**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, 2006.**




**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)





30021
                Tomas, Ste 200, Rancho Santa Margarita, CA
            
            92688(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 (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or
      for such shorter period that the issuer was required to file such reports),
      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 $69,340.




The
      aggregate market value of the voting and non-voting common stock held by
      non-affiliates as of June 28, 2006 was $8,151,193.




ISSUERS
      INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court. Yes x No o





APPLICABLE
      ONLY TO CORPORATE REGISTRANTS





The
      number of shares outstanding of the issuer’s Common Stock as of June 28, 2006
      was 17,650,000.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      following documents as filed by the Company or its predecessors are incorporated
      by reference herein: Form 8-K as filed August 23, 2004, Form SB-2 Registration
      Statement No. 33-85230-LA as filed on October 13, 1994, Form 10-K as filed
      on
      April 14, 2000, Form 10-KSB as filed on March 29, 1995.





Certain
      information contained in the Proxy Statement to be filed for the 2006 Annual
      Meeting of Stockholders of the issuer is also hereby incorporated by reference
      into Part III of this Form 10-KSB.














**TABLE
      OF CONTENTS**




PAGECautionary
                Statement Regarding Forward-Looking Information**PART I**ITEM
                1.   DESCRIPTION OF BUSINESSITEM
                2.   DESCRIPTION OF FACILITIESITEM
                3.   LEGAL PROCEEDINGSITEM
                4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**PART II**ITEM
                5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERSITEM
                6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATIONITEM
                7.   FINANCIAL STATEMENTSITEM
                8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSUREITEM
                8A.   CONTROLS AND PROCEDURESITEM
                8B.   OTHER INFORMATION**PART III**ITEM
                9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACTITEM
                10.   EXECUTIVE COMPENSATIONITEM
                11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENTITEM
                12.   CERTAIN RELATIONSHIPS AND RELATED
                TRANSACTIONSITEM
                13.   EXHIBITSITEM
                14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES










**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.




These
      risks include, among others, the following: increased competitive pressures
      from
      existing competitors and new entrants; deterioration in general or regional
      economic conditions; adverse state or federal legislation or regulation that
      increases the costs of compliance, or adverse findings by a regulator with
      respect to existing operations; ability to grow business in its Aquair
      subsidiary and meet or exceed its return on shareholders’ equity target, which
      will depend on the Company’s ability to manage its capital needs and the effect
      of business and/or acquisitions; ability to successfully replace revenues of
      its
      distributed subsidiary Amerikal; any unforeseen liabilities in value beyond
      the
      escrowed reserve resulting from the Amerikal distribution; if acquisitions
      are
      made, the costs and successful integration of acquisitions; barriers in trade
      with foreign countries or tariff regulations and other United States and foreign
      laws; political and economic instability and changes in monetary policy of
      the
      foreign countries we currently do business in; loss of customers or sales
      weakness; inability to achieve future sales levels or other operating results;
      ability to produce or retain licensing rights to new products; the continuation
      of favorable trends, including the drop in affordable potable water globally;
      outcomes and costs associated with litigation and potential compliance matters;
      inadequacies in the Company’s internal control over financial reporting, which
      could result in inaccurate or incomplete financial reporting; key management
      or
      other unanticipated personnel changes; the unavailability of funds for capital
      expenditures; operational inefficiencies in distribution or other systems;
      and
      other risk factors referenced in this and other filings made with the Securities
      and Exchange Commission.




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 subsidiaries.




**PART I**




**ITEM
      1.  DESCRIPTION OF BUSINESS**




1




**Business
      Development**




Form and
      Year of Organization




R.G.
      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, R.G.
      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 the bankruptcy reorganization, the Company sought alternative business
      opportunities and worked to develop the Company’s new business plan through
      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 an aggregate 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 an aggregate 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 an
      aggregate of 21,462,000 shares of Common Stock issued and outstanding, and
      the
      AIH Shareholders held an aggregate of 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.  The Common Stock issued in the
      course of the reverse merger transaction was recorded at the net book value
      of
      the Company’s assets on the acquisition date. 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”).




2




Aquair,
      Inc .





In
      October, 2004 the Company formed Aquair, Inc. as a wholly owned subsidiary
      and
      California corporation (“Aquair”). Aquair was formed to fulfill the Company’s
      mission 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.




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.”





Amerikal
      Nutraceutical Corp *.*





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 the Company at that time from approximately 25 million
      to
      approximately 17 million, and allowed management to concentrate its efforts
      on
      implementing and executing its Aquair business plan. As part of the
      distribution, the purchasing shareholders set aside 315,561 shares of Company
      common stock into an escrow account as a reserve against any unforeseen
      liabilities arising from the distribution. The Company does not anticipate
      recognition of gain or loss as a result of the distribution.





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 June 30, 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, and was dissolved by the Company
      during the fourth quarter of the fiscal year ended March 31, 2006.





**Business
      of Issuer**





Aquair





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company only has remaining operations in its
      sole subsidiary Aquair.





Aquair
      distributes licensed environmentally-friendly atmospheric water generating
      equipment that creates purified drinking water from air for residential and
      commercial uses, and converts brackish, polluted, or grey water to purified
      water. Aquair plans to distribute (i) “anti-microbial” water technology; (ii)
“anti-scaling” water technology; (iii) potable bottled water generated from
      commercial and industrial water generation and filtration technologies; (iv)
      potable water via mobile air to water units in geographic regions where no
      solution exists for purified drinking water; and (v) other water-related
      technologies.




3




Aquair’s
      marketing strategy will focus on customers in medical related businesses, home
      shoppers via television and internet, pharmaceutical related businesses, large
      businesses within office buildings, large construction companies, maritime
      vessels and offshore rigs, and large restaurant and grocery store chains.
      Additionally, the Company will pursue government agencies through its agent
      Policy Impact.





Principal
      Products and Services, and Distribution Methods





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company only has remaining products and
      services, and distribution methods in its sole subsidiary Aquair





Aquair
      markets and distributes atmospheric water generators that precipitate drinking
      water from air for residential and/or small office uses. The water generating
      machine has been tested in various locations. As of March 31, 2006, the Company
      has sold units to customers in the U.S. and Asia, and anticipates further sales.
      Aquair continues to search for new manufacturers of similar and/or improved
      atmospheric water generators and may add different suppliers or switch suppliers
      altogether in the future as opportunities arise.





Aquair
      has acquired the right to distribute and sell Munters Corp. (“Munters”)
      atmospheric water generating equipment products to the commercial and
      residential building industry, government agencies, shipping industry and the
      oil and gas industry. Additionally, Aquair has the right to bottle potable
      water
      generated by Munters new patented technology. This agreement is effective
      worldwide, with the exclusion of Thailand, Indonesia, Singapore and Malaysia.





Aquair
      had distributed its atmospheric water generation products directly to customers,
      but plans to utilize strategic partners, and redistribution and/or reseller
      channels to increase sales volume.





In
      furtherance of this plan, Aquair has: (1) contracted with Locke Media whereby
      Locke is the exclusive distributor in Vietnam for the Company’s home/office
      model of atmospheric water generators; (2) entered into a relationship with
      Entech Sales and Service, whereby Entech will work in conjunction with Aquair
      and Munters in the engineering, design and bidding on sales of total water
      solutions using Aquair licensed products and technology; and (3) entered into
      a
      strategic alliance with Hendrx Corp. to share in the manufacture and marketing
      of advanced reverse osmosis filtration systems, air-to-water technology, and
      anti-scaling technology.




Status
      of Publicly Announced New Products and Services




On
      April
      10, 2006, Aquair announced that it is the sole worldwide distributor and
      marketer to the proprietary air to water filtration products using Peltier
      technology manufactured by M&T Technologies LLC. The first product to be
      manufactured will be the home/office model atmospheric water generator.
      Initially Aquair will market and distribute the products as manufactured by
      M&T; at a later date, Aquair will be granted a license by M&T to
      manufacture, market and distribute the newly developed products using the
      Peltier technology.




As
      previously announced in the Company’s Form 10-QSB as of December 31, 2005,
      Aquair is still in ongoing negotiations to partner with Roam Chemie, a
      privately-held industrial chemical company located in Belgium, to enter into
      a
      definitive agreement to distribute and market a select group of their
      proprietary chemical compounds and unique water treatment products worldwide.
      The parties have executed a non-binding letter of intent, and anticipate an
      executed definitive agreement in the following quarter.




4




As
      previously announced in a press release dated March 10, 2006, Aquair is engaged
      in continued negotiations to retain Farrah Fawcett as a celebrity spokesperson
      for Aquair products. At that time the parties had entered into a non-binding
      letter of intent, however, Aquair is uncertain whether a definitive agreement
      will be reached.




Competition





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company only has remaining competition in
      relation to the operations, products and markets of its sole subsidiary
      Aquair.





The
      international market for water generation, water treatment and bottled water
      is
      substantial. Our key competitors in the bottled water industry include Nestle,
      Danone, Coca-Cola, and PepsiCo. Our key competitors in the residential and
      small
      office water generation sector are Nestle and DS Waters. Our key competitors
      in
      the water filtration market include Kinetico, Culligan, Rainsoft and
      Oasis.





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.




Principal
      Suppliers





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company only has remaining principal suppliers
      that relate to the products of its sole subsidiary Aquair.





During
      the fiscal year ended March 31, 2006, the Company was supplied with its
      atmospheric water generator products by Munters and Dong Yang. However, moving
      forward the Company intends to have Munters and Hendrx be the principal
      suppliers of the Company’s atmospheric water generation products, as well as any
      other suppliers that the Company deems appropriate for this product sector
      and
      its other planned technologies.





Dependence
      on One or a Few Major Customers





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company’s sole remaining sale activity involved
      the sale of water generator equipment in the United States and Asia through
      its
      Aquair subsidiary. During the fiscal year ended March 31, 2006, the Company’s
      sales were showed the following concentrations: export sales as a percentage
      of
      revenues were 84.4% and 100% for the twelve months ended March 31, 2006, and
      2005 respectively. During the twelve months ended March 31, 2006 and 2005,
      for
      continuing operations, sales to a single customer were 84.4% and 100% of total
      sales, respectively. For discontinued operations (Amerikal Nutraceutical
      Corporation), during the twelve months ended March 31, 2006 and 2005, sales
      to a
      single customer were 58.5% and 80.6%, respectively.




5




Intellectual
      Property





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company only has remaining intellectual property
      issues in relation to its sole subsidiary Aquair. The Company did not have
      any
      intangible assets on its balance sheet as of March 31, 2006; however, the
      Company owns several live trademarks, including the word mark
“Aquair.”.





The
      Company distributes Munters products under licenses granted by Munters. The
      technology underlying Aquair’s products licensed from Munters is protected by
      three patents owned by Munters and others pending.





Government
      Approval





After
      the
      distribution of Amerikal and sale of assets related to Online Surgery during
      the
      fiscal year March 31, 2006, the Company only has remaining government approval
      issues in relation to the products of its sole subsidiary Aquair





For
      Aquair, government approval was not applicable during the fiscal year ended
      March 31, 2006, however the Company plans on distributing certain water
“anti-microbial” technologies which may require, depending on product usage,
      certain approvals, licensing and/or permits from the United States Food and
      Drug
      Administration or their similar counterpart agencies overseas.





Effect
      of Any Existing or Proposed Government Regulations





None.





Research
      and Development Costs





For
      the
      fiscal year ended March 31, 2006, the Company spent $4,086 on laboratory work
      and product development expenses in testing of the Aquair products.





Cost
      and Effects of Compliance with Environmental Laws and
      Regulations





Not
      applicable.





Employees





As
      of
      March 31, 2006, the Company employed three employees comprised of the Company’s
      Chief Executive Officer, Chief Financial Officer and Vice President of Sales.
      The Company retains consultants on an as needed basis, and may need to hire
      additional employees during the fiscal year ending March 31, 2007.





**FACTORS
      THAT MAY AFFECT OUR RESULTS OF OPERATIONS**





RISKS
      RELATING WITH OUR BUSINESS AND MARKETPLACE




6




Our
      business, financial condition and operating results can be impacted by a number
      of factors, any of which could cause our actual results to vary materially
      from
      recent results or from our anticipated future results. You should carefully
      consider the following risk factors that may affect the Company. The risks
      and
      uncertainties described below are those that we currently deem to be material
      and that we believe are specific to our Company. If any of these or other risks
      actually occur, our business, financial condition and results
      of operations could be materially and adversely affected, which in turn could
      materially and adversely affect the trading price of our common
      stock.





