UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB




x QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the
      quarterly period ended June 30, 2006.





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





Commission
      File Number: 000-254888





RG
      GLOBAL LIFESTYLES, INC.


(Exact
      Name of small business issuer as specified 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





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





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





APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING 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 ISSUERS





The
      number of shares outstanding of the issuer’s Common Stock as of August 21, 2006
      was 17,650,000.





Transitional
      Small Business Disclosure Format (Check One): Yes o No x








**INDEX**





**Page****PART
                I - FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)
            3Consolidated
                Balance Sheet -June 30, 2006
            3Consolidated
                Statements of Operations -For
                the Three Months ended June 30, 2006 and 2005
            4Consolidated
                Statements of Cash FlowsFor
                the three months ended June 30, 2006 and 2005
            5Notes
                to Financial Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition andResults
                of Operations
            16Item
                3.
            Controls
                and Procedures
            25**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            28Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            28Item
                3.
            Defaults
                Upon Senior Securities
            29Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            29Item
                5.
            Other
                Information
            29Item
                6.
            Exhibits
            29SIGNATURES
            30





2


**PART
      I — FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**R.G.
        Global Lifestyles, Inc.**
 **Consolidated
        Balance Sheet**
 **(unaudited)**


June
                  302006**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              519,365Accounts
                  receivable
              
              
              900Prepaid
                  expenses
              
              
              252,222Total
                  current assets
              
              
              772,487Fixed
                  assets, net
              
              
              1,770Deposits
                  held
              
              
              161,016Total
                  Assets
              
              $
              935,273**Liabilities
                  and Stockholders' (Deficit)**Current
                  LiabilitiesAccounts
                  payable
              
              $
              68,507Accrued
                  liabilities
              
              
              90,333Notes
                  payable-related party ($708,132 net of $167,704 discount)
              
              
              540,428Notes
                  payable others ($905,808 net of $258,159 discount)
              
              
              647,649Total
                  current liabilities
              
              
              1,346,917Long
                  term liabilitiesLiability
                  associated with detachable warrants-conv. notes
              
              
              3,681,105Accrued
                  derivative liability-convertible notes
              
              
              1,258,782Convertible
                  notes payable ($700,000 net of $680,839 discount)
              
              
              19,161Total
                  long term liabilities:
              
              
              4,959,048Total
                  liabilities
              
              
              6,305,965Commitments
                  and Contingencies
              
              
              -**Stockholders'
                  (deficit)**Preferred
                  stock, $0.001, 10,000,000 sharesauthorized,
                  no shares issued and outstanding
              
              
              -Common
                  stock, $0.001 par value, 100,000,000 sharesauthorized,
                  17,650,000 shares issuedand
                  outstanding as of June 30, 2006
              
              
              17,650Additional
                  paid-in capital
              
              
              8,562,984Prepaid
                  share-based compensation-related party
              
              
              (6,197,414
              )Prepaid
                  share-based compensation
              
              
              (219,432
              )Accumulated
                  (deficit)
              
              
              (7,534,480
              )Total
                  stockholders' (deficit)
              
              
              (5,370,692
              )Total
                  Liabilities & Stockholders' (deficit)
              
              $
              935,273
  The
          accompanying notes are an integral part of these financial
          statements.
  3
  **R.G.
        Global Lifestyles, Inc.**


**Consolidated
        Statements of Operations**
 **(unaudited)**


For
                  the Three Months endedJune
                  302006
              
              2005RevenueProduct
                  sales
              
              $
              425
              
              
              4,600Cost
                  of sales
              
              
              5,928
              
              
              2,230Gross
                  profit
              
              
              (5,503
              )
              
              2,370Expenses:Advertising
                  and marketing
              
              
              3,345
              
              
              -Commissions
              
              
              -
              
              
              12,000Consulting
                  services
              
              
              120,722
              
              
              13,557Depreciation
                  and amortization
              
              
              30
              
              
              -General
                  and administrative expenses
              
              
              103,438
              
              
              3,655Professional
                  fees
              
              
              80,330
              
              
              63,813Rent
                  - related party
              
              
              41,800
              
              
              18,000Stock-based
                  compensation-related party
              
              
              198,359
              
              
              -Stock-based
                  compensation-consultants
              
              
              632,107
              
              
              -Salaries
                  and wages
              
              
              24,500
              
              
              -Total
                  expenses
              
              
              1,204,631
              
              
              111,025Operating
                  (loss)
              
              
              (1,210,134
              )
              
              (108,655
              )Other
                  income (expense)Change
                  in fair value of warrants issued re: conv. notes
              
              
              (193,056
              )
              
              -Change
                  in fair value of derivative liability-conv. notes
              
              
              (6,263
              )
              
              -Interest
                  and financing related to convertible notes
              
              
              (4,159,182
              )Interest
                  and financing expense-related party
              
              
              (128,145
              )
              
              -Interest
                  and financing expense - other
              
              
              (143,077
              )
              
              -Tax
                  refund
              
              
              -
              
              
              510Total
                  other income (expense)
              
              
              (4,629,723
              )
              
              510Net
                  (loss) before income tax and discontinued operations
              
              
              (5,839,857
              )
              
