      Company’s principal short-term and long-term liquidity needs have been, and are
      expected to be, the debt service requirements of its notes payable, capital
      expenditures and general corporate expense expenses. In addition, as its sales
      and operations continue to increase, the Company anticipates significant
      increases in purchases of equipment for the construction of plants utilizing
      the
      CFS Technology. As of March 31, 2008, the Company had cash and cash equivalents
      of $12,319, and liabilities outstanding of $2,958,937.





The
      Company believes that its existing sources of liquidity, along with cash
      expected to be generated from product sales and construction contracts and
      cash
      generated from the issuance of debt and equity securities, will be sufficient
      to
      fund its operations, anticipated capital expenditures, working capital and
      other
      financing requirements through Q2 of 2009. The Company will need to
      continue a focused program of capital expenditures to effectuate its CFS
      Technology project constructions and OC Energy drink production capacity
      expansion. In order to fund capital expenditures or increase working capital
      above the current plan, or complete any acquisitions, the Company may seek
      to
      obtain additional debt or equity financing. It may also need to obtain
      additional debt or equity financing if it experiences downturns or cyclical
      fluctuations in its business that are more severe or longer than anticipated,
      or
      if the Company fails to achieve anticipated revenue, experiences significant
      increases in the costs associated with products sales, or if it engages in
      additional strategic transactions. However, the Company cannot provide assurance
      that such financing will be available to it on favorable terms, or at all.
      If,
      after utilizing the existing sources of capital available to the Company,
      further capital needs are identified and the Company is not successful in
      obtaining the financing, it may be forced to curtail its existing or planned
      future operations.




11




For
      the
      fiscal year ended March 31, 2008, the Company funded operations primarily
      through proceeds from a claim against a key man life insurance policy of
      $3,000,000 and sales of its common stock to investors in the amount of $917,500
      and common stock to be issued of 2,113,904.





OPERATING
      ACTIVITIES





Operating
      cash flows during the fiscal year ended March 31, 2008, decreased by $2,054,306.
      The primary use of cash of $2,054,306 resulted from the Company’s net loss of
      $3,844,562 offset by non-cash and non-operating items (depreciation,
      amortization of intangible assets, stock-based compensation, fair value of
      common stock issued in excess of subscription price, non-cash interest expense
      including the amortization of debt discounts, proceeds from a key man life
      insurance payment and the change in the fair value of derivative instruments)
      totaling $3,248,818.





INVESTING
      ACTIVITIES





Investing
      cash flows during the fiscal year ended March 31, 2008, amounted to $532,176,
      and consisted primarily of $3,000,000 of proceeds from the key man life
      insurance policies, offset by capitalized costs  of $2,486,560 incurred in
      connection with the construction of a water treatment system for a customer
      in
      Wyoming.





FINANCING
      ACTIVITIES





Financing
      cash flows during the fiscal year ended March 31, 2008, amounted to $1,032,171,
      and consisted primarily of sales of its common stock to investors in the amount
      of $917,500 and common stock to be issued of 2,113,904, offset by the payment
      of
      notes payable of $2,240,433.





CRITICAL
      ACCOUNTING POLICIES





We
      prepare our consolidated financial statements in accordance with accounting
      principles generally accepted in the United States of America. The preparation
      of these financial statements requires the use of estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amount of revenues and expenses during the reporting period. Our
      management periodically evaluates the estimates and judgments made. Management
      bases its estimates and judgments on historical experience and on various
      factors that are believed to be reasonable under the circumstances. Actual
      results may differ from these estimates as a result of different assumptions
      or
      conditions.





The
      methods, estimates, and judgment we use in applying our most critical accounting
      policies have significant impact on the results we report in our financial
      statements. The SEC has defined "critical accounting policies" as those
      accounting policies that are most important to the portrayal of our financial
      condition and results, and require us to make our most difficult and subjective
      judgments, often as a result of the need to make estimates of matters that
      are
      inherently uncertain. Based upon this definition, our most critical estimates
      are described below under the heading "Revenue Recognition." We also have other
      key accounting estimates and policies, but we believe that these other policies
      either do not generally require us to make estimates and judgments that are
      as
      difficult or as subjective, or it is less likely that they would have a material
      impact on our reported results of operations for a given period. Although we
      believe that our estimates and assumptions are reasonable, they are based upon
      information presently available, and actual results may differ significantly
      from these estimates.





IMPAIRMENT
      OF LONG-LIVED AND INTANGIBLE ASSETS





The
      Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
      144
      ("SFAS 144"). The Statement requires that long-lived assets and certain
      identifiable intangibles held and used by the Company be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. Events relating to recoverability may include
      significant unfavorable changes in business conditions, recurring losses, or
      a
      forecasted inability to achieve break-even operating results over an extended
      period. The Company evaluates the recoverability of long-lived assets based
      upon
      forecasted undercounted cash flows. Should impairment in value be indicated,
      the
      carrying value of intangible assets will be adjusted, based on estimates of
      future discounted cash flows resulting from the use and ultimate disposition
      of
      the asset. SFAS No. 144 also requires assets to be disposed of be reported
      at
      the lower of the carrying amount or the fair value less costs to
      sell.


12





REVENUE
      RECOGNITION





Product
      sales - For revenue from product sales, the Company recognizes revenue in
      accordance with Staff Accounting Bulletin No. 104, Revenue Recognition
      ("SAB104"), which superseded Staff Accounting Bulletin No. 101, Revenue
      Recognition in Financial Statements ("SAB101"). SAB 101 requires that four
      basic
      criteria must be met before revenue can be recognized: (1) persuasive evidence
      of an arrangement exists; (2) delivery has occurred; (3) the selling price
      is
      fixed and determinable; and (4) collectability is reasonably assured.
      Determination of criteria (3) and (4) are based on management's judgments
      regarding the fixed nature of the selling prices of the products delivered
      and
      the collectability of those amounts. Provisions for discounts and rebates to
      customers, estimated returns and allowances, and other adjustments are provided
      for in the same period the related sales are recorded.





Construction
      contracts - In accordance with Statement of Position 81-1"Accounting for
      Performance of Construction-Type and Certain Production-Type Contracts", the
      Company uses the percentage completion method for the recognition of revenue
      received in connection with its engineering, equipment sale and installation
      contracts. In making the estimate of the percentage of revenue to recognize,
      the
      Company compares costs to the total projected cost of the contract. Accordingly,
      the Company recognizes that portion of the revenue and record the balance of
      the
      cash received as deferred revenues, which is included within accrued liabilities
      on the accompanying balance sheet.





STOCK-BASED
      COMPENSATION





On
      December 16, 2004, the FASB published Statement of Financial Accounting
      Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS
      123R
      requires that compensation cost related to share-based payment transactions
      be
      recognized in the financial statements. Share-based payment transactions within
      the scope of SFAS 123R include stock options, restricted stock plans,
      performance-based awards, stock appreciation rights, and employee share purchase
      plans. The provisions of SFAS 123R were effective as of the first interim period
      that begins after December 15, 2005.





The
      Company has adopted SFAS 123R, which requires disclosure of the fair value
      and
      other characteristics of stock options, and SFAS 148 "Accounting for Stock-Based
      Compensation — Transition and Disclosure," which requires more prominent
      disclosure about the effects of an entity's accounting policy decisions with
      respect to stock-based compensation on reported net loss. The Company has
      reflected the expense of such stock based compensation based on the fair value
      at the grant date for awards consistent with the provisions of SFAS No. 123R.
      There were no options issued to employees as of March 31, 2006, all other
      options and warrants had been accounted for at fair value using the Black
      Scholes valuation model. Thus, the impact of adopting SFAS 123R was immaterial
      to the Company's financial statements.





In
      connection with the adoption of SFAS 123R, we estimate the fair value of our
      share-based compensation utilizing the Black-Scholes pricing model. The fair
      value of the options granted is amortized as compensation expense on a straight
      line basis over the requisite service period of the award, which is generally
      the vesting period. The fair value calculations involve significant judgments,
      assumptions, estimates and complexities that impact the amount of compensation
      expense to be recorded in current and future periods. The factors include:
      (1)
      The time period our stock-based compensation awards are expected to remain
      outstanding based upon the average of the original award period and the
      remaining vesting period in accordance with SEC Staff Accounting Bulletin 107
      simplified method. Our Company's stock trading history has been relatively
      short
      (since January 2005). Our expected term assumption for awards issued during
      the
      year ended March 31, 2008 was five years. As additional evidence develops from
      our stock's trading history, the expected term assumption will be refined to
      capture the relevant trends. (2) The future volatility of our stock has been
      estimated based upon our entire trading history from inception to the reporting
      date. (3) A dividend yield of zero has been assumed for awards issued during
      the
      quarter ended March 31, 2008 based upon our actual past experience and the
      fact
      that we do not anticipate paying a dividend on our shares in the near future.
      (4) We have based our risk-free interest rate assumption for awards issued
      during the quarter ended March 31, 2008 based upon the weighted-average yield
      of
      5.25% available on US Treasury debt instruments with an equivalent expected
      term. (5) Forfeiture rates for awards issued during these periods have not
      yet
      been estimated as the Company has only recently issued share based awards and
      no
      forfeiture data has been available to the Company as a result.


13





The
      Company's accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of Emerging
      Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That are
      Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
      Goods or Services." The measurement date for the fair value of the equity
      instruments issued is determined at the earlier of (i) the date at which a
      commitment for performance by the consultant or vendor is reached or (ii) the
      date at which the consultant or vendor's performance is complete. In the case
      of
      equity instruments issued to consultants, the fair value of the equity
      instrument is recognized over the term of the consulting agreement.





RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 provides accounting guidance on the definition of fair value and
      establishes a framework for measuring fair value and requires expanded
      disclosures about fair value measurements. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007. We plan
      to
      adopt the provisions of SFAS 157 on April 1, 2008 and we are currently assessing
      the impact of the adoption of SFAS 157 on our results of operations and
      financial condition.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure
      financial instruments and certain other items at fair value. The objective
      is to
      improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. SFAS 159 is effective for financial statements issued for fiscal
      year beginning after November 15, 2007. We are currently assessing the impact
      of
      adopting SFAS 159 on our results of operations and financial
      condition.





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
      141(R)”), which replaces FAS 141. SFAS 141(R) establishes principles and
      requirements for how an acquirer in a business combination recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any controlling interest; recognizes and measures
      the
      goodwill acquired in the business combination or a gain from a bargain purchase;
      and determines what information to disclose to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination. SFAS 141(R) is to be applied prospectively to business
      combinations.





OFF-BALANCE
      SHEET ARRANGEMENTS





The
      Company does not have any off-balance sheet arrangements that have or are
      reasonably likely to have a current or future effect on the Company's financial
      condition, changes in financial condition, revenues or expenses, results of
      operations, liquidity, capital expenditures or capital resources that are
      material to investors.




**ITEM
      7. FINANCIAL STATEMENTS**




The
      financial statements required to be filed pursuant to this Item 7 begin on
      page
      F-1 of this report.




**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




None.


14





**ITEM
      8A(T). CONTROLS AND PROCEDURES**




Disclosure
      Controls and Procedures




As
      required by SEC Rule 13a-15 or Rule 15d-15, our Chief Executive and Principal
      Accounting Officers carried out an evaluation under the supervision and with
      the
      participation of our management, of the effectiveness of the design and
      operation of our disclosure controls and procedures as of the end of the period
      covered by this report. Based on the foregoing evaluation, we have concluded
      that our disclosure controls and procedures are not effective as of March 31,
      2008 and that they do not allow for information required to be disclosed by
      the
      company 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 the company in the reports that it files or submits
      under the Exchange Act is accumulated and communicated to the company’s
      management, including its Chief Executive and Principal Accounting Officers
      as
      appropriate to allow timely decisions regarding required
      disclosure.