***The
      Company is a relatively young company with a minimal operating history since
      being reorganized in 2003.***





Since
      the
      Company’s reorganization in 2003 we have generated revenue from operations.
      However, our future operating results will depend on many factors, including
      the
      ability to generate sustained and increased demand and acceptance of our
      products, the level of our competition, and our ability to attract and maintain
      key management and employees. While management believes its estimates of
      projected occurrences and events are within the timetable of its business plan,
      there can be no guarantees or assurances that the results anticipated will
      occur.





***The
      Company has redirected its business plan and is focusing on its Aquair
      subsidiary.***





Since
      the
      Company has distributed its subsidiary Amerikal and sold the rights to the
      sole
      asset within its subsidiary On Line Surgery, it has redirected its focus on
      to
      its subsidiary Aquair. There can be no assurance that we will be able to replace
      revenues generated from the Amerikal subsidiary. While management believes
      the
      potential for revenue growth remains better in its Aquair business plan, there
      can be no guarantees that the anticipated results will occur.





***If
      we are unable to obtain additional funding, our business plan may be slowed
      and
      if we do obtain additional financing our then existing shareholders may suffer
      dilution.***





We
      will
      require additional funds to expand our sales and marketing activities, to
      support operations, implement our business strategy, and to replace future
      revenues lost from the distribution of our Amerikal subsidiary. There can be
      no
      assurance that financing will be available in amounts or on terms acceptable
      to
      us, if at all. The inability to obtain additional capital will restrict our
      ability to grow and may reduce our ability to conduct business operations.
      If we
      are unable to obtain additional financing, we will likely be required to curtail
      our business plan. Any additional equity financing may involve dilution to
      our
      then existing shareholders.




***If
      we acquire additional companies or products in the future, they could prove
      difficult to integrate, disrupt our business, dilute stockholder value or
      adversely affect our operating results.***





We
      anticipate that we will make other investments in complementary companies or
      products. We may not realize the anticipated benefits of any such acquisition
      or
      investment. The success of our acquisition program will depend on our ability
      to
      overcome substantial obstacles, such as the availability of acquisition
      candidates, our ability to compete successfully with other acquirers seeking
      similar acquisition candidates, the availability of funds to finance
      acquisitions and the availability of management resources to oversee the
      operation of acquired businesses. Furthermore, we may have to incur debt or
      issue equity securities to pay for future acquisitions or investments, the
      issuance of which could be dilutive to us or our existing shareholders. In
      addition, our profitability may suffer because of acquisition-related costs
      or
      future impairment costs for acquired goodwill and other intangible assets.




7




***We
      may be unable to retain the services of key personnel, and we may be unable
      to
      successfully recruit qualified personnel.***





Our
      success depends to an extent upon the continued service of key personnel; loss
      of the services of such personnel could have an adverse effect on our growth,
      revenues, and prospective business. In addition, in order to successfully
      implement and manage our business plan, we will be dependent upon, among other
      things, successfully recruiting qualified managerial and sales personnel having
      experience in business. Competition for qualified individuals is intense. There
      can be no assurance that we will be able to find, attract and retain existing
      employees or that we will be able to find, attract and retain qualified
      personnel on acceptable terms.





***If
      we cannot effectively manage our growth, we may incur
      losses.***





Any
      dramatic growth in our business could place a substantial burden on our
      production capacity and administrative resources. Businesses, which grow
      rapidly, often have difficulty managing their growth. Our management may not
      be
      able to manage our growth effectively or successfully. Rapid growth can often
      put a strain on management, financial, and operational resources of a company.
      In addition, we would likely need to enhance our operational systems and
      personnel procedures. Our failure to meet these challenges could cause our
      efforts to expand operations to prove unsuccessful and cause us to incur
      operating losses.





RISKS
      FACTORS RELATING TO OUR COMMON STOCK





***Our
      common stock is subject to SEC “Penny Stock” rules.***





Since
      our
      common stock is a penny stock, as defined in Rule 3a51-1 under the Securities
      Exchange Act, it will be more difficult for investors to liquidate their
      investment of our common stock. Until the trading price of the common stock
      rises above $5.00 per share, if ever, trading in the common stock is subject
      to
      the penny stock rules of the Securities Exchange Act specified in rules 15g-1
      through 15g-10. Those rules require broker-dealers, before effecting
      transactions in any penny stock, to:





ཉ
            Deliver
                to the customer, and obtain a written receipt for, a disclosure
                document;ཉ
            Disclose
                certain price information about the stock;ཉ
            Disclose
                the amount of compensation received by the broker-dealer or any associated
                person of the broker-dealer;ཉ
            Send
                monthly statements to customers with market and price information
                about
                the penny stock; andཉ
            In
                some circumstances, approve the purchaser’s account under certain
                standards and deliver written statements to the customer with information
                specified in the rules.




Consequently,
      the penny stock rules may restrict the ability or willingness of broker-dealers
      to sell the common stock and may affect the ability of holders to sell their
      common stock in the secondary market and the price at which such holders can
      sell any such securities. These additional procedures could also limit our
      ability to raise additional capital in the future.





***Since
      our shares are trading on the OTC Bulletin Board, trading volumes and prices
      may
      be sporadic because it is not an exchange.***




8




Our
      common shares are currently listed for public trading on the Over-the-Counter
      Bulletin Board. The trading price of our common shares has been subject to
      wide
      fluctuations. Trading prices of our common shares may fluctuate in response
      to a
      number of factors, many of which will be beyond our control. The stock market
      has generally experienced extreme price and volume fluctuations that have often
      been unrelated or disproportionate to the operating performance of companies
      with limited business operations. There can be no assurance that trading prices
      and price earnings ratios previously experienced by our common shares will
      be
      matched or maintained. Broad market and industry factors may adversely affect
      the market price of our common shares, regardless of our operating
      performance.





In
      the
      past, following periods of volatility in the market price of a company’s
      securities, securities class-action litigation has often been instituted. Such
      litigation, if instituted, could result in substantial costs for us and a
      diversion of management’s attention and resources.





***We
      are subject to SEC regulations and changing laws, regulations and standards
      relating to corporate governance and public disclosure, including the
      Sarbanes-Oxley Act of 2002, new SEC regulations and other trading market rules,
      are creating uncertainty for public companies.***





We
      are
      committed to maintaining high standards of corporate governance and public
      disclosure. As a result, we intend to invest appropriate resources to comply
      with evolving standards, and this investment may result in increased general
      and
      administrative expenses and a diversion of management time and attention from
      revenue-generating activities to compliance activities.





ITEM
      2.
      DESCRIPTION OF PROPERTY




On
      October 1, 2004, Aquair entered into a month-to-month rental agreement with
      Pinnacle International, Inc., a California corporation which is wholly owned
      by
      Louis Knickerbocker (“Pinnacle”), the Chief Executive Officer and Chairman of
      the Board of Directors of the Company.  The agreement is for 3,000 square
      feet of office space located at 30021 Tomas, Suite 200, Rancho Santa Margarita,
      California 92688 and office support services at a fair market rate of $6,000
      per
      month. During the fiscal year ended March 31, 2006, the Company expensed $72,177
      of rent to related party under this agreement.




**ITEM
      3. 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. allege defamation, interference with prospective economic advantage, and
      false advertising, and seek compensatory and punitive damages, and costs against
      the Company. The Board of Directors believes these claims to be without merit,
      and has engaged legal counsel to strongly defend these claims. Through our
      legal
      counsel, the Company has caused the appropriate legal pleadings to be filed
      to
      dismiss the Complaint in this case. The Company believes that any liability
      it
      may incur in connection with this case will not have a material adverse effect
      upon its financial condition or its results of operations.




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




9




**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 fiscal year.




QUARTERLY
      COMMON STOCK PRICE RANGES




Quarter
                  Ended
              
              
              High
              
              
              LowJune
                  30, 2005
              
              $
              5.45
              
              $
              1.25September
                  30, 2005
              
              $
              4.52
              
              $
              1.70December
                  31, 2005
              
              $
              2.40
              
              $
              1.05March
                  31, 2006
              
              $
              1.45
              
              $
              0.60




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





**Holders**




There
      were approximately 3,200 holders of record of the Company’s Common Stock as of
      March 31, 2006.




**Dividends**




The
      Company has not paid any dividends on its Common Stock since emerging from
      the
      Chapter 11 bankruptcy proceeding in September 2002 and 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**




During
      the fiscal year ended March 31, 2006 the Company issued options to purchase
      100,000 shares of the Company’s common stock to a consultant who later became a
      director (a related party) as described below in Recent Sales of Unregistered
      Securities, and as further described in Notes to Financial Statements, Note
      12
      (“Options and Warrants.”) In addition, the Company issued warrants for purchase
      of 120,000 shares of common stock of the Company to a third party consultant,
      as
      further described below and in Note 12 to the Financial Statements. The
      Company also entered into a legal retainer agreement which provided that the
      Company shall issue warrants to purchase 25,000 shares of common stock of the
      Company, as described below and in Note 12 to the Financial
      Statements.




10




**Recent
      Sales of Unregistered Securities**





Fiscal
      Year Ended March 31, 2006





The
      Company granted options to purchase 100,000 shares of Company common stock
      pursuant to a consulting agreement dated July 7, 2005 between the Company,
      Aquair and Hon. Brig. Gen. Steve Ritchie.


Mr.
      Ritchie subsequently became a Director of the Company (a related party). The
      option shares vest 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.
      In
      recognition of the equitable obligation to issue the options in the event of
      the
      death or disability of the consultant, the Company has reflected the portion
      of
      the options ratably earned between the inception of the agreement and March
      31,
      2006 in the amount of $81,855 in a special equity account entitled “Prepaid
      Compensation.” Upon the occurrence of the vesting events, the Company will issue
      the vested options, and reduce prepaid compensation and increase commission
      expenses. See note 12 “Options and warrants” to the financial
      Statements.




Beginning
      on November 15, 2005, the Company began a private placement offering to
      accredited investors only under the terms and conditions of a Note and Warrant
      Agreement (“Offering”). The terms of the Offering are a non-convertible
      promissory note with an annual interest rate of 8%, with a maturity date of
      one
      year after loan; and for each dollar loaned the Company via promissory note,
      the
      investor is granted a cashless warrant to purchase one share of the Company’s
      common stock at an exercise price equal to the lowest closing price of the
      stock
      as reported by the OTC:BB for the year following the date of warrant grant
      (“Warrant”). These sales are exempt from registration under the Securities Act
      pursuant to Section 4(2) of the Securities Act of 1933, as amended, or
      Regulation D of the Securities Act. As of March 31, 2006, under the terms of
      the
      offering the Company has issued an aggregate of 1,613,940 shares of common
      stock
      as Warrants (See Notes to Financial Statements, Note 5 - Notes Payable, and
      Note
      12 - Options and warrants.)




During
      the fiscal year ended March 31, 2006, the Company received 7,500,000 shares
      of
      its common stock pursuant to the distribution of Amerikal (See Notes to
      Financial Statements, Note 2 - Discontinued Operations). On November 15, 2005,
      the board of directors of the Company resolved to cancel these shares. The
      cancellation was completed prior to March 31, 2006.




In
      the
      third quarter 2005 the Company entered into a legal retainer agreement with
      legal counsel providing for the issuance of 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 $66,963 using the Black Scholes method of valuation.
      The
      Company has reflected $43,350 of this value as Prepaid Compensation for the
      period from the inception of the agreement to March 31, 2006. The legal retainer
      agreement further provides that one third of all legal fees and all costs will
      be paid in cash during the legal services representation, and the balance
      (including the 25,000 warrants referred to above) shall be paid in warrants.
      In
      the event that the legal fees exceed the face value of the warrants already
      issued, or $50,000, additional warrants will be issued on the same terms and
      price.




11




On
      March
      16, 2006, the Company entered into an agreement with a consultant to issue
      warrants to purchase 120,000 shares of the Company’s common stock as
      compensation for services to be rendered over the period of one year. The
      warrants vest ratably over the year at the rate of 1/12 at the end of each
      month
      under the agreement. The Company has valued the warrants at $64,205 as of the
      date of the grant based upon the Black Scholes method of valuation. The Company
      has reflected the entire value of the warrant grant as prepaid compensation
      as
      of March 31, 2006.




During
      the fiscal year ended March 31, 2006 none of the holders of options or warrants
      exercised any of the options or warrants held by them. There have been no other
      issuances of options or warrants by the Company in the year ended March 31,
      2006. See Notes 5 and 12 to the Financial Statements.