              (108,145
              )Provision
                  for income taxesCurrent
                  federal
              
              
              -
              
              
              -Current
                  state
              
              
              800
              
              
              1,600Net
                  (loss) from continuing operations
              
              
              (5,840,657
              )
              
              (109,745
              )Discontinued
                  operationsIncome
                  (loss) from discontinued operations, net of tax
              
              
              -
              
              
              34,595Net
                  income (loss) from discontinued operations
              
              
              -
              
              
              34,595Net
                  (loss)
              
              $
              (5,840,657
              )
              
              (75,150
              )Weighted
                  average number ofcommon
                  shares outstanding - basic and fully diluted
              
              
              17,650,000
              
              
              25,150,000Net
                  income (loss) per share - basic and fully dilutedContinuing
                  Operations
              
              $
              (0.33
              )
              
              (0.00
              )Discontinued
                  Operations
              
              
              -
              
              
              0.00$
              (0.33
              )
              
              (0.00
              )
 The
          accompanying notes are an integral part of these financial
          statements.
 4
  **R.G.
        Global Lifestyles, Inc.**


**Consolidated
      Statements of Cash Flows**


**(unaudited)**


For
                  the 3 months endedJune
                  302006
              
              2005**Cash
                  flows from operating activities****Continuing
                  Operations**Net
                  (loss) from continuing operations
              
              $
              (5,840,657
              )
              $
              (109,745
              )Adjustments
                  to reconcile net income (loss) tonet
                  cash provided (used) by continuing operations:Warrants
                  Discount amortization-related party
              
              
              113,825
              
              
              -Warrants
                  Discount amortization-unrelated party
              
              
              125,451
              
              
              -Depreciation
                  & amortization
              
              
              30
              
              
              -Stock
                  compensation - related party
              
              
              198,359
              
              
              -Stock
                  compensation - consultants
              
              
              632,107
              
              
              -Non-cash
                  finance charges incurred in connection with convertible
                  notes
              
              
              4,059,729
              
              
              -Change
                  in warrant liability
              
              
              193,056
              
              
              -Change
                  in warrant liability
              
              
              6,263
              
              
              -Changes
                  in operating assets and liabilities:(Increase)
                  decrease in inventory
              
              
              -
              
              
              1,253(Increase)
                  decrease in deposits held
              
              
              519
              
              
              (25,000
              )(Increase)
                  in prepaid expenses
              
              
              (76,200
              )
              
              -Increase
                  in accounts payable
              
              
              19,662
              
              
              16,627Increase
                  in accrued liabilities
              
              
              42,360
              
              
              (8,570
              )Increase
                  (decrease) in due to affiliate
              
              
              -
              
              
              121,255Increase
                  (decrease) in income tax payable
              
              
              -
              
              
              800Net
                  cash (used) in continuing operations
              
              
              (525,496
              )
              
              (3,380
              )Net
                  cash provided (used) in discontinued operations
              
              
              -
              
              
              (127,497
              )Net
                  cash provided (used) by operating activities
              
              
              (525,496
              )
              
              (130,877
              )**Cash
                  flows from investing activities:**Purchase
                  of fixed assets
              
              
              (1,800
              )
              
              (350
              )Net
                  cash provided (used) in continuing operations
              
              
              (1,800
              )
              
              (350
              )Net
                  cash (used) in discontinued operationsNet
                  cash provided (used) by investing activities
              
              
              (1,800
              )
              
              (350
              )**Cash
                  flows from financing activities**Proceeds
                  from convertible notes payable
              
              
              700,000
              
              
              -Net
                  cash provided by financing in continuing operations
              
              
              700,000
              
              
              -Net
                  cash provided (used) in discontinued operations
              
              
              -Net
                  cash provided (used) by financing activities
              
              
              700,000
              
              
              -Net
                  increase (decrease) in cash provided by continuing
                  operations
              
              
              172,704
              
              
              (131,227
              )Cash
                  - beginning
              
              
              346,661
              
              
              159,661Cash
                  - ending
              
              $
              519,365
              
              $
              28,434Supplemental
                  DisclosuresInterest
                  paid
              
              
              -
              
              
              -Income
                  taxes paid
              
              
              -
              
              
              -Total
              
              
              -
              
              
              -


The
        accompanying notes are an integral part of these financial
        statements.
 5


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


Notes
      to
      consolidated financial statements


(unaudited)


**Note
        1 - Basis of Presentation**
 
 The
        financial statements included herein, presented in accordance with United
        States
        generally accepted accounting principles and stated in US dollars, have been
        prepared by the Company, without audit, pursuant to the rules and regulations
        of
        the Securities and Exchange Commission. Certain information and footnote
        disclosures normally included in financial statements prepared in accordance
        with generally accepted accounting principles have been condensed or omitted
        pursuant to such rules and regulations, although the Company believes that
        the
        disclosures are adequate to make the information presented not
        misleading.
 