Internal
      Control over Financial Reporting




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting for the company in accordance with as defined
      in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
      over financial reporting is designed to provide reasonable assurance regarding
      the (i) effectiveness and efficiency of operations, (ii) reliability of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles, and (iii)
      compliance with applicable laws and regulations. Our internal controls framework
      is based on the criteria set forth in the Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO).




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




Management’s
      assessment of the effectiveness of the small business issuer’s internal control
      over financial reporting is as of the year ended March 31, 2008. We believe
      that
      internal control over financial reporting is not effective. We have identified
      the following current material weaknesses considering the nature and extent
      of
      our current operations and any risks or errors in financial reporting under
      current operations:





·
            Inadequate
                staffing and supervision;


·
            Inadequate
                approval and substantiation of cash
                disbursements; ·
            Substantiation
                and evaluation of certain general ledger account balances including
                the
                lack of reconciliations and improper
                cut-offs;


·
            Lack
                of procedures and/or expertise needed to prepare all required financial
                disclosures; and evidence that employees lack the qualifications
                and
                training to fulfill their assigned
                functions.





We
      are
      currently in process of remediating these material weaknesses; however, our
      current financial condition has limited the amount of resources available to
      us.
      We plan to implement additional policies, procedures, and controls to address
      these issues.




This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permits us to provide only management’s report in this
      annual report.




**ITEM
      8B. OTHER INFORMATION**





None.




15




**PART III**




**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT**




The
      information required by this Item is incorporated herein by reference to
      Company’s Proxy Statement.





**ITEM
      10. EXECUTIVE COMPENSATION**




The
      information required by this Item is incorporated herein by reference to the
      Company’s Proxy Statement.




**ITEM
      11.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
      MATTERS**




The
      information required by this Item is incorporated herein by reference to the
      Company’s Proxy Statement.




**ITEM
      12.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




The
      information required by this Item is incorporated herein by reference to the
      Company’s Proxy Statement.




**ITEM
      13. EXHIBITS**





See
      Exhibit Index.





**ITEM
      14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      information required by this Item is incorporated herein by reference to the
      Company’s Proxy Statement.





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, duly
      authorized.




R
                G
                GLOBAL LIFESTYLES, INC.Dated:
                July 15, 2008
            /s/
                Grant KingBy:
                Grant King,Chief
                Executive Officer,Dated:
                July 15, 2008
            /s/
                Richard LambrightBy:
                Richard LambrightPrincipal
                Accounting Officer




16





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




**Signature**
            
            **Title**
            
            **Date**/s/
                Juzer Jangbarwala
            
            Chairman
                of the Board
            
            July
                15, 2008Juzer
                Jangbarwala/s/
                Grant King
            
            Director
            
            July
                  15, 2008Grant
                King/s/
                David Koontz
            
            Director
            
            July
                  15, 2008David
                Koontz/s/
                Joseph Murray
            
            Director
            
            July
                  15, 2008Joseph
                Murray/s/
                Steve Ritchie
            
            Director
            
            July
                  15, 2008Steve
                Ritchie


17


**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            
            **Description**2.0
            
            Agreement
                and Plan of Reorganization dated July 8, 2004.(1)3.1
            
            Articles
                of Incorporation of International Beauty Supply Ltd. ("IBS") filed
                July
                12, 1985.(2)3.2
            
            Amendment
                to Articles of Incorporation of IBS filed May 28,
                1993.(2)3.3
            
            Certificate
                of Amendment to Articles of Incorporation of the L.L. Knickerbocker
                Company Inc. ("LLK") filed June 27, 1994.(2)3.4
            
            Certificate
                of Amendment to Articles of Incorporation of LLK filed September
                29,
                1994.(2)3.5
            
            Certificate
                of Amendment of the Articles of Incorporation of LLK, filed September
                1,
                1995. (5)3.6
            
            Certificate
                of Amendment of the Articles of Incorporation of LLK, filed June
                19, 1996.
                (5)3.7
            
            Certificate
                of Amendment to the Articles of Incorporation of LLK filed April
                22,
                1999.(3)3.8
            
            Certificate
                of Amendment to the Articles of Incorporation of the L.L. Knickerbocker
                Company Inc. filed January 9, 2003. (5).3.9
            
            Bylaws
                of the L.L. Knickerbocker Company Inc.(4)4.1
            
            Form
                of Stock Purchase Warrant. (9)4.2
            
            Form
                of Callable Secured Convertible Note. (9)4.3
            
            Warrant
                issued to Ascendiant Securities, LLC. (10)4.4
            
            Form
                of CFS Warrant. (14).4.5
            
            Note
                and Warrant Offering Agreement. (14).4.6
            
            Form
                of Securities Purchase Agreement and Common Stock
                Warrant(16)10.1
            
            Consulting
                Agreement between Aquair and Steve Ritchie dated July 18, 2005.
                (6)10.2
            
            Master
                Separation and Distribution Agreement dated November 15, 2005.
                (7)10.3
            
            Distribution
                Agreement entered into between Aquair, Inc. and Locke Media dated
                August
                30, 2005 filed November 14, 2005. (6)10.4
            
            Agreement
                entered into between Aquair and Entech Sales dated November 2005.
                (8)10.5
            
            Securities
                Purchase Agreement. (9)10.6
            
            Security
                Agreement. (10)10.7
            
            Intellectual
                Property Security Agreement. (10)10.8
            
            Rental
                Agreement between Aquair and Pinnacle International, Inc. dated October
                1,
                2004. (5)10.9
            
            Private
                Label Agreement between Aquair and Ahoy Network Association, Ltd,
                dated
                November 20, 2004. (5)10.10
            
            Exclusive
                Sales and Marketing Agreement between Aquair and Munters Corporation
                dated
                June 8, 2005. (5)10.11
            
            Company's
                2006 Incentive and Nonstatutory Stock Option Plan. (10)10.12
            
            Engagement
                Agreement with Ascendiant Securities, LLC. (11)10.13
            
            Registration
                Rights Agreement. (9)10.14
            
            Technology
                Transfer Agreement between the Company and Catalyx Fluid Solutions,
                Inc.,
                as amended, effective January 2007. (12)10.15
            
            Company's
                2007 incentive and Nonstatutory Stock Option Plan. (13)10.16
            
            Plan
                of Organization and Securities Purchase Agreement dated September
                1, 2007,
                among the Company OC Energy Drink, Inc., Bob Glaser, Mariano Fusco
                and
                Albert Guerra. (15)


18





14.1
            
            Code
                of Ethics (5)21.1
            
            Subsidiaries31.1
            
            Rule
                13a-14(a)/ 15d-14(a) Certification of Grant King31.2
            
            Rule
                13a-14(a)/ 15d-14(a) Certification of Richard Lambright32.1
            
            Certification
                Pursuant to 18 U.S.C. section 1350 of Chief Executive
                Officer32.2
            
            Certification
                Pursuant to 18 U.S.C. section 1350 of Chief Accounting
                Officer







(1)
      Incorporated by reference to the Company's report on Form 8-K as filed August
      23, 2004.


(2)
      Incorporated by reference to the L.L. Knickerbocker Co., Inc. Form SB-2
      Registration Statement No. 33-85230-LA as filed on October 13,
      1994.


(3)
      Incorporated by reference to L.L. Knickerbocker Co., Inc. Form 10-K as filed
      on
      April 14, 2000.


(4)
      Incorporated by reference to the L.L. Knickerbocker Co., Inc. Annual Report
      on
      Form 10-KSB as filed on March 29, 1995.


(5)
      Incorporated by reference to the Company's Annual Report on Form 10-KSB as
      filed
      on June 24, 2005.


(6)
      Incorporated by reference to the Company's Form 10-QSB, as filed on November
      14,
      2005.


(7)
      Incorporated by reference to the Company's Form 8-K, as filed on November 16,
      2005.


(8)
      Incorporated by reference to the Company's Form 10-QSB, as filed on February
      15,
      2006.


(9)
      Incorporated by reference to the Company's Form 8-K, as filed on June 8,
      2006.


(10)
      Incorporated by reference to the Company's Form SB-2 Registration No.
      333-135966, as filed July 21, 2006.


(11)
      Incorporated by reference to the Company's Form SB2/A Registration No.
      333-135966, as filed August 29, 2006.


(12)
      Incorporated by reference to the Company's Form 10-KSB, as filed on July 13,
      2007.


(13)
      Incorporated by reference to the Company's Preliminary Proxy Statement on
      Schedule 14A, as filed on July 27, 2007.


(14)
      Incorporated by reference to the Company's Form SB-2 Registration No. 333-145322
      as filed on August 10, 2007.


(15)
      Incorporated by reference to the Company's Form 8-K as filed on September 7,
      2007.


(16)
      Incorporated by reference to the Company's Form 10_QSB/A as filed on February
      18, 2008.




19


**Index
      to Financial Statements**




Report
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheet
            
            F-2Consolidated
                Statements of Operations
            
            F-3Consolidated
                Statement of Stockholders’ Equity (Deficit)
            
            F-4Consolidated
                Statements of Cash Flows
            
            F-5Notes
                to Financial Statements
            
            F-6




20


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Shareholders and Board of Directors


RG
      Global
      Lifestyles, Inc.





We
      have
      audited the accompanying consolidated balance sheet of RG Global Lifestyles,
      Inc. and its subsidiaries (the "Company") as of March 31, 2008, and the related
      statement of operations, stockholders' equity (deficit), and cash flows for
      each
      of the two year then ended. These consolidated financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      was not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting as of March 31, 2008. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of RG Global Lifestyles, Inc.
      and subsidiaries as of March 31, 2008, and the results of their operations
      and
      their cash flows for each of the two years then ended, in conformity with
      accounting principles generally accepted in the United States.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As discussed in Note 2 of the
      consolidated financial statements, the Company has incurred losses, has used
      cash in operating activities and has a significant accumulated deficit. These
      factors raise substantial doubt about the Company's ability to continue as
      a
      going concern. Management's plans with respect to these matters are also
      discussed in Note 2. The consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





/s/
                  McKennon Wilson & Morgan LLPIrvine,
                  CaliforniaJuly
                  15, 2008




F-1




**RG
      GLOBAL LIFESTYLES, INC.**


**CONSOLIDATED
      BALANCE SHEET**


**March
      31, 2008**





**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            12,319Accounts
                receivable
            
            
            6,087Inventory
            
            
            86,864Federal
                income tax refund receivable
            
            
            143,775Total
                current assets
            
            
            249,045Construction
                in progress
            
            
            3,016,261Property
                and equipment, net of accumulated depreciation of $13,351
            
            
            44,623Intangible
                assets, net
            
            
            4,195,645Other
                assets
            
            
            252,613**Total
                Assets**
            
            $
            7,758,187**Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable
            
            $
            954,500Accrued
                liabilities
            
            
            459,273State
                income taxes payable
            
            
            97,890Convertible
                notes payable
            
            
            864,074Notes
                payable - related party
            
            
            102,700Notes
                payable
            
            
            410,500Total
                current liabilities
            
            
            2,888,937Asset
                retirement obligation
            
            
            70,000Total
                liabilities
            
            
            2,958,937Commitments
                and contingencies (Note 11)Stockholders'
                equity:Preferred
                stock, $0.001 par value, 10,000,000 shares authorized, none issued
                and
                outstanding
            
            
            -Common
                stock, $0.001 par value, 100,000,000 shares authorized, 36,400,410
                issued
                and 34,500,410 outstanding
            
            
            34,501Common
                stock to be issued
            
            
            2,113,904Additional
                paid-in capital
            
            
            32,159,232Accumulated
                deficit
            
            
            (29,508,387
            )Total
                stockholders' equity
            
            
            4,799,250**Total
                Liabilities and Stockholders' Equity**
            
            $
            7,758,187





The
      accompanying notes are an integral part of these financial
      statements.