Fiscal
      Year Ended March 31, 2005




In
      July
      of 2004, pursuant to its 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 an aggregate of 1,934,880 shares
      of
      the Company’s Common Stock. These shares were issued without registration
      pursuant to available exemptions from registration under both state and federal
      securities laws and are subject to certain restrictions and limitations on
      transferability.




**Use
      of Proceeds**




We
      used
      the net proceeds from the Company's private placement offerings that included
      warrants to purchase the Company’s common stock for the fiscal year ended March
      31, 2006 as reported on our Quarterly Reports on Form 10-QSB for general
      corporate purposes.




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




**Plan
      of Operations**




Overview




After
      the
      distribution of Amerikal and sales of assets related to Online Surgery during
      the fiscal year ended March 31, 2006, the Company only has operations in its
      sole subsidiary Aquair.





Aquair
      distributes licensed environmentally-friendly atmospheric water generating
      equipment that creates purified drinking water from air for residential and
      commercial uses, and converts brackish, polluted, or grey water to purified
      water. Aquair plans to distribute (i) “anti-microbial” water technology; (ii)
“anti-scaling” water technology; (iii) potable bottled water generated from
      commercial and industrial water generation and filtration technologies; (iv)
      potable water via mobile air to water units in geographic regions where no
      solution exists for purified drinking water; and (v) other water-related
      technologies.





Aquair’s
      marketing strategy will focus on customers in medical related businesses, home
      shoppers via television and internet, pharmaceutical related businesses, large
      businesses within office buildings, large construction companies, maritime
      vessels and offshore rigs, and large restaurant and grocery store chains.
      Additionally, the Company will pursue government agencies through its agent
      Policy Impact.




12




Aquair
      currently distributes its products directly to customers but plans to utilize
      strategic partnerships, and redistribution and reseller channels to increase
      sales volume.





Changes
      in Plan of Operations





During
      the fiscal year ended March 31, 2006, the Company embarked upon a strategy
      to
      focus its product lines and its customer base in to the clean water technologies
      via Aquair. The Company distributed its nutraceutical subsidiary Amerikal and
      ceased operations in that sector, and sold the assets to online surgery portal
      subsidiary Online Surgery (a subsidiary that never commenced operations). These
      new strategies have only recently been implemented, and there can be no
      assurance of their profitability or success.





In
      order
      to achieve the Company’s projected financial goals, the Company will most likely
      be required to procure capital and generate future cash flows from operations.
      If the Company is unable to obtain such financing, the Company will be forced
      to
      reduce operations, which could have an adverse effect on its financial condition
      and results of operation. The Company is taking steps that it believes will
      be
      sufficient to provide the Company with the ability to continue in existence,
      and
      the Company is seeking additional equity or debt financing. There can be no
      assurances that sufficient financing will be available on terms acceptable
      to
      the Company. In the event that the Company is not successful in obtaining the
      necessary financing, the Company will be required to discontinue some or all
      of
      its existing operations.





**Management’s
      Discussion and Analysis of Financial Condition and Results of Operations**




**2006**
            
            
            **2005****Income
                Statement Data**Revenue
                from operations
            
            
            69,340
            
            $
            5,504,036Gross
                profit (Loss)
            
            
            27,313
            
            $
            2,790,547Income
                (Loss) from operations
            
            
            (848,858
            )
            $
            1,015,846Net
                Income (Loss)
            
            
            (2,036,561
            )
            $
            502,413Net
                Income (Loss) per Share
            
            
            (.12
            )
            $
            .02**Balance
                Sheet Data**Total
                Assets
            
            
            685,118
            
            $
            1,149,753Total
                Liabilities
            
            
            1,045,590
            
            $
            512,680Stockholders’
                Equity (deficit)
            
            
            (360,472
            )
            $
            637,073




Year
      Ended March 31, 2006 Compared to Year Ended March 31,
      2005





The
        following discussion compares financial statement results for the Company
        as
        filed on forms 10-KSB for the years ended March 31, 2006 and 2005. The financial
        statements as filed for the year ended March 31, 2005 included results from
        the
        Amerikal Nutraceutical subsidiary, which was distributed during the current
        fiscal year.  For purposes of comparison of the balance sheet and
        operations of the continuing entities only, please see the Statement of
        operations and Note 3-Pro forma Financial Statements of continuing Entities.
        The
        net loss for the fiscal year ended March 31, 2006 was ($2,036,561) after
        taking into account the loss on distribution of discontinued operations of
        ($1,209,636), compared with net income of $502,413 for the fiscal year ended
        March 31, 2005. The primary reason for the decrease was that the Company
        divested itself of certain operations in order to focus on Aquair, whereas
        the
        Company had experienced a strong demand for its nutraceutical products in
        the
        previous fiscal year, which in turn were the result of the expenditure of
        significant advertising and marketing funds in the fiscal year ending
        March 31, 2004.  The Company generated gross revenues of $69,430
        during the twelve months ended March 31, 2006 compared with gross revenues
        of $5,504,036 in the previous fiscal year ended March 31, 2005.




13




During
      the fiscal year ended March 31, 2006, the Company recognized prepaid
      compensation in the amount of $189,410 for warrants and options issued to
      consultants and attorneys for services to be rendered to the Company. In
      addition, the Company expensed $72,177 in rent paid to a company owned by a
      related party during the year ended March 31, 2006. During the current fiscal
      year ended March 31, 2006, no stock based compensation was issued by the Company
      except as described in Footnotes to Financial Statements, Note 12 “Options and
      warrants ”. By contrast, in the prior fiscal year, the Company issued $225,500
      in stock based compensation issued to officers, directors, founders and
      attorneys for services rendered.




The
      Company expended no cash for salaries and wages during fiscal year ended
      March 31, 2006 as compared to $249,438 during the fiscal year ended
      March 31, 2005. The reason for the decrease in this category of expense is
      primarily attributable to the distribution of the Amerikal subsidiary during
      the
      fiscal year.   However, the Company paid cash of $207,352 for outside
      consulting services during the current fiscal year, as compared to $218,317
      spent in this category during the prior fiscal year.  The Company believes
      that it is likely to continue to hire consultants on an as-needed basis in
      the
      future, which will likely be reflected as an increase in this category of
      expense in the future. The Company anticipates paying salaries and wages to
      its
      officers during the future, based upon the availability of cash to do
      so.




The
      Company’s general and administrative expenses decreased to $254,810 in the
      current fiscal year from $256,201 a year prior. In the fiscal year ended March
      31, 2005, the Company paid $300,000 in cash to acquire the right to distribute
      certain products in Indonesia through its Amerikal subsidiary, which was the
      fair value of the rights on the date of purchase. The Company was amortizing
      the
      value of this asset over a period of three (3) years, which was the useful
      life of the distribution agreement.  During the fiscal year ended
      March 31, 2006, the net value of this intangible asset was distributed
      along with other net assets of Amerikal. During the fiscal year ended March
      31,
      2006 the Company had no fixed assets after the distribution of net assets of
      the
      Amerikal subsidiary, compared to $18,347 in the prior fiscal year. Accordingly,
      the Company did not recognize any expense for depreciation or amortization
      in
      the fiscal year ended March 31, 2006, compared to $76,430 of similar expenses
      in
      the fiscal year ended March 31, 2005.




The
      Company spent $10,946 in advertising and marketing in fiscal year ending
      March 31, 2006, compared with spending $588,074 the prior fiscal
      year.  The primary reason for the decrease in advertising expenditures was
      the distribution of the Amerikal subsidiary during the fiscal year, and the
      Company’s decision to focus upon sales and distribution of atmospheric water
      generating equipment under its Aquair subsidiary during the remainder of the
      fiscal year. While the Company’s reduction in expenditures for advertising and
      marketing in the most recent fiscal year may have an adverse impact upon
      immediate future sales growth, the Company is planning an aggressive advertising
      and marketing campaign for its Aquair product lines in the coming fiscal
      year.




The
      Company has made a provision for federal and state income taxes in the amount
      of
      $(314) during the fiscal year ending March 31, 2006, as compared with a
      provision for federal and state income taxes in the amount of $440,364 during
      the fiscal year ending March 31, 2005. The primary reason for the reduction
      in accrued income tax liability is the net loss from operations incurred by
      the
      Company in its current fiscal year, as compared to net income earned in the
      prior fiscal year.




14




The
      Company accrued interest expenses on notes payable in the amount of $53,002
      during the current fiscal year, and incurred finance charges attributable to
      warrants issued to related parties in the amount of $181,769 and finance charges
      attributable to warrants issued to unrelated parties in the amount of $125,133
      during the year ended March 31, 2006. The Company also recognized a gain of
      $10,000 on the sale of its rights to the URL On Line Surgery during the fiscal
      year. After taking into account interest income, the Company incurred total
      other expenses of $349,621 in the current fiscal year, as compared to $73,069
      of
      other expenses in the fiscal year ended March 31, 2005.





Interest
      income decreased from $1,370 the previous fiscal year to $283 during the fiscal
      year ending March 31, 2006.




Liquidity
      and Capital Resources





At
      March
      31, 2006, the Company had $346,661 of cash or cash equivalents available, as
      compared to $159,661 of cash or equivalents at March 31, 2005. The Company
      had
      $176,022 of prepaid expenses and prepaid inventory at March 31, 2006 compared
      to
      $7,967 of similar prepaid expenses in the prior period ended March 31, 2005.
      The
      primary source of the increase in these balance sheet categories is the
      proceeds from notes payable discussed below and in the Notes to Financial
      Statements, Note 5-Notes Payable.




At
      March 31, 2006, the Company had accumulated earnings (deficit) of
      ($1,693,794) as compared to net accumulated earnings of $342,767 in the fiscal
      year ended March 31, 2005. The primary reason for the change in accumulated
      earnings of the company was the loss attributable to the distribution of its
      Amerikal subsidiary in the amount of ($1,209,636). Net cash (used) by
      operating activities was ($1,390,907) for the fiscal year ended on
      March 31, 2006, compared to $328,822 of net cash provided by operating
      activities for the year ended March 31, 2005.





Net
      cash
      (used) by investing activities in the year ended March 31, 2006 was ($36,033),
      as compared to ($319,777) of cash used to acquire fixed and intangible assets
      during the fiscal year ended March 31, 2005.





The
      company generated net cash from financing activities in the amount of $1,613,940
      during the current fiscal year, as compared to net cash (used) by financing
      activities in the prior fiscal year of ($30,429). The reason for the foregoing
      change in net cash from financing activities was as follows: in order to
      supplement its cash flow requirements, as of March 31, 2006, the Company raised
      capital through a private placement financing wherein the company issued a
      combination of debt in the form of promissory notes and equity in form of
      warrants to purchase Company common stock.  In total, the Company issued
      promissory notes for a total of $1,613,940 in the fiscal ended March 31, 2006.
      In view of the demand for the Company’s launch of its product lines of water
      generating and cleansing equipment and technologies under Aquair, it is
      anticipated that the Company will be required to seek out additional sources
      of
      financing in the near future.  The Company has recently announced the
      placement of secured convertible promissory notes in the amount of $2 million
      as
      of June 2006. See Notes to Financial Statements, Note 16, Subsequent Events.
      However, there is no certainty that this amount of investment capital will
      be
      sufficient to fulfill the Company’s future cash flow needs, and therefore the
      Company may be required to seek additional sources of financing in the future.
      Again, there can be no assurance that the Company will be successful in locating
      such alternate sources of financing or that the terms of any such financing
      will
      be favorable to the Company. 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.




15




**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.




**ITEM
      8A. CONTROLS AND PROCEDURES**




The
      Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying
      Officers”) are responsible for establishing and maintaining our disclosure
      controls and procedures.  The Certifying Officers have designed such
      disclosure controls and procedures to ensure that material information is made
      known to them, particularly during the period in which this report was
      prepared.  The Certifying Officers have evaluated the effectiveness of our
      disclosure controls and procedures as of the end of the period covered by this
      report and believe that our disclosure controls and procedures are effective
      based on the required evaluation.  During the period covered by this
      report, there were no changes in internal controls that materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.




**ITEM 
      8B. OTHER INFORMATION**




None.




**PART III**




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




The
      information required by this Item is incorporated herein by reference to the
      Sections entitled "Election of Directors" and "Executive Officers" in the Proxy
      Statement.





**ITEM
      10.  EXECUTIVE COMPENSATION**




The
      information required by this Item is incorporated herein by reference to the
      Sections entitled "Executive Compensation" and "Directors' Compensation" in
      the
      Proxy Statement.




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




16




The
      information required by this Item is incorporated herein by reference to the
      Sections entitled "Security Ownership of Certain Beneficial Owners and
      Management" and "Equity Compensation Plan Information" in the Proxy
      Statement.