 These
        statements reflect all adjustments, consisting of normal recurring adjustments,
        which, in the opinion of management, are necessary for fair presentation
        of the
        information contained therein. It is suggested that these consolidated interim
        financial statements be read in conjunction with the financial statements
        and
        notes thereto of the Company for the year ended March 31, 2006 included in
        the
        Company’s 10-KSB annual report. The Company follows the same accounting policies
        in the preparation of interim reports .
 
 **Note
        2 - Discontinued Operations**
 
 During
        the fiscal quarter ended December 31, 2005, the Company entered into an
        agreement with a group of its shareholders to distribute 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:
  As
                  of June 30,2005Assets
                  DistributedCash
                  and cash equivalents
              
              $
              26,690Accounts
                  receivable
              
              
              459,516Inventory
              
              
              155,742Property
                  and equipment, net
              
              
              18,240Other
                  assets
              
              
              310,849Total
                  assets of discontinued operations
              
              
              971,037Liabilities
                  DistributedAccounts
                  payable
              
              
              243,349Accrued
                  liabilities
              
              
              199,929Total
                  liabilities of discontinued operations
              
              
              443,278Net
                  assets of discontinued operations distributed
              
              $
              527,759
 
 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:
 
 6
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 
 As
                  of June 30,2005Summary
                  of IncomeRevenues
              
              $
              823,136Cost
                  of revenues
              
              
              398,303Gross
                  profit
              
              
              424,833Total
                  operating expenses
              
              
              388,822Total
                  other (income) expenses
              
              
              (184
              )Provision
                  for income tax
              
              
              1,600Income
                  from operations of Amerikal, net of tax
              
              $
              34,595
 
 As
        a
        result of the foregoing distribution of Amerikal, the Company recognized
        a loss
        from discontinued operations in the quarter ended December 31, 2005 of
        ($837,768). There were no sales from Amerikal included in the periods from
        October 1, 2005 to June 30, 2006.
 
 **Note
        3 - 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 and other expenses of $(1,210,134) for the period ended June
        30,
        2006, and only had $425 in income. 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
“Financing”, Note 15, 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.
 
 **Note
        4 - Fixed Assets**
 
 Fixed
        assets of continuing operations and discontinued operations as of June 30,
        2006
        and 2005 consisted of the following:
 
 Continuing
                  Operations
              
              2006
              
              2005Office
                  equipment
              
              $
              1,800
              
              $
              -Accumulated
                  depreciation
              
              
              (
                  30
              )
              
              -$
              1,700
              
              $
              -Discontinued
                  OperationsOffice
                  equipment
              
              $
              -
              
              $
              19,442Accumulated
                  depreciation
              
              
              -
              
              
              1,202$
              -
              
              $
              18,240
 
 7
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 During
        the years ended June 30, 2006 and 2005, the Company recorded $30 and $0 of
        depreciation expense for continuing operations and recorded $0 and $1,202
        for
        discontinued operations, respectively.
 
 **Note
        5 - Amortization Expense**
 
 During
        the quarters ended June 30, 2006 and 2005, the Company did not record
        amortization expense for continuing operations and recorded $0 and $75,000
        for
        discontinued operations, respectively.
 
 **Note
        6 - 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
        June 30, 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.
        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.
 
 The
        discounts on the notes payable are being amortized over the period of one
        year.
        During the quarter ended June 30, 2006, the Company expensed $239,276 of
        interest as finance charges attributable to the Warrant, and reduced the
        discounts on the notes payable by a similar amount.
 
 **Note
        7 - Convertible Debt with Detachable Warrants** .
 
 On
        June
        6, 2006, the Company entered into a definitive Securities Purchase Agreement
        and
        ancillary agreements (the “Agreements”) with four accredited investors (the
“Investors”) for the sale of up to $2,000,000 of 6.0% callable secured
        convertible notes due June 6, 2009 (the “Convertible Notes”.) The Convertible
        Notes are convertible at the option of the holders at any time prior to the
        maturity date into shares of the Company’s common stock at a conversion price of
        the market price as defined in the agreements. As of June 30, 2006, the Company
        had issued $700,000 of the Convertible Notes pursuant to the Agreements.
        The
        conversion rate of the Convertible Notes is based upon 50% of the Market
        Price
        of the Company’s stock at the time of conversion. Market price is defined as the
        average of the lowest three trading prices for the Company’s stock on the OTC
        Bulletin Board during the twenty day period, ending one trading day prior
        to
        conversion. The Company incurred $96,000 of direct finance charges and expenses
        attributable to the placement of the Convertible Notes in the period ended
        June
        30, 2006. In addition, the Company accrued $3,452 of interest expense on
        the
        $700,000 note payable during the quarter ended June 30, 2006. The Company
        also
        incurred finance charges attributable to the issuance of the warrants issued
        in
        connection with the Convertible Notes in the amount of $4,040,569, and
        recognized an expense of $19,161 for the amortization of the debt discount
        on
        the Convertible Note during the quarter ended June 30, 2006.
  8
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 
 Due
        to
        the preferential conversion feature of these convertible notes, the Company
        has
        accrued a liability attributable to the beneficial conversion feature in
        the
        amount of $1,258,782, which represented the value of additional shares that
        may
        be issued upon conversion at the market price on the date of issuance, versus
        the value of the maximum number of shares that may be issued at the discounted
        price. In addition to the foregoing, the Company issued 4,000,000 detached
        warrants to purchase shares of the Company’s common stock to the convertible
        note investors. The Company determined the value of these warrants using
        the
        Black Scholes method of valuation, and recorded a liability attributed to
        the
        fair value of the warrants at June 30, 2006 in the amount of $3,681,105.
        Since
        the warrants may be exercised at any time following issuance, the Company
        incurred a finance charge attributable to the issuance of the warrants in
        the
        quarter ended June 30, 2006 in the amount of $4,040,569. During the quarter
        ended June 30, 2006 the Company recorded as other income in the amount of
        $193,056 the change in fair value of the warrants between the date of issuance
        and June 30, 2006, and recorded as Other Expense the change in fair value
        of the
        derivative liability in the amount of $6,263.
 