F-2




**RG
      GLOBAL LIFESTYLES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





For
                the Year EndedMarch
                312008
            
            2007Revenue:Product
                related
            
            $
            243,642
            
            $
            -Water
                treatment related
            
            
            737,576
            
            
            89,326Total
                revenues
            
            
            981,218
            
            
            89,326Cost
                of revenues:Product
                related
            
            
            409,977
            
            
            -Water
                treatment related
            
            
            866,955
            
            
            146,351Total
                cost of revenue
            
            
            1,276,932
            
            
            146,351Gross
                loss
            
            
            (295,714
            )
            
            (57,025
            )General
                and administrative, includingstock-based
                compensation of $2,713,753 and $4,651,581 in 2008 and 2007,
                respectively
            
            
            6,160,293
            
            
            6,565,505Selling
                and marketing
            
            
            204,815
            
            
            129,473Project
                costs
            
            
            560,193
            
            
            -Impairment
                of intangibles
            
            
            206,819
            
            
            -Total
                expenses
            
            
            7,132,120
            
            
            6,694,978Operating
                loss
            
            
            (7,427,834
            )
            
            (6,752,003
            )Other
                income (expense):Interest
                income
            
            
            77,494
            
            
            468Interest
                expense - related party
            
            
            (25,643
            )
            
            (14,279
            )Interest
                expense
            
            
            (559,849
            )
            
            (3,793,644
            )Change
                in fair value of derivative liabilities
            
            
            3,403,673
            
            
            (10,766,106
            )Proceeds
                from Key Man life insurance policy
            
            
            3,000,000
            
            
            -Fair
                value of common stock issued in excess of notesnotes
                payable satified
            
            
            (1,675,852
            )
            
            (2,701,323
            )Loss
                on settlement on notes payable
            
            
            (672,589
            )
            
            -Other
                income (expense)
            
            
            (7,865
            )
            
            -Total
                other income (expense)
            
            
            3,539,369
            
            
            (17,274,884
            )Net
                loss before provision for income taxes
            
            
            (3,888,465
            )
            
            (24,026,887
            )(Provision)
                benefit for income taxes
            
            
            -
            
            
            56,856Net
                loss before minority interest
            
            
            (3,888,465
            )
            
            (23,970,031
            )Minority
                interest
            
            
            43,903
            
            
            -Net
                loss
            
            $
            (3,844,562
            )
            $
            (23,970,031
            )Weighted
                average number of common shares:Basic
                and diluted
            
            
            28,994,987
            
            
            19,771,710Net
                loss per share:Basic
                and diluted
            
            $
            (0.13
            )
            $
            (1.21
            )





The
      accompanying notes are an integral part of these financial
      statements.




F-3




**RG
      GLOBAL LIFESTYLES, INC.**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)**


**FOR
        THE YEARS ENDED MARCH 31, 2008 AND 2007**


TotalAdditional
              
              Common
              
              Prepaid
              
              
              
              Stockholders'Common
                  Stock
              
              Paid-in
              
              Stock
                  To
              
              Stock
                  Based
              
              Accumulated
              
              EquityShares
              
              Amount
              
              Capital
              
              Be
                  Issued
              
              Compensation
              
              Deficit
              
              (Deficit)Balance,
                  March 31, 2006
              
              
              17,650,000
              
              $
              17,650
              
              $
              1,505,082
              
              $
              -
              
              $
              (189,410
              )
              $
              (1,693,794
              )
              $
              (360,472
              )Conversions
                  of secured notes payable into common stock
              
              
              778,053
              
              
              778
              
              
              115,897
              
              
              -
              
              
              -
              
              
              -
              
              
              116,675Reclass
                  of conversion feature liability upon conversion of secured notes
                  payable
                  into common stock
              
              
              -
              
              
              -
              
              
              844,828
              
              
              -
              
              
              -
              
              
              -
              
              
              844,828Fair
                  value of warrants issued in connection with secured notes
                  payable
              
              
              -
              
              
              -
              
              
              611,036
              
              
              -
              
              
              -
              
              
              -
              
              
              611,036Common
                  stock issued in settlement of 2006 notes payable
              
              
              6,282,150
              
              
              6,282
              
              
              3,951,472
              
              
              -
              
              
              -
              
              
              -
              
              
              3,957,754Fair
                  value of beneficial conversion feature and warrants issued in connection
                  with 2007 notes payable
              
              
              -
              
              
              -
              
              
              600,000
              
              
              -
              
              
              -
              
              
              -
              
              
              600,000Fair
                  value of 8,000,000 warrants issued to acquire Catalytx's
                  Technology
              
              
              -
              
              
              -
              
              
              4,381,113
              
              
              -
              
              
              -
              
              
              -
              
              
              4,381,113Cashless
                  exercises of stock options
              
              
              1,312,389
              
              
              1,313
              
              
              (1,313
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Fair
                  value of warrants issued to consultants for services
              
              
              -
              
              
              -
              
              
              612,271
              
              
              -
              
              
              -
              
              
              -
              
              
              612,271Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              4,039,310
              
              
              -
              
              
              -
              
              
              -
              
              
              4,039,310Removal
                  of prepaid compensation
              
              
              -
              
              
              -
              
              
              (189,410
              )
              
              -
              
              
              189,410
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              (23,970,031
              )
              
              (23,970,031
              )Balance,
                  March 31, 2007
              
              
              26,022,592
              
              
              26,023
              
              
              16,470,286
              
              
              -
              
              
              -
              
              
              (25,663,825
              )
              
              (9,167,516
              )Common
                  stock to be issued for cash
              
              
              -
              
              
              -
              
              
              -
              
              
              2,113,904
              
              
              **-**
              
              
              -
              
              
              2,113,904Common
                  stock issued for cash
              
              
              3,258,333
              
              
              3,259
              
              
              914,241
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              917,500Common
                  stock issued for payment of NIR note payable
              
              
              100,000
              
              
              100
              
              
              55,900
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              56,000Common
                  stock issued for services
              
              
              953,667
              
              
              954
              
              
              605,021
              
              
              -
              
              
              -
              
              
              -
              
              
              605,975Conversions
                  of notes payable into common stock
              
              
              2,373,241
              
              
              2,373
              
              
              2,271,313
              
              
              -
              
              
              -
              
              
              -
              
              
              2,273,686Exercises
                  of stock options and warrants
              
              
              1,137,642
              
              
              1,137
              
              
              154,180
              
              
              -
              
              
              -
              
              
              -
              
              
              155,317Fair
                  value of stock issued to acquire OC Energy intangible
                  assets
              
              
              654,935
              
              
              655
              
              
              474,173
              
              
              -
              
              
              -
              
              
              -
              
              
              474,828Derivative
                  liabilities reclassed to equity
              
              
              -
              
              
              -
              
              
              8,500,365
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              8,500,365Fair
                  value of warrants issued to consultants for services
              
              
              -
              
              
              -
              
              
              155,666
              
              
              -
              
              
              -
              
              
              -
              
              
              155,666Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              2,558,087
              
              
              -
              
              
              -
              
              
              -
              
              
              2,558,087Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,844,562
              )
              
              (3,844,562
              )Balance,
                  March 31, 2008
              
              
              34,500,410
              
              $
              34,501
              
              $
              32,159,232
              
              $
              2,113,904
              
              $
              -
              
              $
              (29,508,387
              )
              $
              4,799,250
 The
          accompanying notes are an integral part of these financial
          statements.
 F-4


**RG
      GLOBAL LIFESTYLES, INC.**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**





For
                the Year EndedMarch
                312008
            
            2007**Cash
                flows from operating activities:**Net
                loss
            
            $
            (3,844,562
            )
            $
            (23,970,031
            )Adjustments
                to reconcile net loss tonet
                cash used in operating activities:Amortization
                of debt discounts related to beneficialconversion
                features and warrants
            
            
            468,655
            
            
            2,792,691Amortization
                of debt inssuance costs
            
            
            -
            
            
            837,316Proceeds
                from ex-officer's life insurance policy
            
            
            (3,000,000
            )
            
            -Loss
                on settlement on notes payable
            
            
            672,589
            
            
            -Impairment
                of Intangible assets
            
            
            206,819
            
            
            -Stock
                issued for services
            
            
            605,975
            
            
            -Change
                in fair value of derivative liabilities
            
            
            (3,403,673
            )
            
            10,766,106Fair
                value of common stock in excess of notes payable forgiven
            
            
            1,675,852
            
            
            2,701,323Depreciation
                and amortization
            
            
            352,751
            
            
            82,811Stock-based
                compensation
            
            
            2,713,753
            
            
            4,651,581Minority
                interest in subsidiary
            
            
            (43,903
            )
            
            -Accounts
                receivable
            
            
            (6,024
            )
            
            837Inventory
            
            
            166,990
            
            
            (253,854
            )Federal
                income taxes refund receivable
            
            
            11,225
            
            
            (155,000
            )Prepaid
                expenses
            
            
            25,975
            
            
            150,046Accounts
                payable
            
            
            1,198,681
            
            
            55,036Accrued
                liabilities
            
            
            257,664
            
            
            330,334Deferred
                revenues
            
            
            (115,963
            )
            
            -Income
                taxes payable
            
            
            2,890
            
            
            93,619Net
                cash used in operating activities
            
            
            (2,054,306
            )
            
            (1,917,185
            )**Cash
                flows from investing activities:**Purchase
                of fixed assets
            
            
            (5,825
            )
            
            (18,137
            )Construction
                in progress
            
            
            (2,486,560
            )
            
            -Proceeds
                from key man life insurance policy
            
            
            3,000,000
            
            
            -Other
                assets
            
            
            24,561
            
            
            (74,481
            )Net
                cash used in investing activities
            
            
            532,176
            
            
            (92,618
            )**Cash
                flows from financing activities:**Proceeds
                from notes payable - related party
            
            
            102,700
            
            
            2,373,720Cash
                received for common stock to be issued
            
            
            2,113,904
            
            
            -Proceeds
                from sale of common stock
            
            
            917,500
            
            
            -Payments
                on notes payable
            
            
            (2,240,433
            )
            
            (208,300
            )Proceeds
                from exercise of stock options
            
            
            138,500
            
            
            -Net
                cash provided by financing activities
            
            
            1,032,171
            
            
            2,165,420Net
                increase (decrease) in cash
            
            
            (489,959
            )
            
            155,617Cash
                - beginning of year
            
            
            502,278
            
            
            346,661Cash
                - ending of year
            
            $
            12,319
            
            $
            502,278SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the year for:Interest
            
            $
            112,533
            
            $
            28,479Income
                taxes
            
            $
            -
            
            $
            3,200Non-cash
                investing and financing activities:Issuance
                of common stock in settlement of notes payableand
                accrued interest
            
            $
            603,835
            
            $
            1,179,315Issuance
                of warrants for Catalyx's technology
            
            $
            -
            
            $
            4,381,113Conversion
                of secured notes payable into common stock
            
            $
            -
            
            $
            71,267Conversion
                of accounts payable into note payable
            
            $
            710,500
            
            $
            -Conversion
                of stock options with accounts payable
            
            $
            11,417
            
            $
            -Issuance
                of note payable in settlement
            
            $
            600,000
            
            $
            -Issuance
                of common stock for tangible and intangible assets
            
            $
            474,828
            
            $
            -Issuance
                of OC Energy, Inc.'s interests for tangible and intangible
                assets
            
            $
            43,903
            
            $
            -Recognition
                of asset retirement obligation
            
            $
            70,000
            
            $
            -Construction
                in progress recorded in accounts payable
            
            $
            459,701
            
            $
            -





The
      accompanying notes are an integral part of these financial
      statements.




F-5




**RG
      GLOBAL LIFESTYLES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Note
      1 – Organization, History and Significant Accounting Policies and
      Procedures**





**Organization
      and History**


R.G.
      Global Lifestyles, Inc. (the “Company” ),
      was
      incorporated in California on July 12, 1985 as International Beauty Supply
      Ltd.
 The name of the corporation was changed on May 28, 1993 to L.L.
      Knickerbocker Co., Inc., and thereafter on January 9, 2003 to the present name,
      R.G. Global Lifestyles, Inc.