**ITEM
      12.  CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**




The
      information required by this Item is incorporated herein by reference to the
      Section entitled "Certain Relationships and Related Transactions" in the Proxy
      Statement.




**ITEM
      13.   EXHIBITS**




**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)14.1
            
            Code
                of Ethics (5)21.1
            
            Subsidiaries31.1
            
            Certification
                of Chief Executive Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200231.2
            
            Certification
                of Chief Financial Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200232
            
            Certification
                pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes Oxley Act of 2002




(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.




17




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




**Beckstead
      & Watts, LLP, Certified Public Accountants
      (“Beckstead”)**




Beckstead
      was our independent auditor and examined our financial statements for the fiscal
      years ending March 31, 2005 and March 31, 2006.  Beckstead performed the
      services listed below and was paid the fees listed below for the fiscal years
      ended March 31, 2005 and March 31, 2006.




**Kellogg
      and Anderson, Certified Public Accountants (“Kellogg”)**




Kellogg
      was our tax advisor for the fiscal years ending March 31, 2006 and March 31,
      2005.  Kellogg performed services listed below and was paid the fees listed
      below for the fiscal years ending March 31, 2006 and March 31,
      2005.




**Audit
      Fees**




Beckstead
      was paid aggregate fees of approximately $90,000 for the fiscal year ended
      March
      31, 2005 and approximately $83,500 for the fiscal year ended March 31, 2006
      for
      professional services rendered for the audit of our annual financial statements
      and for the reviews of the financial statements included in our quarterly
      reports on Form 10-QSB during these fiscal years.




**Audit
      Related Fees**




Beckstead
      was not paid additional fees for either of the fiscal years March 31, 2005
      or
      March 31, 2006 for assurance and related services reasonably related to the
      performance of the audit or review of our financial statements.




**Tax
      Fees**




Kellogg
      was paid fees of $5,000 for the fiscal year ended March 31, 2005, and fees
      of
      $8,177.50 for the fiscal year ended March 31, 2006 for professional services
      rendered for tax compliance, tax advice and tax planning during these fiscal
      years.




**All
      Other Fees**




Kellogg
      was not paid any other fees for professional services during the fiscal years
      ended March 31, 2005 and March 31, 2006.





Beckstead
      was not paid any other fees for professional services during the fiscal year
      ended March 31, 2005, however, Beckstead was paid $5,000 for professional
      services in connection with the accounting for the distribution of Amerikal
      during the fiscal year ended March 31, 2006.





**Audit
      Committee**




Pursuant
      to the requirements of the Sarbanes-Oxley Act of 2002, the Company constituted
      an Audit Committee in September 2004. As of March 31, 2006, the audit committee
      consisted of six (6) members, including one outside Director, an outside
      financial expert, the CFO, CEO, COO and the Secretary of the Company.  The
      Audit Committee functions independently of Management of the Company, pursuant
      to its Charter, and there is no delegation of audit committee responsibilities
      to management. Effective as of April 30, 2006 the Company received and accepted
      the resignation of Bruce Thomsen as a Director of the Company and as a member
      of
      the audit committee. The audit committee thanks Mr. Thomsen for his diligent
      participation in the activities of the committee during his tenure. The Company
      is currently seeking a replacement for the vacancy created by Mr. Thomsen’s
      resignation.




18




The
      Audit
      Committee met four (4) times during the fiscal year ended March 31, 2006, and
      met twice during the fiscal year ended March 31, 2006.  The Audit Committee
      has four (4) scheduled meetings for the fiscal year ended March 31, 2007. During
      Audit Committee meetings, by vote of the majority of members of the Committee,
      various members were assigned to investigate and report to the Committee
      regarding different areas of internal controls and accounting oversight
      matters.  The Internal Controls Memorandum was divided among all members,
      for review, response, discussion and eventual compilation.  This Internal
      Controls Memorandum has been reviewed and updated by members of the Audit
      Committee four (4) times since the inception of the Company, including once
      on
      March 2006.




Among
      the
      policies and procedures adopted by the Audit Committee is the requirement that
      Mr. David Koontz, CPA, outside financial expert to the Audit Committee, is
      charged with the responsibility for investigation, contact, and negotiation
      with
      the independent auditor regarding audit and review fees incurred during the
      fiscal year.  In accordance with the requirements of paragraph (c) (7) (i)
      of Rule 2-01 of Reg S-X, Mr. Koontz made all necessary contact, inquiry, and
      recommendations to the Audit Committee, in order to enable the Committee to
      approve all (100%) of the independent auditing fees and quarterly review fees,
      in advance, for the conduct of the audit for the fiscal year ended March 31,
      2006, and for the quarterly reviews for the periods ending June 30, September
      30, and December 31, 2006.  Subsequent to the association of Mr. Koontz as
      the outside Financial Expert, no part of the pre-approval policies and
      procedures for the foregoing specified services has been delegated to
      management. Mr. Koontz was further consulted in connection with the Audit
      Committee’s review and recommendations to management concerning the proposed
      distribution of the Amerikal Nutraceutical subsidiary to a group of shareholders
      effective as of October 1, 2005.




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: 
                June 30, 2006
            
            /s/
                Louis L. KnickerbockerBy:
                Louis L. Knickerbocker,Chief
                Executive Officer,Chairman
                of the Board




19




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/
                Louis L. Knickerbocker
            
            Chairman
                of the Board,
            
            June
                30, 2006Louis
                L. Knickerbocker
            
            Chief
                Executive Officer/s/
                William C. Hitchcock
            
            Chief
                Financial Officer
            
            June
                30, 2006William
                C. Hitchcock/s/
                Grant King
            
            Director
            
            June
                30, 2006Grant
                King/s/
                Horst Geicke
            
            Director
            
            June
                30, 2006Horst
                Geicke/s/
                Steve Ritchie
            
            Director
            
            June
                30, 2006Steve
                Ritchie/s/
                Joseph Murray
            
            Director
            
            June
                30, 2006Joseph
                Murray/s/
                Budy Hartano
            
            Director
            
            June
                30, 2006Budy
                Hartano




20


**TABLE
      OF CONTENTS**








**Page**Independent
                Registered Public Accounting Firm Report
            1Consolidated
                Balance Sheets
            2Consolidated
                Statements of Operations
            3Statement
                of Changes in Stockholders’ Equity
            4Consolidated
                Statements of Cash Flows
            5Footnotes
            6







**Beckstead
        and Watts, LLP**
 ***Certified
        Public Accountants***
 2425
        W
        Horizon Ridge Parkway
 Henderson,
        NV 89052
 702.257.1984
        (tel)
 702.362.0540
        (fax)
 
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 Board
        of
        Directors
 RG
        Global
        Lifestyles, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of R.G. Global Lifestyles,
        Inc. and subsidiaries (the “Company”), as of March 31, 2006 and 2005, and the
        related consolidated statement of operations, stockholders’ equity, and cash
        flows for the years 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
        audit.
  We
        conducted our audit in accordance with the standards of 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. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated 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 audit provides 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 R.G. Global Lifestyles,
        Inc.
        and subsidiaries as of March 31, 2006 and 2005, and the results of its
        operations and cash flows for the years then ended, in conformity with U.S.
        generally accepted accounting principles.
 
 The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As discussed in Note 4 to the financial statements,
        the Company has an accumulated deficit and a net loss in the current year.
        This
        raises substantial doubt about its ability to continue as a going concern.
        Management’s plans in regard to these matters are also described in Note 4. The
        financial statements do not include any adjustments that might result from
        the
        outcome of this uncertainty.


/s/
                Beckstead and Watts, LLPJune
                23, 2006




F-1


**R.G.
        Global Lifestyles, Inc. and subsidiaries**
 
 **Consolidated
        Balance Sheets**
 **as
        of**
 **March
        31, 2006 and 2005**
 
 **and**
 
 **Consolidated
        Statement of Operations,**
 **Stockholders’
        Equity, and**
 **Cash
        Flows**
 **For
        the years ended**
 **March
        31, 2006 and 2005**







**R.G.
        Global Lifestyles, Inc.**
 **Consolidated
        Balance Sheets** March
                    31,2006
                
                
                2005**Assets**Current
                    assets:Cash
                    and cash equivalents
                
                
                
                
                $
                346,661
                
                $
                159,661Accounts
                    receivable
                
                
                
                
                
                900
                
                
                506,813Inventory
                
                
                
                
                
                -
                
                
                154,865Prepaid
                    expenses
                
                
                
                
                
                176,022
                
                
                7,967Total
                    current assets
                
                
                
                
                
                523,583
                
                
                829,306Fixed
                    assets, net
                
                
                
                
                
                -
                
                
                18,347Intangible
                    assets, net
                
                
                
                
                
                -
                
                
                235,000Deposits
                    held
                
                
                
                
                
                161,535
                
                
                67,100Total
                    other assets
                
                
                
                
                
                161,535
                
                
                302,100**Total
                    Assets**
                
                
                
                
                $
                685,118
                
                $
                1,149,753**Liabilities
                    and Stockholders' Equity (Deficit)**Current
                    liabilities:Accounts
                    payable
                
                
                
                
                
                48,845
                
                
                249,462Accrued
                    liabilities
                
                
                
                
                
                46,563
                
                
                263,218Taxes
                    Payable
                
                
                
                
                
                1,381
                
                
                -Notes
                    payable related party ($708,132 net of $281,529 discount)
                
                
                
                
                
                426,603
                
                
                -Notes
                    payable ($905,808 net of $383,610 discount)
                
                
                
                
                
                522,198
                
                
                -1,045,590
                
                
                512,680Total
                    liabilities
                
                
                
                
                
                1,045,590
                
                
                512,680Stockholders'
                    equity (deficit):Preferred
                    stock, $0.001 par value, 10,000,000 sharesauthorized,
                    no shares issued and outstanding
                
                
                
                
                
                -
                
                
                -Common
                    stock, $0.001 par value, 100,000,000 sharesauthorized,
                    17,650,000 and 25,150,000 shares issuedand
                    outstanding as of 3/31/06 and 3/31/05, respectively
                
                
                
                
                
                17,650
                
                
                25,150Additional
                    paid-in capital
                
                
                
                
                
                1,505,082
                
                
                269,156Prepaid
                    share-based compensation
                
                
                
                
                
                (189,410
                )
                
                -Accumulated
                    earnings (deficit)
                
                
                
                
                
                (1,693,794
                )
                
                342,767Total
                    Stockholders' equity (deficit)
                
                
                
                
                
                (360,472
                )
                
                637,073$
                685,118
                
                $
                1,149,753




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




F-2


**R.G.
        Global Lifestyles, Inc.**


**Consolidated
        Statements of Operations**
  For
                  the years endedMarch
                  31,2006
              
              
              2005RevenueProduct
                  sales
              
              $
              69,340
              
              $
              3,202Cost
                  of sales
              
              
              42,027
              
              
              3,752Gross
                  profit
              
              
              27,313
              
              
              (550
              )Expenses:Advertising
                  and marketing
              
              
              10,946
              
              
              880Commissions
              
              
              26,051
              
              
              -Consulting
                  services
              
              
              207,352
              
              
              41,621Depreciation and
                    amortization
              
              
              -
              
              
              -General
                  and administrative expenses
              
              
              254,810
              
              
              36,193Professional
                  fees
              
              
              304,835
              
              
              170,635Rent-related
                  party
              
              
              72,177
              
              
              27,000Stock-based
                  compensation - consulting services
              
              
              -
              
              
              46,000Stock-based
                  compensation - related party
              
              
              -
              
              
              104,000Total
                  expenses
              
              
              876,171
              
              
              426,329Operating
                  Income (loss)
              
              
              (848,858
              )
              
              (426,879
              )Other
                  income (expense)Interest
                  income
              
              
              283
              
              
              -Interest
                  expense
              
              
              (53,002
              )
              
              -Finance
                  charge-warrants-related party
              
              
              (181,769
              )
              
              -Finance
                  charge-warrants-other
              
              
              (125,133
              )
              
              -Gain
                  on sale of asset
              
              
              10,000
              
              
              -Total
                  other (expense)
              
              
              (349,621
              )
              
              -Net
                  income (loss) before income tax &discontinued
                  operations
              
              
              (1,198,479
              )
              
              (426,879
              )Provision
                  for income taxesIncome
                  tax expenseCurrent
                  federal
              
              
              -
              
              
              -Current
                  state
              
              
              (314
              )
              
              (800
              )Total
                  income taxes
              
              
              (314
              )
              