 The
        Company has performed calculations of the valuation of the maximum shares
        issuable to satisfy the convertible notes on the date of issuance and the
        end of
        the reporting period based upon the Black Scholes method of valuation, and
        allocated the valuation of the derivative between the convertible note payable
        and the value of the derivative as a discount on the note payable. The discount
        on the convertible note payable is being amortized over the term of the notes
        (three years.) During the period ended June 30, 2006 the Company expensed
        as
        finance charges attributable to the above financing the sum of $19,161, and
        reduced the discount on the convertible notes payable in the same amount.
        In
        calculating the value of the above derivative, the Company has not included
        any
        value attributable to the potential penalty of $0.02 per share that is provided
        for in the agreements in the event of not being successful in have an effective
        Registration statement within 120 days of the issuance of any of the convertible
        notes, as the Company has timely filed the required SB-2 Registration Statement,
        and reasonably expects the approval of such statement within the 120 day
        time
        limit. In the event that the 120 day period is reached without the Registration
        Statement being declared effective, the Company will increase the valuation
        of
        the derivative to include the penalty provisions.
 
 **Note
        8 - 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.
 
 9
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 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.
 
 There
        have been no other issuances of shares by the Company in the period ended
        June
        30, 2006.
 
 **Note
        9 - 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 the 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. These options were not issued pursuant to the
        Company’s 2006 Incentive and Nonstatutory Stock Option Plan, described below.
        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 June 30, 2006 in the amount of $105,838 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.
 
 On
        May 3,
        2006 the Company’s Board of Directors adopted a plan for the issuance of stock
        options to employees or others (“The 2006 Incentive and Nonstatutory Stock
        Option Plan,” hereinafter referred to as the “Plan”). Under the Plan, the
        Company has reserved ten million shares for issuance. During the quarter
        ended
        June 30, 2006, the Company granted the following stock options to four members
        of the Company’s management team and one consultant as
        compensation:
 **Date
                    Issued:**
                
                **Optionee
                    Name**
                
                **Number
                    of Options**
                
                **Exercise
                    Price**
                
                **Value***
                
                **Expiraton
                    Date**May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                4,008,000
                
                $
                0.94
                
                $
                3,073,245
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                1,992,000
                
                $
                0.50
                
                
                1,574,630
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Officer
                
                
                1,008,000
                
                $
                0.50
                
                
                796,801
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                1,008,000
                
                $
                0.50
                
                
                796,801
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Outside
                    Consultant
                
                
                201,600
                
                $
                0.50
                
                
                159,360
                
                
                May
                    3, 2011Totals
                
                
                
                
                
                8,217,600
                
                
                
                
                $
                6,400,837
  *The
        Company determined the fair market value of the options issued above as of
        the
        date of the grant using the Black Scholes valuation method with the following
        estimates: 5.25% risk free rate and 145% volatility of the Company’s common
        stock. The Plan provides for a vesting of the options over a five year term,
        with 40% of the options vesting ratably over the first two years (24 months)
        from the date of issuance. Accordingly as a result of the issuance of these
        options, the Company has expensed as stock based compensation-related party
        the
        vested portion of the options earned between the date of issuance and June
        30,
        2006 in the amount of $198,359, and as stock based compensation-consulting
        services in the amount of $5,065.
 
 10
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 The
        following is a summary of activity of outstanding stock options:
 
 WeightedAverageNumber
              
              ExerciseOf
                  Shares
              
              PriceBalance,
                  March 31, 2006
              
              
              100,000
              
              $
              2.00Options
                  granted
              
              
              8,217,600
              
              
              0.73Options
                  exercised
              
              
              -
              
              
              -Balance,
                  June 30, 2006
              
              
              8,317,600
              
              
              0.73Exercisable,
                  June 30, 2006
              
              
              273,920
              
              $
              0.73
  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$0.50
                  - 2.00
              
              8,317,600
              
              $0.73
              
              5.10
                  yrs
              
              273,920
              
              $
                  0.73
 
 **Common
        Stock Equivalents: Warrants**
 
 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 $65,025 of this value as prepaid
        compensation from the inception of this Agreement to June 30, 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 had previously reflected the entire value of the warrant grant
        as
        Prepaid Compensation as of March 31, 2006. During the quarter ended June
        30,
        2006, the Company recorded $16,006 of consulting expense representing the
        vested
        portion of these warrants, and reduced prepaid compensation by the same
        amount.
 