The
      Company operates primarily in two (2) segments, through a division and a
      subsidiary.





In
      September 2006, the Company developed and introduced a line of energy drinks
      and
      oxygenated bottled water products under the name of OC Energy Drinks (TM),
      through its wholly-owned subsidiary On Line Surgery, Inc. On June 16, 2007,
      the
      Company changed the name of this subsidiary to OC Energy Drinks, Inc. (“OC
      Energy”).


On
        December 24, 2006, the Company entered into a series of agreements with
        Catalyx Fluid Solutions, Inc. (“Catalyx”) to acquire technology for the use in
        removing excessive sodium and other pollutants from the water associated
        with
        wet-bed methane mining in exchange for the issuance of warrants to purchase
        eight (8) million shares of the Company’s common stock.  See
        Notes
        4 and 13 for additional information. In the fourth quarter of fiscal 2007,
        the
        Company entered into a long-term contract with a company that will use this
        technology in its wet-bed mining business.
 
 Additionally,
        the Company’s wholly-owned subsidiary, Aquair, Inc., (“Aquair”) was organized to
        distribute, market and sell atmospheric water generators, a business which
        Aquair entered into in October of 2004. On July 26, 2006, the Company formed
        two
        wholly-owned subsidiaries in Hong Kong and Taiwan Limited. The purpose of
        the
        subsidiaries are to develop markets in Asian and South Pacific countries.
        The
        foreign subsidiaries commenced operations during the year ended March 31,
        2007
        and have had limited operations since inception. The Company is currently
        not
        actively pursuing this business in any market.





**Consolidation**


The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, Aquair, OC Energy and Catalyx, after elimination
      of
      all material inter-company accounts and transactions.





**Estimates**


The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenue and expenses during the reporting period.
      Significant estimates include the valuation of derivatives, equity instruments
      such as options and warrants, and the percentage of completion related to
      construction contracts. Actual results could differ from those estimates.





**Fair
      Value of Financial Instruments**


Fair-value
      estimates discussed herein are based upon certain market assumptions and
      pertinent information available to management as of March 31, 2007 and 2008.
      The
      respective carrying value of certain on-balance-sheet financial instruments
      approximated their fair values. These financial instruments include cash,
      prepaids, accounts payable, accrued liabilities, notes payable and derivative
      liabilities. Fair values were assumed to approximate carrying values for cash
      and payables because they are short term in nature and their carrying amounts
      approximate fair values or they are payable on demand.


F-6




**RG
      GLOBAL LIFESTYLES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Concentrations**





*Credit
      Risk*


At
        times,
        the Company maintains cash balances at a financial institution in excess
        of the
        FDIC insurance limit. In addition, at we extend credit to customers in the
        normal course of business, after we evaluate the credit worthiness. We do
        not
        expect to take any unnecessary credit risks causing significant causing
        write-offs of potentially uncollectible accounts. However,
        during the year ended March 31, 2008, o ne
        of its
        customers, Black Diamond Energy, Inc., suspended payments on its existing
        contract with the Company, which resulted in a significant write-off, see
        Note
        11


*Customer*


During
      the year ended March 31, 2008, 100% of water treatment revenues were generated
      from one customer. The loss of this customer would have a significant
      impact on the Company’s financial results, see Note 11.





*Vendor*


During
        the year ended March 31, 2008, 50% of the equipment used to generate water
        treatment revenues was manufactured and supplied by one vendor. The loss
        of this
        vendor would have a significant impact on the Company’s financial
        results.


**Cash
      Equivalents**


All
        highly-liquid investments with a maturity of three (3) months or less are
        considered to be cash equivalents.





**Inventory**


At
        March
        31, 2008 , the
        Company’s had inventory consisting of chemicals, flavorings, and bottles related
        to the OC Energy Drink, Inc. . Inventory is valued at cost in the amount
        of
        $86,864, and is recorded at the lower of cost (first-in, first-out) or net
        realizable market value.


**Property
      and Equipment**


Property
      and equipment are recorded at cost and depreciation is provided over the
      estimated useful lives of the related assets using the straight-line method
      for
      financial statement purposes. The estimated lives of property and equipment
      are
      as follows:





Office
                equipment
            five
                yearsComputer
                software
            three
                yearsFurniture
                and fixtures
            seven
                years





SFAS
      No.
      143 “Accounting for Asset Retirement Obligations,” requires that a liability for
      the fair value of an asset retirement obligation be recognized in the period
      which it is incurred, with the offsetting associated asset retirement cost
      capitalized as part of the carrying amount of the long-lived asset. Retirement
      obligations related to the Company's leased land are the requirements to
      demolish improvements and return the land to its original state.





**Impairment
      of Long-Lived and Purchased Intangible Assets**


The
      Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 144
      (“SFAS 144”). The Statement requires that long-lived assets and certain
      identifiable intangibles held and used by the Company be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. Events relating to recoverability may include
      significant unfavorable changes in business conditions, recurring losses, or
      a
      forecasted inability to achieve break-even operating results over an extended
      period. The Company evaluates the recoverability of long-lived assets based
      upon
      forecasted undercounted cash flows. Should impairment in value be indicated,
      the
      carrying value of intangible assets will be adjusted, based on estimates of
      future discounted cash flows resulting from the use and ultimate disposition
      of
      the asset. SFAS 144 also requires assets to be disposed of be reported at the
      lower of the carrying amount or the fair value less costs to sell.





F-7


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Conversion
      Features and Warrants Issued with Convertible Debt**


The
      Company's derivative financial instruments consist of embedded derivatives
      related to the senior convertible secured notes. These embedded derivatives
      include the conversion feature and the detachable warrants. As of the inception
      date of the agreement the debt was not considered conventional as defined in
      EITF 05-2, “The Meaning of "Conventional Convertible Debt Instruments" in issue
      No. 00-19”. The accounting treatment of derivative financial instruments
      requires that the Company record the conversion feature and related warrants
      at
      their fair values and record them at fair value as of each subsequent balance
      sheet date. Any change in fair value is to be recorded as non-operating,
      non-cash income or expense at each reporting date. If the fair value of the
      derivatives is higher at the subsequent balance sheet date, the Company will
      record a non-operating, non-cash charge. If the fair value of the derivatives
      is
      lower at the subsequent balance sheet date, the Company will record
      non-operating, non-cash income.





EITF
      98-5, “Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratios,” and EITF 00-27, “Application of
      Issue 98-5 to Certain Convertible Instruments” governs the calculation of an
      embedded beneficial conversion, which is treated as an additional discount
      to
      the to the instruments where derivative accounting (explained above) does not
      apply. The amount of the value of warrants and beneficial conversion feature
      may
      reduce the carrying value of the instrument to zero, but no further. The
      discounts relating to the initial recording of the derivatives or beneficial
      conversion features are accreted over the term of the debt.





**Derivative
      Financial Instruments**


Derivative
      financial instruments, as defined in SFAS No. 133, Accounting for Derivative
      Financial Instruments and Hedging Activities (“FAS 133”), consist of financial
      instruments or other contracts that contain a notional amount and one or more
      underlying (e.g. interest rate, security price or other variable), require
      no
      initial net investment and permit net settlement. Derivative financial
      instruments may be free-standing or embedded in other financial instruments.
      Further, derivative financial instruments are initially, and subsequently,
      measured at fair value and recorded as liabilities or, in rare instances,
      assets.





The
      Company does not use derivative financial instruments to hedge exposures to
      cash-flow, market or foreign-currency risks. However, the Company has issued
      financial instruments including senior convertible notes payable and
      freestanding stock purchase warrants with features that are either (i) not
      afforded equity classification, (ii) embody risks not clearly and closely
      related to host contracts, or (iii) may be net-cash settled by the counterparty.
      As required by FAS 133, in certain instances, these instruments are required
      to
      be carried as derivative liabilities, at fair value, in our financial
      statements.





The
      Company estimates the fair values of derivative financial instruments using
      various techniques (and combinations thereof) that are considered to be
      consistent with the objectively measuring fair values. In selecting the
      appropriate technique, consideration is give to, among other factors, the nature
      of the instrument, the market risks that it embodies and the expected means
      of
      settlement. For less complex derivative instruments, such as free-standing
      warrants, the Company generally uses the Black-Scholes option valuation
      technique because it embodies all of the requisite assumptions (including
      trading volatility, estimated terms and risk free rates) necessary to fair
      value
      these instruments. Estimating fair values of derivative financial instruments
      requires the development of significant and subjective estimates that may,
      and
      are likely to, change over the duration of the instrument with related changes
      in internal and external market factors. In addition, option-based techniques
      are highly volatile and sensitive to changes in the trading market price of
      our
      common stock, which has a high-historical volatility. Since derivative financial
      instruments are initially and subsequently carried at fair values, the Company's
      operating results will reflect the volatility in these estimate and assumption
      changes.





F-8


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Revenue
      Recognition**


*Product
      Sales and Water Treatment Royalties* - For
      revenue from product sales, the Company recognizes revenue in accordance with
      Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB104”), which
      superseded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
      Statements (“SAB101”). SAB 101 requires that four basic criteria must be met
      before revenue can be recognized: (1) persuasive evidence of an arrangement
      exists; (2) delivery has occurred; (3) the selling price is fixed and
      determinable; and (4) collectability is reasonably assured. Determination of
      criteria (3) and (4) are based on management's judgments regarding the fixed
      nature of the selling prices of the products delivered and the collectability
      of
      those amounts. Provisions for discounts and rebates to customers, estimated
      returns and allowances, and other adjustments are provided for in the same
      period the related sales are recorded.





*Construction
      Contracts* - In
      accordance with Statement of Position 81-1 “Accounting for Performance of
      Construction-Type and Certain Production-Type Contracts”, the Company uses the
      percentage completion method for the recognition of revenue received in
      connection with it’s engineering, equipment sale and installation contracts. In
      making the estimate of the percentage of revenue to recognize, the Company
      compares costs to the total projected cost of the contract. Accordingly, the
      Company recognizes that portion of the revenue and record the balance of the
      cash received as deferred revenues. As of March 31, 2008, the Company did not
      have any deferred revenues.





**Net
      Loss Per Share**


Net
      loss
      per share is provided in accordance with SFAS No. 128 “Earnings Per Share”
(“SFAS 128”). Basic loss per share is computed by dividing losses available to
      common stockholders by the weighted average number of common shares outstanding
      during the period, after giving effect to dilutive common stock equivalents,
      such as stock options, warrants and convertible debt. The following is a summary
      of outstanding securities which have been excluded from the calculation of
      diluted net loss per share because the effect would have been anti-dilutive
      for
      the years ending March 31, 2008 and 2007:





2008
            
            2007Common
                stock options
            
            
            7,903,579
            
            
            13,851,230Common
                stock warrants
            
            
            17,163,344
            
            
            15,403,940Secured
                convertible notes
            
            
            -
            
            
            3,308,040Totals
            
            
            25,066,923
            
            
            32,563,210





**Proceeds
      from Key Man Life Insurance**


In
        January of 2008, the Company received $3,000,000 in connection with a claim
        it
        had on a key man life insurance policy related to the death of one of its
        officers. On January 24, 2008, the Company used $2,000,000 of the proceeds
        to
        settle litigation with one of its previous investors, the NIR Group. See
        Notes 7
        and 11 for additional information.


**Advertising
      Costs**


The
      Company expenses all costs of advertising as incurred. The Company expensed
      $182,518 and $99,973 of advertising costs during the years ended March 31,
      2008
      and 2007, respectively.





F-9


**RG
          GLOBAL LIFESTYLES, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


**Stock-Based
      Compensation** ****


On
      December 16, 2004, the FASB published Statement of Financial Accounting
      Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R
      requires that compensation cost related to share-based payment transactions
      be
      recognized in the financial statements. Share-based payment transactions within
      the scope of SFAS 123R include stock options, restricted stock plans,
      performance-based awards, stock appreciation rights, and employee share purchase
      plans. The provisions of SFAS 123R were effective as of the first interim period
      that begins after December 15, 2005.