              (800
              )Net
                  Loss from continuing operations
              
              
              (1,198,793
              )
              
              (427,679
              )Discontinued
                  OperationsIncome
                  (loss) from discontinued operations, net of tax
              
              
              371,868
              
              
              930,092Loss
                  on distribution of discontinued operations, net of tax
              
              
              (1,209,636
              )
              
              -Net
                  (loss) from discontinued operations
              
              
              (837,768
              )
              
              930,092Net
                  income (loss)
              
              $
              (2,036,561
              )
              $
              502,413Weighted
                  average number ofcommon
                  shares outstanding - basic and fully diluted
              
              
              17,650,000
              
              
              23,069,135Net
                  income (loss) per share - basic and fully dilutedContinuing
                  operations
              
              $
              (0.07
              )
              $
              (0.02
              )Discontinued
                  operations
              
              
              (0.05
              )
              
              0.04(0.12
              )
              
              0.02




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




F-3




**R.G.
        Global Lifestyles, Inc.**
 **Statement
        of Changes in Stockholders' Equity**
  Common
                  StockShares
              
              
              Amount
              
              
              Additional
                    Paid-inCapital
              
              
              PrepaidCompensation
              
              
              RetainedEarnings
                  (Deficit)
              
              
              Total
                    Stockholders'Equity (Deficit)Balance,
                  March 31, 2004
              
              
              19,965,120
              
              
              19,965
              
              
              29,270
              
              
              
              
              
              (159,646
              )
              
              (110,411
              )Shares
                  issued pursuant to merger
              
              
              1,934,880
              
              
              1,935
              
              
              7,636
              
              
              
              
              
              
              
              
              9,571Shares
                  issued for services
              
              
              3,000,000
              
              
              3,000
              
              
              147,000
              
              
              
              
              
              
              
              
              150,000Shares
                  issued for assets
              
              
              200,000
              
              
              200
              
              
              9,800
              
              
              
              
              
              
              
              
              10,000Shares
                  issued for legal services
              
              
              50,000
              
              
              50
              
              
              75,450
              
              
              
              
              
              
              
              
              75,500Net
                  Income for the year endedMarch
                  31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              502,413
              
              
              502,413Balance
                  March 31, 2005
              
              
              25,150,000
              
              
              25,150
              
              
              269,156
              
              
              -
              
              
              342,767
              
              
              637,073Shares
                  received and cancelled fordistribution
                  of subsidiary
              
              
              (7,500,000
              )
              
              (7,500
              )
              
              7,500
              
              
              
              
              
              
              
              
              -Options
                  granted to related party for services
              
              
              
              
              
              
              
              
              81,855
              
              
              (81,855
              )
              
              
              
              
              -Warrants
                  issued for services
              
              
              
              
              
              
              
              
              107,555
              
              
              (107,555
              )
              
              
              
              
              -Warrants
                  granted in connection with financing
              
              
              
              
              
              
              
              
              972,041
              
              
              
              
              
              
              
              
              972,041Forgiveness
                  of debt on distribution
              
              
              
              
              
              
              
              
              66,975
              
              
              
              
              
              
              
              
              66,975Net
                  (Loss) for the year ended March 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,036,561
              )
              
              (2,036,561
              )Balance,
                  March 31, 2006
              
              
              17,650,000
              
              $
              17,650
              
              $
              1,505,082
              
              
              (189,410
              )
              $
              (1,693,794
              )
              $
              (360,472
              )




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




F-4


**R.G.
        Global Lifestyles, Inc.**
 **Consolidated
          Statements of Cash Flows**


For
                  the years endedMarch
                  31,2006
              
              
              2005**Cash
                  flows from operating activities****Continuing
                  Operations**Net
                  income (loss)
              
              $
              (2,036,561
              )
              $
              502,413Income
                  from discontinued operations
              
              
              (371,868
              )
              
              (929,958
              )Loss
                  on distribution of discontinued operations
              
              
              1,209,636
              
              
              -Net
                  loss from continuing operations
              
              
              (1,198,793
              )
              
              (427,545
              )Adjustments
                  to reconcile net income (loss) tonet
                  cash provided (used) by continuing operations:Warrants
                  Discount amortization-related party
              
              
              181,769
              
              
              -Warrants
                  Discount amortization-unrelated party
              
              
              125,133
              
              
              -Stock
                  compensation - related party
              
              
              -
              
              
              104,000Stock
                  compensation - consulting services
              
              
              -
              
              
              46,000Stock
                  compensation - legal
              
              
              -
              
              
              75,500Changes
                  in operating assets and liabilities:(Increase)
                  in accounts receivable
              
              
              (900
              )
              
              -(Increase)
                  decrease in inventory
              
              
              25,875
              
              
              (25,875
              )(Increase)
                  in deposits held
              
              
              (136,535
              )
              
              (24,650
              )(Increase)
                  in prepaid expenses
              
              
              (176,021
              )
              
              -Increase
                  in accounts payable
              
              
              39,271
              
              
              1,710Increase
                  in accrued liabilities
              
              
              37,993
              
              
              6,020Increase
                  (decrease) in due to affliliate
              
              
              (172,337
              )
              
              239,062Increase
                  (decrease) in income tax payable
              
              
              (300
              )
              
              1,681Net
                  cash (used) in continuing operations
              
              
              (1,274,845
              )
              
              (4,097
              )Net
                  cash provided (used) in discontinued operations
              
              
              (116,062
              )
              
              332,919Net
                  cash provided (used) by operating activities
              
              
              (1,390,907
              )
              
              328,822**Cash
                  flows from investing activities:**Sale
                  (purchase) of Intangible Assets
              
              
              10,000
              
              
              -Net
                  cash provided (used) in continuing operations
              
              
              10,000
              
              
              -Net
                  cash (used) in discontinued operations
              
              
              (46,033
              )
              
              (319,777
              )Net
                  cash provided (used) by investing activities
              
              
              (36,033
              )
              
              (319,777
              )**Cash
                  flows from financing activities**Proceeds
                  from notes payable
              
              
              1,613,940
              
              
              -Contributed
                  capital
              
              
              -
              
              
              9,571Net
                  cash provided in continuing operations
              
              
              1,613,940
              
              
              9,571Net
                  cash provided (used) in discontinued operations
              
              
              -
              
              
              (40,000
              )Net
                  cash provided (used) by financing activities
              
              
              1,613,940
              
              
              (30,429
              )Net
                  increase (decrease) in cash provided by continuing
                  operations
              
              
              187,000
              
              
              (21,384
              )Cash
                  - beginning
              
              
              159,661
              
              
              181,045Cash
                  - ending
              
              $
              346,661
              
              $
              159,661




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




F-5




**R.G.
        Global Lifestyles, Inc.**
 Notes
        to
        consolidated financial statements


**Note
        1 - Significant Accounting Policies and Procedures**
 
 Organization
        and History
 R.G.
        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, R.G. Global Lifestyles,
        Inc.  Since inception, the Company, through predecessor management teams,
        has been involved in several businesses and engaged in various consumer,
        retail
        and commercial ventures, which ultimately proved unsuccessful.
 
 During
        the fiscal year commencing April 1, 2005, for a period of six (6) months,
        the
        Company through its subsidiary, Amerikal Nutraceutical Corporation (“Amerikal”),
        manufactured, sold and distributed dietary supplements, health and beauty
        aid
        products. The primary markets for Amerikal during this period were South
        East
        Asia and Asia. Amerikal also manufactured, sold and distributed dietary
        supplements, health and beauty aid products in the United States of America
        during this period, through its division named Magna-1 USA. During the third
        fiscal quarter, the Company entered into an agreement with a group of its
        shareholders to distribute its wholly-owned subsidiary Amerikal in exchange
        for
        7,500,000 shares of the Company’s common stock. The effective date of this
        transaction was October 1, 2005. See discussion in note 2, Discontinued
        Operations, below.
 
 On
        May 2,
        2005 the Company formed a wholly-owned subsidiary named On Line Surgery,
        Inc,
        for purpose of diversifying its market, and to develop internet marketing
        for
        the companies products. Also in the third fiscal quarter ending December
        31,
        2005, pursuant to its strategy to focus resources on its Aquair subsidiary,
        the
        Company sold its rights to www.onlinesurgery.com for
        $20,000. The disposition of the website resulted in other income in the amount
        of $10,000. The website was the sole asset related to the wholly owned
        subsidiary On Line Surgery, Inc., which never commenced operations, and is
        in
        the process of being dissolved by the Company.
 
 During
        the fiscal year ended March 31, 2006, the Company continued to operate its
        wholly-owned subsidiary, Aquair, Inc., (Aquair), which distributes, markets
        and
        resells atmospheric water generators.
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiaries, Amerikal Nutraceutical Corporation, Aquair, Inc.
        and
        On Line Surgery, Inc., after elimination of all material inter-company accounts,
        transactions and profits.
  Chapter
        11 Bankruptcy
 On
        August
        15, 2002, the Company filed for Chapter 11 “Debtor in Possession” reorganization
        with the US Bankruptcy Court, Central District of California. Pursuant to
        the
“Plan of Reorganization”, the Company liquidated its assets in full satisfaction
        of its creditors’ claims in September 2002.
 
 Cash
        Equivalents
 For
        the
        purpose of the accompanying financial statements, all highly liquid investments
        with a maturity of three months or less are considered to be cash
        equivalents.
 
 Allowance
        for Doubtful Accounts
 The
        Company has elected to use an allowance method for bad debts based on historical
        experience of bad debts as a percent of its aged outstanding receivables.
        The
        Company has reviewed its outstanding accounts receivable as of March 31,
        2006
        and 2005 and determined all outstanding balances to be collectible and therefore
        has not recorded an allowance.
  F-6
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  Inventory
 At
        March
        31, 2006 and 2005, the Company had inventory consisting of finished goods
        in the
        amount of $0 and $154,865 respectively. At March 31, 2005, the inventory
        consisted of $25,875 of goods attributable to continuing operations, and
        $128,990 attributable to discontinued operations. At March 31, 2006 the Company
        reflected advance payments of $141,578 toward the purchase of water generating
        equipment under the agreement with Munters Corporation as “Prepaid Items”.
        Inventory is recorded at the lower of cost (first-in, first-out) or net
        realizable market value. During the fourth fiscal quarter, the Company expensed
        at cost its remaining inventory of water generating machines purchased from
        Korea, and recorded an expense of $13,597.
 
 Fixed
        Assets
 Fixed
        assets 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
              5
                  yearsComputer software
              3
                  yearsFurniture and fixtures
              7
                  years
  Impairment
        of Long-Lived Assets
 The
        Company has adopted Statement of Financial Accounting Standards 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. For
        the
        years ended March 31, 2006 and 2005, the Company recorded $0 and $76,430
        of
        impairment expense, respectively.
 
 Revenue
        Recognition
 For
        revenue from product sales, the Company recognizes revenue in accordance
        with
        Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB104"), which
        superceded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
        Statements ("SAB101"). SAB 101, to the extent not superseded by SAB 104,
        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) collectibility 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 collectibility 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.
 
 Advertising
        Costs
 The
        Company expenses all costs of advertising as incurred. The Company had $3,070
        of
        advertising costs included in selling, general and administrative
        expenses in the year ended March 31, 2006 and no advertising costs included
        in selling, general and administrative expenses for the year ended March
        31,
        2005, respectively.
 
 Loss
        Per Share
 Net
        loss
        per share is provided in accordance with Statement of Financial Accounting
        Standards No. 128 (SFAS #128) “Earnings Per Share”. 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 and warrants.
        Potential dilutive securities had an anti-dilutive effect and were not included
        in the calculation of diluted net loss per common share as of March 31, 2006
        and
        2005.
  F-7
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  Stock
        Based Compensation
 The
        Company has adopted both SFAS 123 “Accounting for Stock-Based Compensation,”
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 income. The Company has chosen under the provisions of SFAS
        123 to
        continue using the intrinsic-value method of accounting for employee stock-based
        compensation in accordance with Accounting Principles Board Opinion No. 25
“Accounting for Stock Issued to Employees” (APB 25), which does not necessarily
        require the recognition of compensation cost in the financial statements.
        There
        is no change to the Company’s net income had compensation costs been determined
        based on the fair value at the grant date for awards consistent with the
        provisions of SFAS No. 123.
 
 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.
        Actual
        results could differ from those estimates.
 
 Reclassification
 Certain
        reclassifications have been made to the prior year’s financial statements to
        conform to the current year presentation. These reclassifications had no
        effect
        on previously reported results of operations or retained earnings.
 