 **Warrants
        Issued in Connection with Convertible Notes:**
 
 The
        investors in the convertible note transaction were issued warrants to purchase
        4,000,000 shares of the Company’s common stock, concomitant with the sale of the
        convertible notes. These warrants have an exercise price of $1.10 per share,
        and
        expire on June 6, 2016. These warrants have not yet been registered through
        the
        filing of an SB-2 Registration Statement, but have been issued and are
        exercisable at any time during their ten year term. The Company has determined
        the valuations of these warrants based upon the Black Scholes method of
        valuation, using the following estimates: 5.25% risk free interest rate,
        163%
        volatility of the Company’s common stock, and an expected life of ten years. The
        Company recorded a liability in the amount of $3,681,105 as at June 30, 2006
        attributable to the issuance of these warrants.
 
 11
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 In
        addition to the foregoing, pursuant to an engagement agreement for financial
        advisory services and as compensation for the Convertible Note financing,
        the
        Company issued 640,000 warrants to purchase shares of the Company’s common stock
        to Ascendiant Securities, LLC. These warrants bear an exercise price of $0.80
        per share, and are exercisable for a term of seven (7) years from the date
        of
        issuance. The Company has determined the value of the warrants to be $611,036
        based upon the Black Scholes method of valuation, using the following estimates:
        5.25% risk free interest rate, 150% volatility of the Company’s common stock,
        and an expected life of 7 years. Since the services for which these warrants
        were issued have been fully performed, the Company has recorded the entire
        value
        of the warrants as stock based consulting expense in the quarter ended June
        30,
        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.
 
 The
        following is a summary of activity of outstanding stock warrants:
 
 WeightedAverageNumber
              
              ExerciseOf
                  Shares
              
              PriceBalance,
                  March 31, 2006
              
              $
              1,758,940
              
              $
              0.63Warrants
                  granted
              
              
              4,640,000
              
              
              1.06Warrants
                  exercised
              
              
              -
              
              
              -Balance,
                  June 30, 2006
              
              
              6,398,940
              
              
              0.94Exercisable,
                  June 30, 2006
              
              $
              4,640,000
              
              $
              1.06
  At
        June
        30, 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$
                  0.60 - 2.00
              
              6,398,940
              
              $
                  0.94
              
              8.8
                  yrs
              
              4,640,000
              
              $
                  1.06
 
 There
        have been no other issuances of options or warrants by the Company in the
        quarter ended June 30, 2006.
  12
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 **Note
        10 - Commitments and Contingencies**
 
 **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 an answer and alleged over twenty affirmative
        defenses to the remaining charging allegations in the plaintiff’s complaint. 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.
 
 On
        July
        7, 2006 the Company was served with a lawsuit for “injunctive and declaratory
        relief and damages” filed by plaintiffs H2O Liquid Air, LLC and H2O Liquid Air
        of Florida, LLC on June 10, 2006 in the United States district Court, Southern
        district of Florida, Miami Division, against the Company and eight other
        defendants. The complaint alleges ten “counts” although only three of these
        counts are directed against the Company: unfair competition under common
        law,
        statutory infringement under Section 32 of the Lanham Act, and interference
        with
        a distribution agreement. The Company will be defended by legal counsel engaged
        by co-defendant Munters Corporation. The Company will strongly defend these
        claims through its legal counsel. The Company further 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, the Company is not aware of any litigation, either pending
        or threatened, and has not been the defendant or a plaintiff in any litigation,
        since the discharge from bankruptcy attributable to its precedessor L.L.
        Knickerbocker Company, Inc.
 
 **Commitments**
 
 On
        June
        1, 2006, the company acquired the rights to distribute certain licensed
        anti-microbial products, currently sold under the brand name Hydrosil, from
        Apcan Distribution, LLC. The Agreement provides for the exclusive license
        to
        distribute Hydrosil and related licensed technology, over a perpetual term.
 
 On
        June
        1, 2006, the Company engaged Intercontinental Management of Nevada (“IMN” as a
        consultant to head up sales and marketing, and provide product support, training
        and maintenance services to customers of Hydrosil. The consulting agreement
        obligates the Company to pay consulting fees of up to $7,500 per month for
        the
        sales, product support, training, and maintenance services to be performed
        by
        IMN over the ten-year term. In addition, the Agreement provides for commissions
        on sale of products licensed to the Company under the Apcan Distributors,
        LLC
        agreements discussed above, and provides for the Company on August 1, 2006
        to
        issue to IMN options to purchase 100,000 shares of common stock of the Company
        under certain conditions. The Company will value the options when issued
        using
        the Black Scholes method of valuation, and record this value in a special
        equity
        account entitled prepaid compensation, as the options vest. The consulting
        agreement further provides for IMN to earn additional options based upon
        realization of stated sales objectives
 
 **Note** **11
        - Segment reporting and concentrations**
 
 Up
        until
        the end of the quarter ended September 30, 2005, 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
        the quarter ended December 31, 2005 the Company completed the distribution
        of
        Amerikal, and has subsequently concentrated solely upon Aquair for its revenue
        activity. The Company is therefore again operating in a single business segment
        for the sales of its water generators.
 