The
      Company adopted SFAS 123R, which requires disclosure of the fair value and
      other
      characteristics of stock options, and SFAS 148 “Accounting for Stock-Based
      Compensation — Transition and Disclosure,” which requires more prominent
      disclosure about the effects of an entity’s accounting policy decisions with
      respect to stock-based compensation on reported net loss. The Company has
      reflected the expense of such stock based compensation based on the fair value
      at the grant date for awards consistent with the provisions of SFAS No. 123R.


In
        connection with the adoption of SFAS 123R, the fair value of our share-based
        compensation has been determined utilizing the Black-Scholes pricing model.
        The
        fair value of the options granted is amortized as compensation expense on
        a
        straight line basis over the requisite service period of the award, which
        is
        generally the vesting period. The fair value calculations involve significant
        judgments, assumptions, estimates and complexities that impact the amount
        of
        compensation expense to be recorded in current and future periods.


The
        following variables were used in the Black Scholes model for all option
        issuances valued during the fiscal years ended March 31, 2008 and
        2007:


Year
                ending
                March
                  31,
              
              Stock Price at
                Grant Date
              
              Dividend
                Yield
              
              Rangeof
                Exercise
                Price
              
              Risk Free
                Interest Rate
              
              Volatility
              
              Average
                Life2008
              
              $
              0.56
              
              
              -
              %
              $
              0.49 - $0.56
              
              
              2.64
              %
              
              297
              %
              
              5.02007
              
              $
              0.75
              
              
              -
              %
              $
              0.20 - $0.69
              
              
              5.25
              %
              
              216
              %
              
              5.0





The
      Company's accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of Emerging
      Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That are
      Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
      Goods or Services”.  The measurement date for the fair value of the equity
      instruments issued is determined at the earlier of (i) the date at which a
      commitment for performance by the consultant or vendor is reached or (ii) the
      date at which the consultant or vendor's performance is complete.  In the
      case of equity instruments issued to consultants, the fair value of the equity
      instrument is recognized over the term of the consulting agreement.





**Segment
      Reporting**


The
      Company reports its segments under SFAS No. 131, “Disclosures about Segments of
      an Enterprise and Related Information” (“SFAS 131”) which establishes standards
      for reporting information regarding operating segments in annual financial
      statements and requires selected information for those segments to be presented
      in interim financial reports issued to stockholders. SFAS 131 also establishes
      standards for related disclosures about products and services and geographic
      areas. Operating segments are identified as components of an enterprise about
      which separate discrete financial information is available for evaluation by
      the
      chief operating decision maker, or decision making group, in making decisions
      on
      how to allocate resources and assess performance.





F-10


****  **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Income
      Taxes**


The
      Company follows SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) for
      recording the provision for income taxes. Deferred tax assets and liabilities
      are computed based upon the difference between the financial statement and
      income tax basis of assets and liabilities using the enacted marginal tax rate
      applicable when the related asset or liability is expected to be realized or
      settled. Deferred income tax expenses or benefits are based on the changes
      in
      the asset or liability each period. If available evidence suggests that it
      is
      more likely than not that some portion or all of the deferred tax assets will
      not be realized, a valuation allowance is required to reduce the deferred tax
      assets to the amount that is more likely than not to be realized. Future changes
      in such valuation allowance are included in the provision for deferred income
      taxes in the period of change.





Deferred
      income taxes may arise from temporary differences resulting from income and
      expense items reported for financial accounting and tax purposes in different
      periods. Deferred taxes are classified as current or non-current, depending
      on
      the classification of assets and liabilities to which they relate. Deferred
      taxes arising from temporary differences that are not related to an asset or
      liability are classified as current or non-current depending on the periods
      in
      which the temporary differences are expected to reverse.





**Recent
      Accounting Pronouncements**


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 provides accounting guidance on the definition of fair value and
      establishes a framework for measuring fair value and requires expanded
      disclosures about fair value measurements. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007. We plan
      to
      adopt the provisions of SFAS 157 on April 1, 2008 and we are currently assessing
      the impact of the adoption of SFAS 157 on our results of operations and
      financial condition.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure
      financial instruments and certain other items at fair value. The objective
      is to
      improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. SFAS 159 is effective for financial statements issued for fiscal
      year beginning after November 15, 2007. We are currently assessing the impact
      of
      adopting SFAS 159 on our results of operations and financial
      condition.





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
      141(R)”), which replaces FAS 141. SFAS 141(R) establishes principles and
      requirements for how an acquirer in a business combination recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any controlling interest; recognizes and measures
      the
      goodwill acquired in the business combination or a gain from a bargain purchase;
      and determines what information to disclose to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination. SFAS 141(R) is to be applied prospectively to business
      combinations.





**Note
      2 – Going Concern**





The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. As shown in the accompanying financial statements,
      the Company during the year ended March 31, 2008 incurred an operating loss
      before income taxes of $3,888,465 and used cash from operations of $2,054,306.
      As of March 31, 2008, the Company had a working capital deficit of $2,639,892.
      These conditions raise substantial doubt about the Company's ability to continue
      as a going concern.





F-11


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 The
          future of the Company is dependent upon its ability to obtain equity and/or
          debt
          financing and ultimately achieving profitable operations from the development
          of
          its business segments. During the year ended March 31, 2008, the Company
          funded
          operations through debt and equity offerings. Subsequent to the year end,
          the
          Company raised an additional $394,000 through the sales of common stock.
          Currently, the Company does not have any commitments or assurances for
          additional capital. However, subsequent to March 31, 2008, the Company
          commenced
          production under the water treatment contract with a customer. In addition,
          the
          Company is currently in negotiations for the construction of additional
          water
          treatment facilities for this customer. There can be no assurance that
          the
          revenue from these contracts will be sufficient for the Company to achieve
          profitability in its operations, and it is possible that additional equity
          or
          debt financing may be required to for the Company to continue as a going
          concern. The Company estimates it has current cash reserves sufficient
          to fund
          operations through Q2 of fiscal 2009.





The
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded assets, or the amounts of and
      classification of liabilities, which might be necessary in the event the Company
      cannot continue in existence.





**Note
      3 – Property and Equipment**





Property
      and equipment as of March 31, 2008 consisted of the following:





Office
                equipment, computersoftware,
                and furniture and fixtures
            
            $
            57,974Accumulated
                depreciation
            
            
            (13,351
            )Total
            
            $
            44,623





During
      the years ended March 31, 2008 and 2007, the Company recorded depreciation
      expense of $13,740 and $1,362, respectively.





*Construction
      in Progress*


The
        Company entered into a contract to build, own and operate a facility utilizing
        the Catalyx technology. During the year ending March 31, 2008, the Company
        incurred costs of $3,016,261 for construction of the building and the related
        equipment., See Note 11 for additional information.





*Asset
      Retirement Obligations*


The
        Company recognizes asset retirement costs under SFAS 143 in the period in
        which
        they are incurred. Under a water treatment contract with a customer, the
        Company’s owns the building and equipment but does not own the land. At the
        termination of the contract, the Company is required to return the land to
        its
        original condition. At March 31, 2008, the Company recorded an asset retirement
        obligation of approximately $70,000 and has not recorded any accretion expense





F-12


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


*Capitalized
      Interest*





The
      Company capitalized interest costs related to the construction of its water
      treatment facilities of $39,000 during the year ended March 31,
      2008.





**Note
      4 – Catalyx Technology**


During
        fiscal 2007, the Company entered into a series of agreements with Catalyx
        Fluid
        Solutions, Inc. (“Catalyx”) pursuant to which the Company acquired certain
        technology, know-how, and patent rights related to water treatment for use
        in
        the oil and gas industry. This patent for this technology has a remaining
        legal
        life of 14 years. The Company acquired the technology to exploit its water
        purification operations in the oil and gas industry. In accordance with these
        agreements, the Company
        issued warrants to purchase eight million shares of the Company’s common stock
        at various exercise prices ranging from $0.21 to $0.40. The Company valued
        these
        warrants using the Black Scholes option valuation model using a term of five
        years for the warrants, a risk free interest rate of 5.25% and a volatility
        for
        the Company’s stock as of the date of issuance of 243%, and determined that the
        value of the warrants issued was $4,381,113. This amount was recorded as
        an
        intangible asset on the consolidated balance sheet, and is being amortized
        over
        the period of its estimated benefit period of 14 years. In addition, per
        the
        terms of the acquisition agreement the initial $200,000 paid to acquire this
        technology will be offset against future royalties of $0.01 per barrel of
        water
        treated and 5% of equipment sold based on the Catalyx technology due to Catalyx.


During
      the year ended March 31, 2008 and 2007, the Company recorded amortization
      expense of $314,652 and $81,449, respectively. Estimated aggregate amortization
      expense for each of the five succeeding years is as follows: 2009 $312,937;
      2010
      $312,937; 2011 $312,937; 2012 $312,937; 2013 $312,937; thereafter
      $2,420,327.





**Note
      5 – Formation of Subsidiary and Asset Purchase**


On
        June
        16, 2007, the Company changed the name of its wholly-owned subsidiary On
        Line
        Surgery, Inc. to OC Energy Drink, Inc. On September 1, 2007, the Company
        entered
        into a definitive agreement (the “OCE Agreement”) with three individuals to
        acquire certain tangible and intangible assets related to the energy drink
        segment. Pursuant to the OCE Agreement, the Company issued 654,935 shares
        of its
        common stock valued at $474,828 (using the average value of three days prior
        and
        subsequent to date of issuance of approximately $0.73 per share), assumed
        liabilities of $80,000, and issued 24% of the issued and outstanding shares
        of
        common stock of its subsidiary OC Energy Drink, Inc. The Company valued the
        24%
        interest in OC Energy Drink, Inc. at $43,903. The valuation was determined
        through using the future discounted cash flow method using projected results
        of
        operations of the new subsidiary for a five (5) year period, reduced to present
        value as of the date of the transaction, at a discount of 5.25%. In accordance
        with the requirements of SFAS 94 “Consolidation of All Majority-Owned
        Subsidiaries an amendment of ARB No. 51, with related amendments of APB Opinion
        No. 18 and ARB No. 43, chapter 12”, the Company recorded the value of the
        minority interest of the subsidiary on the date of issuance as $43,903 as
        a
        long-term liability. The purchase price of the assets was allocated as follows:
        $53,912 to tangible assets consisting of bottling equipment, $80,000 to accrued
        liabilities and $464,819 as intangible assets. Intangible assets consisted
        of
        tooling design and engineering drawings for bottling equipment, bottle designs,
        labels, logos, and artwork which support the trademarks. At March 31, 2008,
        due
        to the limited sales by OC Energy compared to initial projections, the Company
        determined that the carrying value of the intangible assets had been impaired.
        Based on the Company’s projections the discounted cash flows did not support the
        carrying value of the intangible assets. Thus, the Company determined that
        a
        write down of $206,819 was required at March 31, 2008. At March 31, 2008,
        the
        Company has determined that the only remaining intangible asset is the
        trademarks in which the Company will not amortize and assess for impairment
        annually.





F-13


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 During
          the year ended March 31, 2008, the Company recorded as other income-Minority
          Interest on the consolidated statements of operations, the change in value
          of
          the subsidiary based upon 24% of the subsidiary’s net loss from operations in
          the period then ended, and correspondingly reduced the long term liability.
          The
          long term liability was reduced to zero as a result of year-to-date losses
          incurred by OC Energy. No additional amounts will be allocated to the minority
          interest as the minority holder does not have an obligation to contribute
          additional monies to OC Energy.