 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, 2006 and 2005,
        respectively. The respective carrying value of certain on-balance-sheet
        financial instruments approximated their fair values. These financial
        instruments include cash, trade receivables, trade payables and notes payable.
        Fair values were assumed to approximate carrying values of these instruments
        because they are short term in nature and their carrying amounts approximate
        fair values.
 
 Segment
        Reporting
 The
        Company has adopted Statement of Financial Accounting Standards No. 131,
        Disclosures about Segments of an Enterprise and Related Information ("SFAS
        131")
        in the years ended December 31, 2001 and subsequent years. SFAS 131 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.
 
 Dividends
 The
        Company has not yet adopted any policy regarding payment of dividends. No
        dividends have been paid or declared since inception.
  F-8
  **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
 Income
        Taxes
 The
        Company follows Statement of Financial Accounting Standard No. 109, “Accounting
        for Income Taxes” (“SFAS No. 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
        Pronouncements
 In
        November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
        151,
        Inventory Costs—an amendment of ARB No. 43, Chapter 4. This Statement amends the
        guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the
        accounting for abnormal amounts of idle facility expense, freight, handling
        costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
        previously stated that “. . . under some circumstances, items such as idle
        facility expense, excessive spoilage, double freight, and rehandling costs
        may
        be so abnormal as to require treatment as current period charges. . . .” This
        Statement requires that those items be recognized as current-period charges
        regardless of whether they meet the criterion of “so abnormal.” In addition,
        this Statement requires that allocation of fixed production overheads to
        the
        costs of conversion be based on the normal capacity of the production
        facilities. This Statement is effective for inventory costs incurred during
        fiscal years beginning after June 15, 2005. Management does not believe the
        adoption of this Statement will have any immediate material impact on the
        Company.
 
 In
        December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate
        Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS
        152) The amendments made by Statement 152 This Statement amends FASB Statement
        No. 66, Accounting for Sales of Real Estate, to reference the financial
        accounting and reporting guidance for real estate time-sharing transactions
        that
        is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
        Estate Time-Sharing Transactions. This Statement also amends FASB Statement
        No.
        67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
        to state that the guidance for (a) incidental operations and (b) costs incurred
        to sell real estate projects does not apply to real estate time-sharing
        transactions. The accounting for those operations and costs is subject to
        the
        guidance in SOP 04-2. This Statement is effective for financial statements
        for
        fiscal years beginning after June 15, 2005 with earlier application encouraged.
        The Company does not anticipate that the implementation of this standard
        will
        have a material impact on its financial position, results of operations or
        cash
        flows.
  F-9
  **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  On
        December 16, 2004, the Financial Accounting Standards Board (“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 are
        effective as of the first interim period that begins after December 15, 2005.
        Currently, the Company accounts for its share-based payment transactions
        under
        the provisions of APB 25, which does not necessarily require the recognition
        of
        compensation cost in the financial statements. Management is assessing the
        implications of this revised standard, which may materially impact the Company’s
        results of operations. This pronouncement would be effective for the fiscal
        year
        beginning April 1, 2006. The current shares outstanding will have no effect
        on the future financial statements based on this pronouncement.
 
 On
        December 16, 2004, FASB issued Statement of Financial Accounting Standards
        No.
        153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,
        Accounting for Non-monetary Transactions (" SFAS 153"). This statement amends
        APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar
        productive assets and replaces it with a general exception for exchanges
        of
        non-monetary assets that do not have commercial substance. Under SFAS 153,
        if a
        non-monetary exchange of similar productive assets meets a commercial-substance
        criterion and fair value is determinable, the transaction must be accounted
        for
        at fair value resulting in recognition of any gain or loss. SFAS 153 is
        effective for non-monetary transactions in fiscal periods that begin after
        June
        15, 2005. The Company does not anticipate that the implementation of this
        standard will have a material impact on its financial position, results of
        operations or cash flows.
 
 On
        February 16, 2006, the Financial Accounting Standards Board (FASB) issued
        SFAS
        No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155) which permits,
        but does not require, fair value accounting for any hybrid financial instrument
        that contains an embedded derivative that would otherwise require bifurcation
        in
        accordance with SFAS 133. The statement is effective as of January 1, 2007
        with
        earlier adoption permitted. Management is currently evaluating the effect
        of the
        statement on the Company’s results of operations and financial condition.
 
 Year-end
 The
        Company has selected March 31 as its year-end.
 
 **Note
        2 - Discontinued Operations**
 
 During
        the third fiscal quarter, the Company entered into an agreement with a group
        of
        its shareholders to distribute its wholly-owned subsidiary Amerikal
        Nutraceutical Corp. (“Amerikal”), in exchange for 7,500,000 shares of the
        Company’s common stock. The effective date of this transaction was October 1,
        2005. The distribution of Amerikal qualified for treatment as discontinued
        operations in accordance with FASB Statement No. 144 (“SFAS No. 144”),
        Accounting for the Impairment or Disposal of Long-Lived Assets. Therefore,
        the
        operating results of Amerikal were not included in results from continuing
        operations. In addition, all operating results of Amerikal previously reported
        in the consolidated financial statements were reflected as “Discontinued
        Operations” for all periods prior to the effective date of the distribution. The
        following is a summary of the net assets distributed as of the end of the
        period
        immediately prior to the effective date of the Distribution
        Agreement:
 
 October
                  1, 2005
              
              
              March
                  31, 2005Assets
                  DistributedCash
                  and cash equivalents
              
              $
              45,287
              
              $
              154,186Accounts
                  receivable
              
              
              1,039,683
              
              
              506,813Inventory
              
              
              131,120
              
              
              128,990Property
                  and equipment, net
              
              
              17,037
              
              
              18,697Other
                  assets
              
              
              315,780
              
              
              514,130Total
                  assets of discontinued operations
              
              
              1,548,907
              
              
              1,322,816Liabilities
                  DistributedAccounts
                  payable
              
              
              106,657
              
              
              239,888Accrued
                  liabilities
              
              
              240,420
              
              
              252,967Total
                  liabilities of discontinued operations
              
              
              347,077
              
              
              492,855Net
                  assets of discontinued operations distributed
              
              $
              1,201,830
              
              $
              829,961
  F-10
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  Net
        income (loss) from discontinued operations as reported on the consolidated
        statements of operations, including the (loss) on the distribution of
        discontinued operations, consists of the following:
  For
                  the years ended
                March
                  31,2006
              
              
              2005Summary
                  of Income (Loss)Revenues
              
              $
              1,923,877
              
              $
              5,500,834Cost
                  of revenues
              
              
              786,964
              
              
              2,709,737Gross
                  profit
              
              
              1,136,913
              
              
              2,791,097Total
                  operating expenses
              
              
              670,655
              
              
              1,348,372Total
                  other (income) expenses
              
              
              (441
              )
              
              73,069Provision
                  for income tax
              
              
              94,831
              
              
              439,564Income
                  from operations of Amerikal, net of tax
              
              $
              371,868
              
              $
              930,092Summary
                  of (Loss) on DistributionNet
                  assets distributed
              
              
              1,201,830
              
              
              -Costs
                  and expenses of distribution:Transfer
                  agent fees
              
              
              632
              
              
              -Legal
                  and accounting costs
              
              
              7,174
              
              
              -Total
                  costs and expenses of sale
              
              
              7,806
              
              
              -(Loss)
                  on distribution of Amerikal, net of tax
              
              $
              (1,209,636
              )
              $
              -Net
                  income (loss) from discontinued operations
              
              $
              (837,768
              )
              $
              930,092
  As
        a
        result of the foregoing distribution of Amerikal, the Company recognized
        a loss
        from discontinued operations in the third fiscal quarter of ($837,768). There
        were no sales from the Amerikal subsidiary included in the periods from October
        1, 2005 to March 31, 2006.
  F-11
 
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
 **Note
        3 - Pro-Forma Financial Statements of Continuing
        Operations**
 
 For
        purposes of providing comparative disclosure of continuing operations between
        the current period and the prior fiscal year, the following pro forma summary
        of
        financial statements is set forth:
 
 As
                  of March 31,2006
              
              
              2005Assets
                  of continuing operationsCash
                  and cash equivalents
              
              $
              346,661
              
              $
              5,475Accounts
                  receivable
              
              
              900
              
              
              -Inventory
              
              
              -
              
              
              25,875Property
                  and equipment, net
              
              
              -
              
              
              (350
              )Other
                  assets
              
              
              337,557
              
              
              35,000Total
                  assets of continuing operations
              
              $
              685,118
              
              $
              66,000Liabilities
                  of continuing operationsAccounts
                  payable
              
              $
              48,845
              
              $
              9,574Accrued
                  liabilities
              
              
              47,944
              
              
              10,251Notes
                  payable
              
              
              948,801
              
              
              -Total
                  liabilities of continuing operations
              
              
              1,045,590
              
              
              19,825Stockholder’s
                  equity of continuing operationsCommon
                  stock
              
              
              17,650
              
              
              25,150Additional
                  paid-in capital
              
              
              1,505,082
              
              
              508,118Prepaid
                  share-based compensation
              
              
              (189,410
              )
              
              -Accumulated
                  earnings (deficit)
              
              
              (1,693,794
              )
              
              (487,093
              )Total
                  stockholder’s equity
              
              
              (360,472
              )
              
              46,175Total
                  Liabilities & Stockholders’ Equity
              
              $
              685,118
              
              $
              66,000
   For
                  the years ended
                March
                  31,2006
              
              
              2005Summary
                  of Income (Loss) of continuing operationRevenues
              
              $
              69,340
              
              $
              3,202Cost
                  of revenues
              
              
              42,027
              
              
              3,752Gross
                  profit
              
              
              27,313
              
              
              (550
              )Total
                  operating expenses
              
              
              876,171
              
              
              426,329Total
                  other (income) expenses
              
              
              (349,621
              )
              
              0Provision
                  for income tax
              
              
              (314
              )
              
              800Income
                  from operations of continuing entities, net of tax
              
              $
              (1,198,793
              )
              $
              (427,679
              )
  **Note
        4 - 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 has incurred an operating loss from continuing operations before
        income taxes of $1,198,479 for the period March 31, 2006, and only had $69,340
        in sales. These conditions raise substantial doubt about the Company's ability
        to continue as a going concern.
 
 The
        future of the Company is dependent upon its ability to obtain equity and/or
        debt
        financing and upon future profitable operations from the development of its
        new
        business opportunities. The Company has recently announced the raising of
        $2,000,000 of invested capital through the placement of convertible notes.
        See
“Subsequent Events”, NOTE 16, below. There can be no assurance that this
        additional capital 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 continue as a going concern. Without such additional capital,
        there is some doubt as to whether the Company will continue as a going
        concern.
 
 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.
 
 F-12
  **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
 **Note
        5 - Notes Payable**
 
 On
        November 15, 2005, the Company began a private placement offering to accredited
        investors only under the terms and conditions of a Note and Warrant Agreement
        (“Offering”). The terms of the Offering are a non-convertible promissory note
        with an annual interest rate of 8%, with a maturity date of one year after
        loan
        (“Note”); and for each dollar loaned the Company via Note, the investor is
        granted a cashless warrant to purchase one share of the Company’s common stock
        at an exercise price equal to the lowest closing price of the stock as reported
        by the OTC: BB for the year following the date of warrant grant (“Warrant”).
        These sales are exempt from registration under the Securities Act pursuant
        to
        Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”), or
        Regulation D of the Securities Act.
 
 As
        of
        March 31, 2006, the Company had entered into eight separate investments totaling
        $1,613,940 under the terms of the Offering, of which $613,940 was money already
        loaned to the Company and then converted into an investment in the Offering.
        Each of the eight financing transactions is described in detail below. In
        each
        instance, the Company allocated the proceeds between Notes and Warrants based
        upon their fair value, using the Black Scholes method of valuation. For purposes
        of determining the volatility factor in the Black Scholes valuation model,
        the
        company looked to the lowest price of the Company’s stock over the entire
        trading history of the Company’s stock from inception to the date of the Warrant
        grant. The exercise price is redetermined as of the filing date for each
        quarter’s financial statements, and is based upon the lowest price for the
        Company’s common stock during the look-back period.
 
 On
        October 31, 2005 the Company issued a Note with Warrant attached to an officer
        and Director of the Company. The Note is in the amount received of $200,000.
        The
        Company allocated $127,122 to the Warrant, and $72,878 to the Note, and recorded
        a discount on the note payable in the amount attributed to the value of the
        Warrant. The discount on Note Payable is being amortized over the period
        of one
        year. From inception to March 31, 2006 on this Note, the Company expensed
        $52,590 of interest as finance charges attributable to the Warrant, and reduced
        the discount on note payable by a similar amount.
 