 13
 
 **R.G.
            Global Lifestyles, Inc.**
 Notes
            to
            consolidated financial statements
 (unaudited)
 **Note
        1** **2
        - 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. Effective
        as
        of April 1, 2006, the Company amended the previous agreement between its
        Aquair
        subsidiary and the related party, to increase the amount of monthly rental
        space
        and support services provided. The amended agreement provides for 1000 square
        feet of office space at a fair market rate of $3.00 per square foot, including
        maintenance, utilities and base telephone, for a total rent payment of $4,000
        per month, and expanded support services including administrative and
        secretarial support staff at a rate of $7,500 per month. In addition, in
        order
        to provide more space for its increased staff, the Company entered into a
        new
        month to month rental and support services agreement with the same related
        party, to provide an additional 667 square feet of rental space on a full
        service basis, including maintenance, utilities and base telephone, at the
        fair
        market rental rate of $3.00 per square foot, for a total monthly space rental
        charge of $3,000 per month. The second rent and support services agreement
        also
        provides for additional support services in the form of secretarial staff,
        at a
        rate of $5,200 per month. The agreements are not binding and may be cancelled
        by
        either party at any time. During the quarter ended June 30, 2006, the Company
        expensed $41,800 under this agreement.
 
 As
        described in detail in Note 6- 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). On May 3, 2006, the Company also adopted a stock
        option plan pursuant to which it granted options to four members of its
        management team, three of whom are officers and directors, and one of whom
        is an
        officer of the Company. During the quarter ended June 30, 2006 the Company
        recorded the vested portion of these options as an expense entitled “Stock-based
        compensation-related party in the amount of $198,359. See Note 9 - Options
        and
        Warrants, above.
 
 **Note
        13 - Subsequent Events**
 
 In
        addition to the filing on July 19, 2006 of the shelf registration statement
        described in Note 15 above, the Company also filed its annual Form 14A Proxy
        Statement on July 28, 2006, in connection with the Company’s annual stockholders
        meeting to be held September 15, 2006 at the offices of the Company.
 
 On
        July
        12, 2006, the Company executed a letter of intent with Catalyx, Inc. to license
        their patented technology for use in removing excessive sodium from the water
        associated with wet bed methane mining in the State of Wyoming. The Company
        pre-paid $200,000 cash for this right. The transaction contemplates that
        three
        selected oil companies located in Wyoming will each produce a purchase order
        to
        Aquair, through Catalyx, for the purpose of proving the viability of the
        technology for the oil companies. When testing is successfully completed,
        it is
        anticipated that contracts with one or all three of the oil companies will
        be
        generated for Aquair to process the water on a “charge by the barrel” basis. The
        Company will record this payment as an intangible asset and amortize the
        value
        over the ten year life of the agreement.
 
 14


**FORWARD-LOOKING
      STATEMENTS**





This
      document contains “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995. All statements other than statements
      of historical fact are “forward-looking statements” for purposes of federal and
      state securities laws, including, but not limited to, any projections of
      earnings, revenue or other financial items; any statements of the plans,
      strategies and objections of management for future operations; any statements
      concerning proposed new services or developments; any statements regarding
      future economic conditions or performance; any statements or belief; and any
      statements of assumptions underlying any of the foregoing.





Forward-looking
      statements may include the words "may," "could," "estimate," "intend,"
      "continue," "believe," "optimistic," "plan," "aim," "will," "likely," "expect"
      or "anticipate" or other similar words. These forward-looking statements present
      our estimates and assumptions only as of the date of this report. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      speak only as of the date on which they are made. Except for our ongoing
      securities laws, we do not intend, and undertake no obligation, to update any
      forward-looking statement.





Although
      we believe that the expectations reflected in any of our forward-looking
      statements are reasonable, actual results could differ materially from those
      projected or assumed in any of our forward-looking statements. Our future
      financial condition and results of operations, as well as any forward-looking
      statements, are subject to change and inherent risks and uncertainties. The
      factors impacting these risks and uncertainties include, but are not limited
      to:




·
            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 locate suitable new products for distribution within our business
                sector, and retain licensing rights to such new products on acceptable
                terms;·
            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; and·
            Operational
                inefficiencies in distribution or other
                systems.





The
      following discussion should be read in conjunction with the historical financial
      statements of R.G. Global Lifestyles, Inc., including Form 10-KSB as of March
      31, 2006, and those of its predecessor, the L.L. Knickerbocker Company, Inc.,
      and notes thereto.





15


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





**Overview
      and Outlook**





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 R.G. Global Lifestyles, Inc.





***Operating
      Subsidiary***





***Aquair,
      Inc*** .





In
      October, 2004 the Company formed Aquair, Inc. as a wholly owned subsidiary,
      a
      California corporation (“Aquair”). Aquair was formed to fulfill the Company’s
      initial mission to distribute licensed environmentally friendly water generating
      equipment in the United States and Asia that creates purified drinking water
      from air for residential and commercial uses. Since that time, the Company
      has
      expanded its vision in the clean water technology sector to include other
      related products.