**Note
      6 – Other Assets**





At
      March
      31, 2008, the Company had deposits with various vendors comprised of the
      following:





Rental
                deposits
            
            $
            32,557Deposit
                against future Catalyx royalty
            
            
            200,000Other
            
            
            20,056Total:
            
            $
            252,613





**Note
      7 – Notes Payable**




*2006
        Notes Payable*
 In
        April
        2007, the Company entered into a series of conversion agreements with a group
        of
        individuals who had received an assignment of a $300,000 note and accrued
        interest of $24,000 which was due on March 31, 2007. On April 19, 2007, the
        Company issued 875,000 shares of common stock valued at $1,417,500 based
        on the
        closing market price of the Company’s common stock on the date of the
        transaction to certain note holders in satisfaction of $162,037 of principal
        and
        $12,963 of accrued interest on the assigned note. At the time of issuance,
        the
        Company recorded the excess in fair value of the common stock over the
        liabilities satisfied of $1,242,500 as additional interest expense.
 
 On
        September 4, 2007, a director of the Company holding the remaining portion
        of
        the assigned note agreed to receive shares of the Company’s common stock at
        $0.20 per share in satisfaction of the note and accrued interest. The Company
        issued 780,475 shares of common stock valued at $569,747 based on the closing
        market price of the Company’s common stock on the date of the transaction to the
        director in settlement of $137,963 in principal and $18,132 in accrued interest.
        At the time of issuance, the Company recorded the excess in fair value of
        the
        common stock over the liabilities satisfied of $413,652 as additional interest
        expense.


**


*2007
      Notes Payable*


On
        December 26, 2006 and January 12, 2007, the Company entered into three new
        note
        agreements (the "2007 Notes") with accredited investors for total proceeds
        of
        $600,000. The 2007 Notes had a term of one year and bear interest at 8% per
        annum. For each dollar loaned, the holders were granted a warrant to purchase
        one share of the Company's common stock at $0.20 per share (a total of 600,000
        warrants). The warrants vest at maturity and expire in five years from the
        date
        of issuance. The 2007 Notes and accrued interest are convertible into shares
        of
        the Company's common stock upon maturity, at the lowest price traded of the
        Company's common stock for the prior year, but not less than $0.10 per
        share.


The
      Company determined the value of these warrants to be $778,953 using the Black
      Scholes method with the following weighted average estimates: 5.25% risk free
      interest rate, 248% volatility, and a five-year life. The Company allocated
      $320,346 to the warrants based on their relative fair value to the 2007 Notes,
      resulting in a discount.





In
      addition, since the lowest conversion price of $0.10 per share was lower than
      the fair market value of the Company's common stock on the dates of issuance
      of
      $0.63 and $1.75, respectively, management used $0.10 per share in its
      computation of the value of the beneficial conversion feature. The Company
      valued the beneficial conversion feature as of the date of issuance in the
      amount of $279,654, and recorded a discount against the 2007 Notes. The total
      discount between the warrants and the conversion feature applicable to the
      notes
      was $600,000. The discount is being amortized over the one year term of the
      notes. During the years ended March 31, 2008 and 2007, the Company amortized
      $460,137 and $139,863 of the discount to interest expense,
      respectively.





Two
      of
      these notes, with a principal balance totaling $250,000, matured on December
      26,
      2007. Subsequent to that date, the two note holders elected to convert the
      principal amounts due, plus accrued interest totaling $22,740, into 717,766
      shares of the Company’s common stock, at a purchase price per share of $0.38,
      all in accordance with the terms of the associated notes. At the time of
      issuance, the Company recorded the excess in fair value of the common stock
      over
      the liabilities satisfied of $13,700 as additional interest
      expense.


The
        third
        note, with a principal balance of $350,000 matured on January 12, 2008 and
        is
        currently in default as the holder demanded payment. In connection with the
        default, the interest rate increased to 11% per annum. As of March 31, 2008,
        accrued interest of $9,069 was recorded in accrued liabilities related to
        this
        note. See Note 11 for discussion of a lawsuit filed by holder of the note
        against the Company.





F-14


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


*$2,000,000
      Secured Convertible Notes*


On
      June
      6, 2006, the Company entered into a definitive securities purchase agreement
      and
      ancillary agreements with accredited investors for a private placement of
      $2,000,000 of 6% callable secured convertible notes due June 6, 2009 (the
“Secured Notes”) and stock purchase warrants to purchase 4,000,000 shares of the
      Company’s common stock, vesting immediately and exercisable before June 6, 2013,
      with an exercise price of $1.10 subject to adjustment upon certain events.
      The
      Secured Notes are convertible at the option of the holder at any time prior
      to
      maturity into shares of the Company’s common stock at a conversion price based
      upon the average of the three lowest trading prices of the Company’s common
      stock for the previous 20 trading days discounted by 50%, and are secured by
      a
      security interest in substantially all of the assets of the Company.


In
        connection with the issuance of the Secured Notes, the Company evaluated
        the
        terms and features of the conversion feature and the warrants and determined
        that the instruments embodied certain derivative features that were not clearly
        and closely related to the debt instrument. Thus, the conversion feature
        and
        warrants did not meet the established criteria for equity classification
        under
        EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
        Potentially Settled in, a Company's Own Stock”. On the dates of issuance, the
        Company allocated the proceeds between the Secured Notes, warrants and
        conversion feature. Accordingly, the Company accounted for the embedded
        conversion feature and warrants as derivatives under SFAS 133. Thus, the
        conversion feature and warrants are carried at their respective fair values
        with
        changes in their values recorded in the statements of
        operations.





Upon
      issuance, the Company valued the bifurcated embedded conversion feature of
      the
      Secured Notes at $4,286,729 using the Black Scholes valuation method based
      upon
      the following weighted average variables; a risk free interest rate of 5.25%,
      a
      conversion price of $0.27, a volatility of 216%, and a remaining term of three
      years.





Upon
      issuance, the Company valued the 4,000,000 detached warrants to purchase shares
      of the Company's common stock at $3,443,336 based upon the Black Scholes method
      of valuation using the following weighted average variables; risk free interest
      rate of 5.25%, an exercise price of $1.10, a volatility of 150%, and an
      estimated remaining life of seven years.





The
      warrants and embedded conversion feature exceeded the carrying value of the
      Secured Notes, and accordingly, the Company recorded $5,730,065 of additional
      expense. The Company is amortizing the discount of the Secured Notes of
      $2,000,000 over the term of the Secured Notes. The conversion feature and
      warrants are being carried at their respective fair values with changes in
      their
      values recorded in the statement of operations. The change in the fair value
      of
      the bifurcated embedded conversion feature liability for the year ended March
      31, 2007 was $1,021,209. The change in the fair value of the warrant liability
      for the year ended March 31, 2007 was $3,152,764.





In
      November 2006, the Company made a payment of $66,000 toward the Secured Notes,
      which reduced accrued interest by $7,700 and reduced the principal balance
      by
      $58,300. During the year ended March 31, 2007, the Secured Note holders
      converted principal of $71,267 and accrued interest of $45,408 into 778,053
      shares of the Company's common stock. At the time of conversion, the Company
      increased additional paid-in capital by $844,828 based on the proportionate
      share of the fair value of the conversion feature converted.




F-15


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      $2,000,000 discount on the Secured Notes was being amortized over the three-year
      term of the notes. During the year ended March 31, 2007, the Company amortized
      $685,052 to interest expense. In January 2007, a dispute arose between the
      Company and the holders of the Secured Notes, see below for additional
      information. At March 31, 2007, the Company expensed the remaining discount
      of$1,314,948 on the Secured Notes and carried the notes at their face value
      due
      to the dispute.





Pursuant
      to an engagement agreement for financial advisory services and as compensation
      for the Secured Notes financing, the Company issued 640,000 warrants to purchase
      shares of the Company's common stock and made cash payments of $226,280 to
      a
      placement agent and for legal fees. These warrants bear an exercise price of
      $0.80 per share, and are exercisable for a term of seven years from the date
      of
      issuance. The Company determined the value of the warrants to be $611,036 based
      upon the Black Scholes method of valuation, using the following estimates:
      5.25%
      risk free interest rate, 150% volatility, and an expected life of seven years.
      Due to a dispute with the Secured Notes holder, all amounts were expensed during
      the year ended March 31, 2007, see below for additional
      information.





In
      early
      fiscal 2008, a dispute arose between the Company and the holders of the Secured
      Notes which resulted in litigation between the parties. On January 24, 2008,
      the
      parties dismissed the litigation and Company entered into a settlement agreement
      with the holder of the Secured Notes. As part of this settlement agreement,
      the
      Company paid the holders of the Secured Notes $2,000,000, accrued interest
      of
      $112,533 and issued a $600,000 promissory note with an interest rate of 10%,
      with payments due in 12 equal $50,000 monthly payments commencing on March
      3,
      2008. In addition, the Company issued 2,000,000 shares of common stock to an
      escrow account in which secures the promissory note. The promissory note can
      be
      paid in cash or the Company’s common stock at the election of the Company. If
      paid in common stock, the common stock will be issued at a equal to $55,000
      divided by the lesser of the weighted average price (“VWAP”) over the five days
      preceding the due date of payment or the day on which the note is transmitted
      to
      the escrow agent. If the VWAP is lower than $0.10 or the there are insufficient
      shares in escrow the Company cannot settle the monthly obligation in common
      shares. In connection with the settlement the Company recorded a loss of
      $672,589 due to the fair value of the consideration given being in excess of
      the
      amount extinguished.





Since
      the
      $600,000 promissory note does not incur interest the Company recorded a discount
      of $44,444 to the note with an offset to the loss on settlement of the Secured
      Notes. During the year ended March 31, 2008, the Company amortized $8,518 to
      interest expense. As of March 31, 2008, the remaining discount was
      $35,926.





In
      March
      2008, the Company issued 100,000 shares of common stock from the escrow account
      to satisfy the March 2008 $50,000 payment. As of March 31, 2008, 1,900,000
      shares of common stock are held in treasury. See Note 14, for subsequent
      issuances in settlement of amounts payable.





Upon
      settlement the Company estimated the fair value of the conversion-feature
      liability related to Secured Notes to be $5,382,748, which was re-classed to
      additional paid-in capital. The Company valued the beneficial conversion feature
      at settlement, using the Black Scholes method of valuation with the following
      variables; a risk free interest rate of 2.07%, an exercise price of $0.21,
      a
      volatility of 293%, a remaining life of .001 years and no dividends. For the
      year ended March 31, 2008, the change in fair value of the conversion feature
      liability resulted in additional expense of $74,810.





F-16


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Upon
      settlement the Company estimated the fair value of the warrant liability related
      to Secured Notes to be $3,117,617, which was re-classed to additional paid-in
      capital. The Company valued the warrant liability at settlement, using the
      Black
      Scholes method of valuation with the following variables; a risk free interest
      rate of 2.64%, an exercise price of $1.10, a volatility of 293%, a remaining
      life of approximately five years and no dividends. For the year ended March
      31,
      2008, the change in fair value of the warrant liability resulted in other income
      of $3,478,483.





*Note
      Payable to Vendor*


On
      January 29, 2008, the Company the issued a promissory note to a vendor in
      settlement of $780,500 in accounts payable. The vendor manufactured and
      installed the Company’s water treatment facility. The note bears interest at 10%
      per annum and is secured by the Company’s contract with Yates Petroleum
      Corporation and the equipment that was manufactured by the vendor (see Note
      11).
      The note calls for an initial payment of $270,000 due on February 1, 2008 with
      monthly principal payments of $100,000 due each month until paid off. Payments
      made on this note during 2008 were $370,000. The balance due on this note at
      March 31, 2008 was $410,500 with accrued interest of $9,068. The Company did
      not
      make its April 2008 payment and is technically in default on this
      note.