 On
        October 31, 2005, the Company issued a Note with Warrant attached to an officer
        and director of the company, in the amount received of $150,000. The company
        allocated $95,341 to the Warrant and $54,659 to the Note, and recorded a
        discount on the Note payable in the amount attributed to the value of the
        Warrant. The discount on Note payable is being amortized over the period
        of one
        year. On this Note, from inception to March 31, 2006, the Company expensed
        $39,443 of interest as finance charges attributable to the Warrant, and reduced
        the discount on Note payable by a similar amount.
 
 On
        November 15, 2005 the Company issued two Notes with Warrants attached to
        two
        shareholders who had previously advanced funds to the Company. The Notes
        were
        issued in the face amount of the prior debt plus accrued interest ($358,132
        and
        $255,808 respectively). On the first Note of $358,132, which was issued to
        an
        officer, director and shareholder of the Company, the Company allocated $240,835
        to the Warrant, and $117,297 to the Note, and recorded a discount on Note
        payable in the amount attributed to the value of the Warrant. The discount
        on
        Note payable is being amortized over the period of one year. On this Note,
        the
        Company expensed $89,736 of interest as finance charges attributable to the
        Warrant from inception of the Note to March, 31, 2006, and reduced the discount
        on Note payable by a similar amount.
 
 On
        the
        second Note of $255,808, issued to a shareholder of the Company who was not
        a
“related party” for purposes of Section 16 of the Securities Act, the Company
        allocated $172,024 to the Warrant, and $83,784 to the Note, and recorded
        a
        discount on the Note payable in the amount attributed to the value of the
        Warrant. The discount on Note payable is being amortized over the period
        of the
        Note, and from inception to March 31, 2006 the Company expensed $64,097 of
        interest expense as finance charges attributable to the Warrant and reduced
        the
        discount on Note payable in a similar amount.
  F-13
  On
        December 15, 2005, the Company issued a Note with Warrant attached for $100,000
        to a less than 5% shareholder. The Company allocated $61,867 to the Warrant
        and
        $38,133 to the Note, and recorded a discount on Note payable in the amount
        attributed to the value of the Warrant. The discount on Note payable is being
        amortized over the period of one year. Between the commencement of the Note
        and
        March 31, 2006, the Company expensed $17,967 of interest as finance charges
        attributable to the Warrant, and reduced the discount on Note payable by
        a
        similar amount.
 
 On
        December 15, 2005, the Company issued a Note with Warrant attached in the
        amount
        of $150,000 to an unrelated party. The Company allocated $92,709 to the Warrant
        and $57,291 to the Note, and recorded a discount on Note payable in the amount
        attributed to the value of the Warrant. The discount on Note payable is being
        amortized over one year. Between the Note commencement date and March 31,
        2006,
        the Company expensed $26,924 of interest as finance charges attributable
        to the
        Warrant, and reduced the discount on Note payable by a similar amount.
 
 On
        December 22, 2005 the Company issued a Note with Warrant attached to an
        unrelated party, in the amount received of $100,000. The Company allocated
        $59,532 to the Warrants and $40,468 to the Note, and recorded a discount
        on the
        Note payable in the amount attributed to the value of the Warrant. The discount
        on Note payable is being amortized over the period of one year. On this Note,
        the Company expensed $16,145 of interest expense-finance charges attributable
        to
        the Warrant for the period between December 22, 2005 and March 31, 2006,
        and
        reduced the discount on Note payable by a similar amount.
 
 On
        March
        31, 2006, the Company issued a Note with Warrant attached to an unrelated
        party,
        in the amount received of $300,000. The Company allocated $122,611 to the
        Warrant and $177,389 to the Note, and recorded a discount on the Note payable
        in
        the amount attributed to the value of the Warrant. The discount on Note Payable
        will be amortized over the period of one year. On this Note, which occurred
        at
        the end of the fiscal year, the Company accrued no interest payable on the
        Note,
        and accordingly did not reduce the discount on note payable.
 
 **Note
        6 - Income Taxes**
 
 For
        the
        year ended March 31, 2006, the Company incurred net operating losses in an
        amount exceeding the net income from the year ending March 31, 2005. However,
        no
        benefit for income taxes has been recorded due to the uncertainty of the
        realization of this deferred tax asset. At March 31, 2006, the Company had
        approximately $297,000 of federal and state net operating losses allocated
        to
        continuing operations available, after utilization of $942,777 of net operating
        losses carried back to the year ended March 31, 2005. The net operating loss
        carry forward, if not utilized, will begin to expire in 2024. The net operating
        loss has been computed without regard to the financial loss reported on
        distribution of discontinued operations, as the Company has been advised
        that
        the transaction in which the Amerikal subsidiary was distributed did not
        give
        rise to taxable income or loss.
 
 The
        components of the Company’s deferred tax asset are as follows:
  As
                  of March 31,2006
              
              
              2005Deferred
                  tax assets:Net
                  operating loss carryforwards (net income)
              
              $
              157,236
              
              $
              (942,777
              )Total
                  deferred tax assets (deferred tax liability)
              
              
              157,236
              
              
              (942,777
              )Net
                  deferred tax assets before valuation allowance
              
              
              157,236
              
              
              (942,777
              )Less:
                  Valuation allowance
              
              
              (157,236
              )
              
              942,777Net
                  deferred tax assets
              
              $
              -
              
              $
              -
  F-14
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
 
 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, 2006 will not be fully realizable. Furthermore, based upon the current
        year
        net operating loss being available to carry back to March 31, 2005 for Federal
        income tax purposes, the federal tax liability for the year ended March 31,
        2005
        will be eliminated or substantially reduced. Accordingly, the Company provided
        for a full valuation allowance against its net deferred tax assets at March
        31,
        2006.
 
 However,
        based upon current law, the Company believes that for state of 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, which has been previously paid by the Company,
        remains in existence.
 
 A
        reconciliation between the amount of income tax benefit determined by applying
        the applicable U.S. and State statutory income tax rate to pre-tax loss is
        as
        follows:
  For
                  the year ended March 31,2006
              
              
              2005Federal
                  and state statutory rate
              
              $
              (157,236
              )
              $
              440,364Change
                  in valuation allowance on deferred tax assets
              
              
              157,236
              
              
              (346,477
              )
 
 **Note
        7 - Prepaid Expenses**
 
 At
        March
        31, 2006 and 2005, the Company had prepaids with various vendors comprised
        of
        the following:
  2006
              
              
              2005Prepaid
                  Insurance
              
              $
              4,444
              
              $
              7,967Prepaid
                  Inventory
              
              
              141,578
              
              
              -Prepaid
                  Rent
              
              
              30,000
              
              
              -Totals
              
              $
              176,022
              
              $
              7,967
 
 **Note
        8 - Fixed Assets**
 
 Fixed
        assets of continuing operations and discontinued operations as of March 31,
        2006
        and 2005 consisted of the following:
  Continuing
                  Operations
              
              
              2006
              
              
              2005Office
                  equipment
              
              $
              -
              
              $
              (350
              )Accumulated
                  depreciation
              
              
              -
              
              
              -Total
                - continuing operations
              
              $
              -
              
              $
              (350
              )Discontinued
                  OperationsOffice
                  equipment
              
              
              20,873
              
              
              20,127Accumulated
                  depreciation
              
              
              (3,836
              )
              
              (1,430
              )Total
                  - dicontinued operations
              
              $
              17,037
              
              $
              18,697Total
                  Fixed Assets
              
              $
              17,037
              
              $
              18,347
  During
        the years ended March 31, 2006 and 2005, the Company recorded depreciation
        expense of $0 and $0 for continuing operations and recorded $2,406 and $1,430
        for discontinued operations, respectively.
 
 F-15
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  **Note
        9 - Intangible Assets**
 
 On
        July
        1, 2004, through its Amerikal subsidiary, the Company entered an agreement
        to
        distribute products developed by another company. The purchase price paid
        for
        the distribution rights was $300,000 in cash, which represented its fair
        value.
        The amount was recorded as an intangible asset on the Consolidated Balance
        Sheet
        of the Company, and was amortized over the period of its estimated benefit
        period of three years. The intangible asset was amortized until the distribution
        of the net asset effective October 1, 2005 in connection with the distribution
        of the discontinued operations.
 
 On
        January 13, 2005, the Company entered into an agreement to acquire a
        website/internet portal in exchange for 200,000 shares of its $0.001 par
        value
        common stock valued at the fair market value of the shares of $10,000. This
        asset was sold for $20,000 to an unrelated third party during the quarter
        ending
        December 31, 2005. The Company recorded net gain on sale of this asset in
        the
        amount of $10,000 as other income on its consolidated statement of
        operations.
 
 During
        the years ended March 31, 2006 and 2005, the Company recorded amortization
        expense of $0 and $0 for continuing operations and recorded $50,000 and $75,000
        for discontinued operations, respectively.
 
 **Note
        10 - Deposits**
 
 At
        March
        31, 2006 and 2005, the Company had deposits with various vendors comprised
        of
        the following:
  2006
              
              
              2005Deposit
                  for future purchase of inventory
              
              $
              125,000
              
              $
              59,600Deposit
                  Marketing Services Agreement
              
              
              10,000
              
              
              7,500Legal
                  Retainer Deposits
              
              
              11,328
              
              
              -Refundable
                  Deposit
              
              
              15,207
              
              
              -Totals
              
              $
              161,535
              
              $
              67,100
 
 **Note
        11 - Stockholders’ Equity**
 
 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.
 
 On
        July
        28, 2004, the Company issued 1,934,880 shares of its $0.001 par value common
        stock pursuant to the reverse acquisition agreement with Amerikal International
        Holding, Inc.
 
 On
        August
        31, 2004, the Company entered into stock compensation agreements with its
        officers and directors whereby the Company issued 2,080,000 shares of its
        $0.001
        par value common stock to the related parties. Pursuant to amendments of
        these
        agreements as of December 28, 2004, the fair market value of services is
        deemed
        by the Company to be equal to the book value of the shares as of the date
        of the
        amendments, namely $0.05 per share. During the year ended March 31, 2005,
        the
        Company expensed $104,000 as stock compensation to related parties.
 
 On
        August
        31, 2004, the Company entered into consulting agreements with various
        individuals and companies. Per the agreements, the Company issued 46,000
        shares
        of its $0.001 par value common stock in exchange for the consulting services
        to
        be amortized over a term of three years. As of December 28, 2004, the Company
        amended the agreements to provide for the outright grant of the shares at
        the
        then-book value of the shares. During the year ended March 31, 2005, the
        company
        expensed $46,000 of consulting services per the agreements.
 
 In
        January 2005 the Company issued 200,000 shares of its $0.001 par value common
        stock in exchange for the rights to a web portal known as “On Line Surgery”,
        which represents the fair market value of the rights as of the date of
        acquisition. The fair market value of rights is deemed by the Company to
        be
        equal to the book value of the shares as of the date of the agreement, namely
        $0.05 per share.
  F-16
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  On
        March
        23, 2005 the Company issued 50,000 shares of its $0.001 par value common
        stock,
        then trading on the NASD Over the Counter Bulletin Board at $1.51 per share,
        to
        two attorneys in compensation for legal services rendered to the company.
        The
        Company expensed as legal expenses the fair market value of the shares on
        the
        date of issuance.
 
 During
        the quarter ended December 31, 2005, the Company received 7,500,000 shares
        of
        its common stock pursuant to the distribution agreement of Amerikal (See
        Note 2
        - Discontinued Operations). On November 15, 2005, the board of directors
        resolved to cancel these shares, and the cancellation was effective as of
        March
        31, 2006. In connection with the transaction, after taking all intercompany
        accounts into consideration, there was a net forgiveness of intercompany
        debt in
        the amount of $66,975.
 
 There
        have been no other issuances of shares by the Company in the year ended March
        31, 2006.
 
 **Note
        12** - **Options and Warrants**
 
 Common
        Stock: Options
 
 In
        the
        quarter ended September 30, 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 % risk free rate and 100
        %
        volatility of the Company’s common stock. In recognition of the equitable
        obligation to issue the options in the event of the death or disability of
        the
        consultant, the Company has reflected the portion of the options ratably
        earned
        between the inception of the agreement and March 31, 2006 in the amount of
        $81,855 in a special equity account entitled “Prepaid Compensation.” In July
        2006, at the twelve-month anniversary date of the consulting agreement when
        the
        options are vested, the Company will issue the vested options, and reduce
        Prepaid Compensation and increase Commission expense.
 