Currently,
      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, and licensed “anti-microbial” water cleaning and filtration
      products.





Aquair
      plans to distribute or sublicense (i) “anti-scaling” water technology; (ii)
      potable bottled water generated from commercial and industrial water generation
      and filtration technologies; (iii) potable water via mobile air to water units
      in geographic regions where no solution exists for purified drinking water;
      (v)
      carbonated energy drinks made with purified water from our licensed
      technologies; (v) water desalinization technology for use in conjunction with
      wet bed mining; and (vi) other water-related technologies.





Aquair’s
      marketing strategy for its atmospheric pure water generators 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. Aquair’s marketing strategy
      for its anti-microbial water cleaning agents will initially focus on residential
      and commercial pool owners, and hotel chains.





Atmospheric
      Pure Water Generators :





Aquair
      has acquired the rights to market and distribute water generators that
      precipitate drinking water from air. The various water generating machine has
      been tested in various locations. As of June 30, 2006, the Company has sold
      units to customers in the U.S. and Asia, and anticipates further
      sales.





Aquair
      has the right to distribute and sell Munters water generating equipment products
      to the commercial residential building industry, government agencies, shipping
      industry and oil and gas industry. Additionally, Aquair the right to bottle
      water generated by Munters new patented technology. These rights are effective
      worldwide, with the exclusion of Thailand, Indonesia, Singapore and Malaysia.





Aquair
      has engaged Locke Media to be the exclusive distributor in Vietnam for the
      Company’s home/office model of atmospheric water generators. Locke has begun
      issuing purchase orders, and is obligated to make certain minimum purchases
      of
      the product.





Aquair
      has engaged Entech Sales and Service (headquartered in Dallas, Texas) to work
      in
      conjunction with Munters Corporation in the engineering, design and bidding
      on
      sales of total water solutions using Aquair products and
      technology.





16


Aquair
      has 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 a 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.





In
      addition to being supplied by atmospheric water generators by Munters, until
      present, the Company had been supplied with its home/office atmospheric water
      generators by Dong Yang. However, moving forward the Company intends to have
      Hendrx Corp. replace Dong Yang and be the principal suppliers of the Company’s
      atmospheric water generation products for that niche, as well as any other
      suppliers that the Company deems appropriate for this product sector and its
      other planned technologies.





Anti-Microbial
      Products





The
      Company has acquired the rights to distribute certain licensed anti-microbial
      products, currently sold under the brand name Hydrosil, from Apcan Distribution
      LLC. Hydrosil is a substitute for chlorine and bromine. Revenue generation
      in
      the swimming pool and spa industry is expected to grow rapidly in the face
      of
      consumer dislike of traditional halogen chemicals and the large increases in
      costs of these chemicals during the past 5 years. Other applications for the
      products include, but are not limited to, cooling towers, surface cleansers,
      medical equipment sanitation, bottling equipment disinfection and other
      industrial applications wherein safe, effective alternatives to chlorine and
      bromine are desirable. The Hydrosil broad-spectrum, anti-microbial disinfectant
      solution is designed to kill up to a stage-5 airborne virus. In Europe, Hydrosil
      is being used to dissolve bio-film in air conditioning units, to disinfect
      hospital operating rooms, and as a treatment for municipal water in the U.K.
      In
      the US, tests have been conducted on poultry and fish farms using Hydrosil
      to
      kill the bacteria and viruses in the water, and to stop the spread of bird
      flu
      virus. The Hydrosil product is already in use in over 350 residential pools
      as a
      chlorine substitute and is currently undergoing tests by several major
      corporations.





The
      Company has engaged Intercontinental Management of Nevada (“IMN”) as a
      consultant to head up sales and marketing, and to provide product support,
      training and maintenance services to the customers of Hydrosil.





***Discontinued
      Operations***





***Amerikal
      Nutraceutical Corp*** .





On
      July
      28, 2004 the Company entered into an agreement with Amerikal International
      Holding, Inc. (“AIH”) whereby the Company acquired all of the issued and
      outstanding common stock of AIH in exchange for 1,900,000 voting common shares
      of the Company’s common stock. The acquisition closed and the shares were
      exchanged on July 28, 2004. At the close of the transaction, the former
      shareholders of AIH controlled 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
      allowed under SFAS 141, “Business Combinations,” we treated this acquisition as
      a recapitalization for accounting purposes, in a manner similar to reverse
      acquisition accounting.





As
      a
      result of the merger, the Company owned and operated Amerikal Nutraceutical
      Corp., a California corporation, (“Amerikal”) as a wholly-owned subsidiary.
      Amerikal’s business is to manufacture, sell and distribute dietary supplements,
      health and beauty aid products. The primary geographic markets for the Company’s
      products are in South East Asia and Asia, including Singapore, Indonesia,
      Malaysia, Thailand, Taiwan, Hong Kong and Japan.