**Note
      8 – Income taxes**




The
        following table presents the current and deferred income tax provision for
        federal and state income taxes for the years ended March 31, 2008 and
        2007:


As of March 31,2008
            
            2007Current
                tax provision:Federal
            
            $
            -
            
            $
            (60,000
            )State
            
            
            -
            
            
            3,144Total
            
            
            -
            
            
            (56,856
            )Deferred
                tax provision (benefit)Federal
            
            
            (1,628,374
            )
            
            (1,882,791
            )State
            
            
            (210,384
            )
            
            (460,224
            )Increase
                in valuation allowance
            
            
            1,838,757
            
            
            2,343,015Total
            
            
            -
            
            
            -Total
                provision (benefit) for income taxes
            
            $
            -
            
            $
            (56,856
            )





Reconciliations
      of the U.S. federal statutory rate to the actual tax rate for the years ended
      March 31, 2007 and 2008 are as follows:





2008
            
            2007US
                federal statutory income tax rate
            
            
            34
            %
            
            34
            %State
                tax **–** net of benefit
            
            
            5.8
            %
            
            5.8
            %39.8
            %
            
            39.8
            %Permanent
                differences
            
            
            20.5
            %
            
            (29.9
            )%Others
            
            
            (12.8
            %)
            
            0.1
            %Increase
                in valuation allowance
            
            
            (47.5
            %)
            
            (11.4
            %)Effective
                tax rate
            
            
            0.0
            %
            
            (1.4
            %)


F-17




**RG
      GLOBAL LIFESTYLES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      components of the Company’s deferred tax assets and (liabilities) for federal
      and state income taxes as of March 31, 2008 consisted of the
      following:





Current
                deferred tax assets (liabilities):Accrued
                expenses
            
            $
            102,456Total
                current deferred tax assets
            
            
            102,456Non-current
                deferred tax assetsState
                taxes
            
            
            (536,196
            )Stock
                options
            
            
            3,159,135Net
                operating losses
            
            
            1,786,373Total
                non-current deferred tax assets
            
            
            4,409,312Valuation
                allowance
            
            
            (4,511,768
            )**Net
                deferred tax assets (liabilities)**
            
            $
            -





At
      March
      31, 2008, the Company had approximately $5,254,039 of federal and state net
      operating losses allocated to continuing operations available. The net operating
      loss carry forward, if not utilized, will begin to expire in 2025 for federal
      purposes and 2009 for state purposes.


For
        financial reporting purposes based upon continuing operations, the Company
        has
        incurred a loss in each period since its inception. Based on the available
        objective evidence, including the Company’s history of losses, management
        believes it is more likely than not that the net deferred tax assets at March
        31, 2008, will not be fully realizable. Due to the uncertainty surrounding
        realization of the deferred tax asset, the Company has provided a full valuation
        allowance against its net deferred tax assets at March 31, 2008. Based upon
        current law, the Company believes that for California income tax purposes,
        the
        net operating loss from the current year will not be allowed to be carried
        back
        to reduce or eliminate the state income tax liability for the year ended
        March
        31, 2005. Accordingly, the State tax liability of $93,887 for the year ended
        March 31, 2005, remains in existence and will not be subject to
        refund.


During
        the year ended March 31, 2008, the Company accrued $89,725 in income tax
        liabilities related to the exercise of non-qualified stock options in which
        the
        required withholding for income tax was not made. The amount is included
        in
        accrued liabilities on the accompanying consolidated balance
        sheet.





**Note
      9 – Stockholders’ Equity (Deficit)**




The
      Company is authorized to issue 100,000,000 shares of $0.001 par value common
      stock and 10,000,000 shares of $0.001 par value preferred stock.





During
      the year ended March 31, 2008, the Company sold 3,258,333 shares of common
      stock
      to accredited investors at a price of $0.30 per share for total net cash
      proceeds of $917,500. As of March 31, 2008, the Company has not
      issued 7,046,347 shares of common stock related to subscriptions of
      $1,631,904 and warrant exercises resulting in $482,000. Thus, the proceeds
      received are recorded as “common stock to be issued” on the accompanying balance
      sheet. In addition, for each dollar invested the investor received a warrant
      to
      purchase one share of the Company’s common stock at an exercise price of $0.40
      per share. The warrants vest immediately and expire in five years. The warrants
      were valued at $1,209,505 based upon the Black Scholes valuation model using
      the
      following weighted average estimates: 3.45% risk free rate, 297% volatility,
      an
      expected life of five years and no dividends. In addition, the Company paid
      $60,000 in finder’s fees in which was recorded as an offset to the cash
      proceeds.





F-18


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


During
      the year ended March 31, 2008, the Company issued 953,667 shares of common
      stock
      for services rendered by consultants and employees. The services related to
      general corporate duties, marketing and production. The Company valued the
      shares on the date of issuance as there were no future performance conditions.
      The shares were valued at $605,975 based on the closing market price of the
      Company’s common stock on the date of issuance.





See
      Notes
      10 and 14 for discussion of common stock issuances and other items impacting
      stockholders’ equity (deficit) during the year ended March 31, 2008 and
      2007.





**Note
      10 – Options and Warrants**





**Options**





In
      July
      2005, the Company entered into a three-year agreement with a consultant, who
      later became a related party (Director of the Company). As a portion of the
      compensation due to consultant under the agreement, the Company issued options
      to purchase 100,000 shares of the Company’s common stock vesting at the rate of
      one-third at the end of each 12 months under the agreement. The Company
      determined the fair market value of the options as of the date of the grant
      at
      $346,379, using the Black Scholes valuation method with the following estimates:
      4.0% risk free rate and 100% volatility of the Company’s common stock.
      Compensation expense recorded during the years ended March 31, 2008 and 2007
      was
      $115,460 and $138,350, respectively.





On
      May 3,
      2006 the Company’s Board of Directors adopted the 2006 Incentive and
      Non-statutory Stock Option Plan (“2006 Plan”) for issuance of stock options to
      employees and others. Under the 2006 Plan, the Company reserved ten million
      shares for issuance. On October 20, 2006, the Company re-priced 8,217,600
      options granted under the 2006 Plan and recorded additional stock based
      compensation of $1,392,000. As of March 31, 2008, 2,229,973 options were
      available for issuance under the 2006 Plan.





On
      December 26, 2006, the Board of Directors authorized the issuance of up to
      6,000,000 options under its 2007 Incentive and Non-statutory Stock Option Plan
      (“2007 Plan”). The 2007 Plan provides for a vesting of the following option
      grants over a five year term, with the options vesting ratably over the first
      two years from the date of issuance. As of March 31, 2008, 3,872,700 options
      were available for issuance under the 2007 Plan. The 2007 Plan has not yet
      been
      ratified by the shareholders of the Company.





Although
      management believes its estimate regarding the fair value of the services to
      be
      reasonable, there can be no assurance that all of the subjective assumptions
      will remain constant, and therefore the valuation of the services may not be
      a
      reliable measure of the fair value of stock compensation or stock based payments
      for consulting services.


F-19




**RG
      GLOBAL LIFESTYLES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      following is a summary of activity of outstanding stock options:


Number of
                Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Average
                Remaining
                Contractual Term
                (Years)
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at March 31, 2006
              
              
              100,000
              
              $
              2.00Options
                  granted
              
              
              15,212,400
              
              
              0.32Options
                  exercised
              
              
              (1,461,170
              )
              
              0.21Outstanding
                  at March 31, 2007
              
              
              13,851,230
              
              
              0.35Options
                  granted
              
              
              1,100,000
              
              
              0.56Options
                  exercised
              
              
              (632,578
              )
              
              0.20Options
                  cancelled
              
              
              (6,415,073
              )
              
              0.40Outstanding
                  at March 31, 2008
              
              
              7,903,579
              
              $
              0.33
              
              
              3.63
              
              $
              1,302,016Exercisable
                  at March 31, 2008
              
              
              5,999,967
              
              $
              0.29
              
              
              3.40
              
              $
              1,083,274




Exercisable
              
              Unexercisable
              
              TotalStock
                  Options
              
              Number of
                Shares
              
              Weighted
                Average
                ExercisePrice
              
              Number of
                Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Number of
                Shares
              
              Weighted
                Average
                Exercise
                PriceLess than
                  $0.48
              
              
              5,251,548
              
              $
              0.27
              
              
              1,301,531
              
              $
              0.32
              
              
              6,553,079
              
              $
              0.28Above
                  $0.48
              
              
              348,419
              
              
              0.64
              
              
              1,002,081
              
              
              0.54
              
              
              1,350,500
              
              $
              0.57Total
                  Outstanding
              
              
              5,599,967
              
              $
              0.30
              
              
              2,303,212
              
              $
              0.41
              
              
              7,903,579
              
              $
              0.33





The
      Company will record estimated future compensation expense related to options
      of
      approximately $1,229,169 and $254,115 during the years ended March 31, 2009
      and
      2010, respectively.





**Warrants**





In
      September 2005, the Company entered into a legal retainer agreement with legal
      counsel providing for the issuance of cashless warrants to purchase 25,000
      shares of the Company’s common stock at $2.00 per share, in prepayment of legal
      services to be rendered by the law firm on behalf of the Company. The warrants
      vest over ten months from the inception of the agreement in September, 2005,
      and
      expire five years after the vesting date in July 2006. The warrants have been
      attributed a value of $77,388 using the Black Scholes method of valuation with
      the following estimates: 4.0% risk free rate and 105% volatility, and an
      expected life of five years. During the year ended March 31, 2007, the Company
      recorded compensation expense of $65,025.





On
      March
      16, 2006, the Company entered into an agreement with a consultant to issue
      cashless warrants to purchase 120,000 shares of the Company’s common stock at an
      exercise price of $0.60, as compensation for services to be rendered over the
      period of one year. The warrants vested over the service period of one year.
      Upon vesting, the Company valued the warrants at $197,686 and recorded
      compensation expense of the same amount during the year ended March 31, 2007.
      The Company accounted for this agreement under EITF 96-18, thus previously,
      the
      Company estimated the fair value of the warrants and was expensing over the
      service period. In March 2007, the warrants were valued based upon the Black
      Scholes method of valuation using the following estimates: 5.25% risk free
      rate,
      265% volatility, and an expected life of five years.




F-20


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


On
      July
      1, 2006, the Company issued 100,000 and 5,000 warrants at an exercise price
      of
      $0.60, respectively, to two consultants for past services provided. The Company
      valued these warrants at $90,519 and $4,526, respectively, using the Black
      Scholes method of valuation using the following estimates: 5.25% risk free
      interest rate, 163% volatility and an expected life of five years. Since the
      warrants were vested immediately and the services had been provided, the Company
      expensed the value immediately.





On
      October 11, 2006, the Company issued 300,000 warrants at an exercise price
      of
      $0.47 to a consultant for services. One third of the warrants were vested upon
      issuance, the remaining 200,000 warrants vest over the period of two years.
      During the years ended March 31, 2008 and 2007, the Company recorded total
      compensation expense of $40,206 and $116,164, respectively. The Company accounts
      for this agreement under EITF 96-18 and revalues these warrants at each quarter
      end. At March 31, 2008, the warrants were valued based upon the Black Scholes
      method of valuation using the following estimates: 5.25% risk free rate, 297%
      volatility, and an expected life of 3.50 years.





The
      following is a summary of activity of outstanding stock warrants:





WeightedAverageNumber
            
            ExerciseOf
                Shares
            
            PriceBalance,
                March 31, 2006
            
            
            1,733,940
            
            $
            0.25Warrants
                granted
            
            
            13,670,000
            
            
            0.50Balance,
                March 31, 2007
            
            
            15,403,940
            
            
            0.53Warrants
                granted
            
            
            2,609,404
            
            
            0.39Warrants
                exercised
            
            
            (850,000
            )
            
            0.20Balance,
                March 31, 2008
            
            
            17,163,344
            
            $
            0.52Exercisable,
                March 31, 2008
            
            
            17,063,344
            
            $
            0.52





**Note
      11 – Commitments and Contingencies**





**Operating
      Leases**


In
      July
      2007, the Company entered into a lease agreement with a company that is owned
      in
      part by Juzer Jangbarwala, a Company Director and its Chief Technology Officer,
      to sub-lease approximately 7,000 square feet to serve as its corporate office
      in
      Anaheim, California. The lease term is for 18 months commencing August 1, 2007,
      at a rental rate of $7,200 per month and includes office services. The lease
      agreement required a security deposit of $7,200 and does not provide for any
      renewal options. Payments to the related entity were $64,800 during the year
      ended March 31, 2008.