 The
        following is a summary of activity of outstanding stock options:
 
 WeightedAverageNumber
              
              
              ExerciseOf
                  Shares
              
              
              PriceBalance,
                  April 1, 2005
              
              
              -0-
              
              $
              -Options
                  granted
              
              
              100,000
              
              
              2.00Options
                  exercised
              
              
              (-0-
              )
              
              -Balance,
                  March 31, 2006
              
              
              100,000
              
              $
              2.00Exercisable,
                  March 31, 2006
              
              
              -0-
              
              $
              -
  F-17
  **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  At
        March
        31, 2006, the range of option prices for shares and the weighted-average
        remaining contractual life is as follows:
 
 Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of
                Option
                Exercise
                  Prices
              
              Number
                  of
                Options
              
              Weighted-
                Average
                Exercise
                Price
              
              Weighted-
                Average
                Remaining
                Contractual
                Life
              
              Number
                Of
                Options
              
              Weighted-
                Average
                Exercise
                Price$                         2.00
              
              
              100,000
              
              $
              2.00
              
              
              5.67
                  yrs
              
              
              -
              
              $
              -
 
 Common
        Stock: Warrants
 
 During
        the quarter ended December 31, 2005, the Board of Directors approved the
        issuance of cashless warrants as part of the private placement offering to
        purchase an aggregate of 1,313,940 shares of the Company’s common stock, and
        during the quarter ended March 31, 2006 the Board of Directors approved the
        issuance of cashless warrants to purchase an additional 300,000 shares of
        the
        Company’s common stock (See detailed discussion in Note 5 - Notes Payable,
        above). Such warrants are exercisable at exercise prices equal to the lowest
        closing price of the common stock, as reported by the OTC: BB, during one
        year
        following the date of grant of the warrants. The lowest closing price at
        filing
        date was $0.60 a share. The weighted average fair value of these warrants
        using
        the Black Scholes valuation method was $1.63 using the following estimates:
        5.25
        % risk free rate, average volatility of the Company’s common stock of 127 % and
        an expected life of 5 years. The warrants were issued at various dates between
        November 15, 2005 and March 31, 2006. The warrants vest over one year, and
        expire at various dates ending five (5) years from the date of grant of the
        warrants. During the quarter ended March 31, 2006, no shareholders exercised
        warrants held by them. Included among the warrants issued during the third
        fiscal quarter were warrants to purchase an aggregate of 708,132 shares of
        common stock of the Company issued to directors and officers of the Company.
 
 In
        the
        third quarter 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 $66,963 using the Black Scholes method of valuation
        with
        the following estimates: 4 % risk free rate and 105 % volatility of the
        Company’s common stock. The Company has reflected $43,350 of this value as
        prepaid compensation from the inception of this Agreement to March 31, 2006.
        The
        legal retainer agreement further provides that one third of all legal fees
        will
        be paid in cash during the legal services representation, and the balance
        (including the 25,000 warrants referred to above) shall be paid in warrants.
        In
        the event that the fees exceed the face value of the warrants already issued
        or
        $50,000, additional warrants will be issued on the same terms and price.
 
 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, as
        compensation for services to be rendered over the period of one year. The
        warrants vest ratably over the one year agreement period. The Company has
        valued
        the warrants at $64,205 as of the date of the grant, based upon the Black
        Scholes method of valuation using the following estimates: 5.25 % risk free
        rate, 138 % volatility of the Company’s common stock and an expected life of 5
        years. The Company has reflected the entire value of the warrant grant as
        prepaid compensation as of March 31, 2006.
 
 The
        issuance of the warrants was accounted for in accordance with Financial
        Accounting Standards Board Statements using the Black-Scholes option pricing
        model (with the same assumptions as those used for the option), which resulted
        in the recording of discounts to Notes Payable issued in conjunction with
        certain warrant grants above, in the amounts equal to the portion of the
        note
        proceeds allocated between the debt and the fair value of the
        warrants.
  F-18
  **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  The
        following is a summary of activity of outstanding stock
        warrants:
 WeightedAverageNumber
              
              ExerciseOf
                  Shares
              
              PriceBalance,
                  April 1, 2005
              
              
              -0-
              
              $
              -Options
                  granted
              
              
              1,733,940
              
              
              0.63Options
                  exercised
              
              
              (-0-
              )
              
              -Balance,
                  March 31, 2006
              
              
              1,733,940
              
              $
              0.63Exercisable,
                  March 31, 2006
              
              
              -0-
              
              $
              -
 
 At
        March
        31, 2006, the range of warrant prices for shares under warrants and the
        weighted-average remaining contractual life is as follows:
 
 Warrants
                  Outstanding
              
              Warrants
                  ExercisableRange
                  of
                Warrant
                Exercise
                  Prices
              
              
              Number
                  of
                Warrants
              
              
              Weighted-
                Average
                Exercise
                Price
              
              
              Weighted-
                Average
                Remaining
                Contractual
                Life
              
              
              Number
                Of
                Warrants
              
              
              Weighted-
                Average
                Exercise
                Price$          
                  .60-2.00
              
              
              1,733,940
              
              $
              0.63
              
              
              4.74
                  yrs
              
              
              -
              
              $
              -
 
 There
        have been no other issuances of options or warrants by the Company in the
        year
        ended March 31, 2006.
  **Note
        13 - 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. allege defamation, interference with prospective economic advantage,
        and
        false advertising, and seek compensatory and punitive damages, and costs
        against
        the Company. The Board of Directors believes these claims to be without merit,
        and has engaged legal counsel to strongly defend these claims. Through its
        legal
        counsel, the Company has filed appropriate pleadings in response to the
        plaintiff’s claims. Thus far the case has not yet progressed past the pleadings
        phase, as the plaintiff has just filed a second amended complaint after losing
        on the second demurrer to the previously filed complaints. The Company intends
        to vigorously defend against the plaintiff’s claims through continued discovery
        and potentially through a motion for summary judgment. The Company believes
        that
        any liability it may incur in connection with this case will not have a material
        adverse effect upon its financial condition or its results of operations.
 
 **Note** **14
        - Segment reporting and concentrations**
 
 Up
        until
        the end of the second fiscal quarter, the Company operated in a business
        segment
        that included the manufacture and sale of natural supplements, health and
        beauty
        aid products for the nutraceutical industry. Effective as of October 1, 2005,
        the Company completed the distribution of its subsidiary Amerikal, and in
        the
        third fiscal quarter has concentrated solely upon the Aquair subsidiary for
        its
        revenue activity. The Company is therefore again operating in a single business
        segment for the sales of its water generators. During the year ended March
        31,
        2006, the Company generated revenues of $69,340 from sales of water generators
        under its Aquair subsidiary to customers in the United States and Asia. The
        Company has no long lived assets attributable to this activity.
  F-19
 **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  A
        summary
        of revenues generated by geographical location is as follows:
  For
                    the year ended March 31,2006
                
                
                2005Revenues
                    of continuing operations:United
                    States
                
                $
                10,840
                
                $
                0Vietnam
                
                
                58,500
                
                
                3,202Total
                
                $
                69,340
                
                $
                3,202Revenues
                    of discontinued operations:United
                    States
                
                $
                90,846
                
                $
                168,974Singapore
                
                
                1,124,810
                
                
                4,436,253Other
                    foreign countries
                
                
                708,221
                
                
                895,607Total
                
                $
                1,923,877
                
                $
                5,500,834
 Geographic
          data is based upon product shipment destination. For continuing operations,
          export sales as a percentage of revenues were 84.4% and 100% for the twelve
          months ended March 31, 2006 and 2005, respectively. For discontinued operations,
          export sales as a percentage of revenues were 95.3% and 96.9% for the twelve
          months ended March 31, 2006 and 2005, respectively. During the twelve months
          ended March 31, 2006 and 2005, for continuing operations, sales to a single
          customer were 84.4% and 100% of total sales respectively. For discontinued
          operations, during the twelve months ended March 31, 2006 and 2005, sales
          to a
          single customer were 58.5% and 80.6%, respectively. After the distribution
          of
          its Amerikal subsidiary, the Company has focused upon the sale of water
          generator equipment in the United States and Asia. The Company contracts
          for the
          manufacture of its water generator equipment in the United States and Korea.
          In
          addition to the above concentrations in sales to customers and by geographic
          region, during the years ended March 31, 2006 and 2005, the Company’s continuing
          operations in the Aquair subsidiary relied upon one principal supplier
          for
          atmospheric water generating equipment: 100% of the costs of sale purchases
          during both periods were from a South Korean supplier. During the fiscal
          year
          ended March 31, 2006, the Company established a relationship with a United
          States Corporation for a future supply of products in connection with its
          Aquair
          subsidiary. At March 31, 2006 approximately 76 % of the deposits and 82
          % of the
          prepaid expenses shown on the balance sheet related to payments made to
          the U.S.
          Corporation. At the end of the most recent fiscal year, the Company was
          also in
          the process of establishing strategic alliances with other suppliers to
          diversify its product lines available for sale or distribution under the
          Aquair
          subsidiary.
 
 Prior
        to
        the distribution of Amerikal, the Company’s business included the manufacture of
        nutraceutical products in the United States. Most of the Company’s revenues were
        previously derived from shipments of products to Singapore, Indonesia, Thailand
        and other countries in South East Asia. The Company continues to export its
        water generator equipment to Viet Nam and other countries in South East Asia.
        These areas have, in the past, experienced varying degrees of illiquidity,
        volatile currency exchange rates, reduced economic activity and in some
        instances, war, revolution or insurrection. The Company may be adversely
        affected by economic conditions in these regions for the foreseeable future,
        although it is not possible to determine the nature or value of such possible
        future events.
  Summary
        of long lived assets by geographical location:
 Long-Lived
                  Assets (net):
              
              
              March
                  31, 2006
              
              
              March
                  31, 2005United
                  States
              
              $
              -
              
              $
              253,347-Singapore
              
              
              -
              
              
              -Other
                  Foreign Countries
              
              
              -
              
              
              -Totals
              
              $
              -
              
              $
              253,347
  The
        geographic summary of long-lived assets attributable to discontinued operations
        (as of March 31, 2005) is based in part upon physical location, as to the
        net
        physical assets ($18,347) and in part upon the location
        of the holder of the intangible rights (in the instance of the intangible
        Distribution Rights Agreement for the country of Indonesia, net of amortization,
        in the amount of $225,000.) These long-lived assets were distributed in
        connection with the discontinued operations effective October 1, 2005. See
        discussion in Note 2, above.
  F-20
  **R.G.
          Global Lifestyles, Inc.**
 Notes
          to
          consolidated financial statements
  **Note
        1** **5
        - Related Party Transactions**
 
 During
        the fiscal year ended March 31, 2005, the Company entered into an agreement
        with
        a company wholly owned by an officer and director of the Company. This Agreement
        continued in force for the entire fiscal year ended March 31, 2006. The
        agreement provides for office space as well as administrative services at
        a fair
        market rate of $6,000 per month. The agreement is not binding and may be
        cancelled by either party at any time. During the year, the Company expensed
        $72,177 under this agreement.
 
 As
        described in detail in Note 5- Notes Payable, above, during the year ended
        March
        31, 2006, the Company also entered into three transactions with related parties
        whereby the Company issued Notes with Warrants to officers and directors
        of the
        Company. The Company also entered into an agreement to issue options to purchase
        stock of the Company with a Consultant who later became a related party
        (Director of the Company).
 
 **Note
        16 - Subsequent Events**
 
 Effective
        on April 30, 2006 the Company received and accepted the resignation of Bruce
        Thomsen as a Director of Company and as a member of the Audit Committee of
        the
        Company. The Company thanks Mr. Thomsen for his loyal service as a director
        and
        member of the audit committee and wishes him well. The Company is currently
        seeking a replacement for the vacant position of Director on the Board of
        Directors and as a member of the audit committee.
 
 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
        “Notes”) and Stock Purchase Warrants (the “Warrants”) to purchase 4,000,000
        shares of the Company’s common stock exercisable before June 6, 2013, with an
        exercise price of $1.10 subject to adjustment upon certain events. The 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 market
        price as defined in the agreements. The Company has agreed to file a shelf
        registration with the Securities and Exchange Commission (“SEC”) for the
        underlying common stock upon conversion of the Notes according to the terms
        of a
        Registration Rights Agreement. The Company’s obligations under the Notes and
        accompanying transaction documents are secured by certain assets of the Company.
        For further information concerning this subsequent event including copies
        of all
        definitive agreements, please see the Form 8-K filed by the Company with
        SEC on
        June 7, 2006
 
 F-21