In
      November 2007, the Company’s OC Energy Drink, Inc. subsidiary entered into a
      lease agreement with a third-party company for approximately 1,100 square feet
      for a commercial office suite to serve as its new corporate office in Upland,
      California. The lease term is for 25 months commencing November 1, 2007, at
      a
      rental rate of $1,031 per month for the period November 1, 2007, through January
      31, 2008, $2,063 for the period February 1, 2008, through October 31, 2008,
      and
      $2,146 for the period November 1, 2008, through November 30, 2009. It is also
      responsible for approximately 2.0% of the overall buildings common area
      maintenance costs. The lease agreement required a security deposit of $3,004
      and
      does not provide for any renewal options. Additionally, performance under the
      lease is guaranteed by the President and CEO of OC Energy.





F-21


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Future
      minimum lease payments under non-cancelable operating leases at March 31, 2008
      are as follows:





2009
            
            $
            104,2882010
            
            
            17,168Total
            
            $
            121,456





**Legal
      Proceedings**


On
      August
      30, 2005, the Company was served with a lawsuit filed as Case No. 05CC09548
      in
      Orange County, California Superior Court. In the complaint, Universal
      Communications Systems, Inc. and its subsidiary Atmospheric Water Technologies,
      Inc. alleged defamation, interference with prospective economic advantage,
      and
      false advertising, and sought compensatory and punitive damages, and costs
      against the Company. As of June 21, 2007, the parties to this litigation have
      entered into an agreement that provides for dismissal of the case and exchange
      of mutual releases. The formal dismissal of this lawsuit was filed July 16,
      2007, with no amounts due.





On
      January 24, 2008, the Company settled and dismissed its prior litigation with
      certain of its previous investors, the NIR Group. The case had been in the
      discovery phase during the quarter ended December 31, 2007. The settlement
      was
      funded by proceeds the Company received in connection with a claim it had on
      a
      key man life insurance policy, taken out in connection with the financing with
      the NIR Group. Other than the foregoing, the Company is not aware of any
      litigation, either pending or threatened; see Note 7 for additional
      information.





On
      June
      11, 2008, the Company was served a lawsuit from one of its note holders claiming
      that the Company defaulted on repayment on a note payable in the amount of
      $350,000 plus interest at 8%. The complaint asks for payment of these amounts
      plus damages. The Company is currently in the process of negotiating a
      settlement of this dispute. No amounts for damages have been accrued in the
      accompanying consolidated financial statement other than the note payable and
      accrued interest.





On
      July
      11, 2008, the Company received notice that one of the Company’s vendors filed a
      lien against the Company’s water treatment plant for past due amounts due to the
      vendor. As of March 31, 2008, the vendor is due $140,310, which is included
      in
      accounts payable.





**Water
      Treatment Contracts**


In
      January 2007, the Company entered into a contract with a customer to construct
      and install a water treatment facility for the customer using the Catalyx
      technology. The total proceeds expected from the sale were $2.3 million. In
      accordance with the Company’s revenue recognition policy, the Company recorded
      the revenue on the basis of a percentage completion of the pending contract.
      During the year ended March 31, 2008 the Company recorded $737,576 of revenue
      under this contract. During 2008, the Company’s customer requested that the
      project be halted until such time as the customer could secure funds to continue
      with the project. Previous progress payments had been made by the customer,
      however, a receivable had been accrued for additional costs incurred. As a
      result, the Company determined that the collectibiliy of the receivable of
      $171,613 was potentially in doubt and elected to reserve the entire
      amount.





F-22


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


On
      June
      25, 2007, the Company entered into contract with Yates Petroleum Corporation
      (“YPC”) to engineer, design, and install a water treatment system (“System”) of
      Coal Bed Methane (“CBM”) produced water provided by YPC. The Company will own
      and operate the System and regeneration waste pond. The Company will receive
      a
      base rate under the contract of $0.125 (12.50 cents) per barrel (42 US gallons)
      of water discharged by the System. The term of the contract is for 60 months
      from the start of the first billing cycle. The Company received an initial
      deposit of $25,000 which was recorded as a reduction of costs incurred in the
      construction of the System. During the year ended March 31, 2008, the Company
      incurred capitalized costs in the construction of the System in the amount
      of
      $3,016,261, which are reflected as construction in progress on the accompanying
      consolidated balance sheet. Included in this amount is a provision in the amount
      of $70,000 for the asset retirement obligation (see Note 3). During the
      construction of the System, the Company incurred costs significantly in excess
      of initially estimated. Thus, during the fourth quarter the Company determined
      that costs being incurred were in excess of the estimated future undiscounted
      cash flows of the System. In addition, these projections include estimates
      as to
      the probability of an increase to the base rate of the current price per barrel.
      If an increase is in the base rate is not attainable, future impairments might
      be necessary. The Company incurred $560,193 of costs related to the construction
      of the System that were expensed as project costs on the accompanying
      consolidated statement of operations.





YPC
      is
      responsible for constructing the inflow pond and will receive a credit from
      the
      Company of $50,000 each month for the first three months of operation. In
      addition, YPC will receive credits on current billings for future repairs and
      maintenance to the inflow pond of which there were none during the year ended
      March 31, 2008.





**Note
      12 – Segment Reporting and Concentrations**





The
      Company’s segments consist of the sale of energy drinks and the licensing of
      water treatment technology. The results of the energy drink operations are
      insignificant to the financial statements for the year ended March 31, 2007
      and
      thus have not been presented. Currently, the Company operates in a single
      geographical segment.





The
      following is a summary of revenues generated by segment for the year ended
      March
      31, 2008:


Water
                    treatment revenues:
              
              $
              737,576Energy
                    drink sales:
              
              
              243,642Total
              
              $
              981,218


During
      the years ended March 31, 2008 and 2007, one customer accounted for 100% of
      water treatment revenues.





A
      summary
      of operating loss by segment for the year ended March 31, 2008, is as
      follows:





Water
                treatment segment
            
            $
            (881,483
            )OC
                energy drink segment
            
            
            (650,246
            )Corporate
                segment
            
            
            (5,896,134
            )Total
            
            $
            (7,427,883
            )





A
      summary
      of the net assets as of March 31, 2008 related to the Company’s segments, after
      eliminating all inter-company assets, are as follows:




Water
                treatment segment
            
            $
            6,817,701OC
                energy drink segment
            
            
            632,849Corporate
                segment
            
            
            307,637Total
            
            $
            7,758,187





F-23


**** **RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Note
      13 – Related Party Transactions**





During
      the fiscal year ended March 31, 2005, the Company entered into an agreement
      with
      a company wholly owned by the former Chief Executive Officer of the Company
      for
      the subleasing of office space and administrative support services. The
      agreement was month to month and cancelled during fiscal 2008. During the years
      ended March 31, 2008 and 2007, payments to this former related party for these
      services were $9,175 and $208,715, respectively.





As
      described in detail in Note 7, during the year ended March 31, 2006, the Company
      entered into three transactions with related parties whereby the Company issued
      notes and warrants to officers and directors of the Company in exchange for
      loans $1,256,430. During the year ended March 31, 2007, the Company paid accrued
      interest of $16,000 on one of the notes. On December 26, 2006, the Company
      issued 6,282,150 shares of its $0.001 par value common stock at $0.20 per share
      in full payment of the balance due on six short term notes totaling $1,256,431.
      Of this amount, 3,801,278 shares were issued to related parties in payment
      of
      three outstanding notes and accrued interest in the total amount of $760,257.





On
      February 11, 2008, Grant King, Chief Executive Officer, made a payment of
      $100,000 towards a note from a vendor and recorded it as a loan payable to
      a
      related party. On March 4, 2008, the Company repaid Grant King $30,000 against
      the loan. On March 14, 2008, the Company received an additional $32,700 from
      Grant King for operating purposes. The total loan outstanding from Grant King
      at
      the end of the fiscal year is $102,700. The loan does not incur interest and
      is
      due upon demand.





During
      the year ended March 31, 2008, the Company issued a purchase order to Catalyx
      Fluid Solutions, Inc. (“Catalyx”), for the purchase of resin, at the approximate
      cost of $756,000, needed for the operation of the Company’s wastewater treatment
      plant in Wyoming. Catalyx is partially owned by Juzer Jangbarwala, a Company
      Director and its Chief Technology Officer. In addition, from time to time
      Catalyx has paid for various costs related to the wastewater treatment plant
      on
      behalf of the Company, for which the Company has reimbursed Catalyx. Total
      costs
      incurred by the Company with Catalyx during the year ended March 31, 2008 were
      $767,049. As of March 31, 2008, amounts due to Catalyx included in accounts
      payable were $300,000.





In
      July
      2007, the Company entered into a lease agreement with Catalyx Engineering,
      Inc.
      (“CEI”), a company that is owned in part by Juzer Jangbarwala, a Company
      Director and its Chief Technology Officer, to sub-lease approximately 7,000
      square feet to serve as its new corporate office in Anaheim, California. The
      term
      of the lease is 18 months at a base monthly rent of $7,200. During the year
      ended March 31, 2008, payments to CEI for rent were $64,800.





During
      the year ended March 31, 2008, the Company utilized CEI for engineering services
      related to the design and construction of its water treatment plant in Wyoming.
      The agreement is verbal and provides engineering services at $75 per hour,
      which
      represents a 37.5% discount off of normal CEI rates. Total costs incurred by
      the
      Company with CEI during the year ended March 31, 2008 were $118,157. As of
      March
      31, 2008, amounts due to CEI included in accounts payable were
      $24,353.





During
      the fiscal year ended March 31, 2008, the Company utilized Fusion Solutions
      (“Fusion”) for manufacturing of product and promotional items for it OC Energy
      drink products. Fusion is partially owned by Mariano Fusco, a partial owner
      and
      former CEO of the Company’s subsidiary, OC Energy and Albert Guerra, a partial
      owner of OC Energy. Total costs incurred by the Company with Fusion during
      the
      year ended March 31, 2008 were $112,750. As of March 31, 2008, amounts due
      to
      Fusion included in accounts payable were $99,181.




During
      the year ended March 31, 2008, the Company utilized Glaser Corporation
      (“Glaser”) for the rental of office space and equipment, as well as for
      accounting and administrative services for it OC Energy subsidiary. Glaser
      is
      owned by Robert Glaser, a partial owner and President of OC Energy. Total costs
      incurred by the Company with Glaser during the year ended March 31, 2008 were
      $18,789. As of March 31, 2008, amounts due to Glaser included in accounts
      payable were $18,789.




F-24


**RG
        GLOBAL LIFESTYLES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Note
        14 – Subsequent Events**





On
      April
      8, 2008, the Company issued 6,963,251 shares of common stock to an investor
      for
      the exercise of 1,606,904 warrants and the purchase of 5,356,347 shares of
      common stock at $0.30 per share, totaling $2,088,275. These amounts had
      previously been recorded in “common stock to be issued” on the accompanying
      balance sheet at March 31, 2008 due to the shares not being issued.





From
      April 1, 2008 through June 30 2008, the Company received $394,000 at $0.30
      per
      share from 16 investors and issued 620,664 shares of commons stock with warrants
      to purchase 394,000 shares of common stock at $0.40 per share.





On
      June
      30, 2008, the Company issued 323,467 shares of common stock for services to
      two
      individuals for services provided to the Company. The individuals provided
      consulting services. The common shares were valued at $64,693 based on the
      closing market price of $0.20 of the Company’s common stock on the date of
      issuance. The Company expensed the value upon issuance as there were no future
      performance requirements.





As
      of
      June 30, 2008, the Company issued 468,537 shares of common stock out of escrow
      in lieu of its payments of $150,000 due on its note obligation to
      NIR.





F-25