On
      November 15, 2005 the Company executed an agreement with an effective date
      of
      October 1, 2005, between the Company and a group of founding shareholders,
      pursuant to which the Company distributed its wholly owned subsidiary Amerikal
      to such 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’s legal and accounting advisors indicated that the
      proposed transaction will qualify as a tax-free distribution of a controlled
      corporation and exchange of equity under applicable provisions of the Internal
      Revenue Code, and accordingly the Company does not anticipate recognition of
      gain or loss as a result of the proposed agreement. As a result of the foregoing
      distribution of Amerikal, the company recognized a loss from distribution of
      discontinued operations in the quarter ended December 31, 2005 of ($837,768).
      There were no sales from the Amerikal subsidiary included in the current fiscal
      quarter ended June 30, 2006.





17


***On
      Line Surgery, Inc*** .





In
      addition to the foregoing, 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, a California
      Corporation (“On Line Surgery”), to develop the advertising potential of this
      web portal for the Company’s existing and future nutraceutical products, 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 its subsidiary On Line Surgery,
      for $20,000. On Line Surgery Inc. never commenced operations, and is in the
      process of being dissolved by the Company.





**Results
      of Operations for the Three Months Ended June 30, 2006 and
      2005**





As
      a
      result of the distribution of Amerikal and the sale of the rights to the On
      Line
      Surgery website, described above, the following discussion compares results
      of
      continuing operations of the Company only.





Three
                Months Ended June 302006
            
            2005Product
                Sales
            
            $
            425
            
            $
            4,600Cost
                of sales
            
            $
            5,928
            
            $
            2,230Gross
                Profit
            
            $
            (5,503
            )
            $
            2,370General
                and
              administrative
                expenses
            
            $
            103,438
            
            $
            3,655Consulting
                services
            
            $
            120,722
            
            $
            13,557Stock
                based compensation-related party
            
            $
            198,359Stock
                based compensation-consultants
            
            $
            632,107Depreciation
                andAmortization
            
            $
            30
            
            $
            0Total
                Expenses
            
            $
            1,204,631
            
            $
            111,025Net
                Income
            
            $
            (1,210,134
            )
            $
            (108,655
            )





18


**Revenues
      and Cost of Sales**





For
                the three months ended June 30
            
            
            
            
            
            **Increase/(decrease)**2006
            
            2005
            
            $
            
            %Gross
                profit
            
            $
            (5,503
            )
            $
            2,370
            
            $
            (7,873
            )
            
            332.2
            %





During
      the three months ending June 30, 2006, the Company generated gross profit of
      $(5,503) on net product sales of $425 and cost of sales totaling $5,928,
      compared to $2,370 of gross profit on net product sales of $4,600 and costs
      of
      sales of $2,230 in the three months ending June 30, 2005. This resulted in
      a
      decrease in gross profits of $7,873, or 332.2%, from the same period one year
      ago. The primary reason for the decrease in revenues was because the Company
      has
      been concentrating on establishing marketing and distribution channels for
      its
      products and expanding its product line, but has not yet commenced sales in
      its
      Aquair subsidiary.





**General
      and Administrative Expenses**





For
                the three months ended June 30
            
            
            
            
            
            **Increase/(decrease)**2006
            
            2005
            
            $
            
            %General
                & Administrative Expenses
            
            $
            103,438
            
            $
            3,655
            
            $
            99,783
            
            
            2730
            %





General
      and administrative expenses were $103,438 for the three months ended June 30,
      2006 versus $3,655 for continuing operations for the three months ended June
      30,
      2005, which resulted in an increase of $99,783. General and administrative
      expenses increased comparatively for the three months ended June 30, 2006 to
      the
      comparative period in 2005 as a result of costs associated with costs associated
      with the diversification of the Company’s product line.





**Total
      Operating Expenses**





For
                the three months ended June 30
            
            
            
            
            
            **Increase/(decrease)**2006
            
            2005
            
            $
            
            %Total
                Operating Expenses
            
            $
            1,204,631
            
            $
            111,025
            
            $
            1,093,606
            
            
            985.0
            %





Our
      operating expenses for the three months ended June 30, 2006 were $1,204,631
      compared to $111,025 for the three months ended June 30, 2005. The primary
      reasons for the increase in operating expense were the stock based compensation
      expense-related party of $198,359 and stock based compensation -consultants
      of
      $632,107 recorded by the Company in the current fiscal quarter, as a result
      of
      the issuance of options to related parties under the 2006 Non-statutory Stock
      option plan and the issuance of warrants and options to consultants,
      respectively. For both periods, we incurred expenses for general management
      and
      legal and accounting fees related to continuing operations. For the three months
      ended June 30, 2006, the Company expended $41,800 in rent and interest paid
      to a
      related party, and paid $ 80,330 in legal and accounting fees, compared to
      $18,000 and 63,813 respectively for these expenses in the three months ended
      June 30, 2005. During the three months ended June 30, 2006, the company incurred
      total general and administrative expenses of $103,438, compared to $3,655 of
      similar expenses in the same period last year.





**Net
      Income (Loss)**




For
                the three months ended June 30
            
            
            
            
            
            **Increase/(decrease)**2006
            
            2005
            
            $
            
            %Net
                income
            
            $
            (1,210,134
            )
            $
            (108,655
            )
            $
            1,101,479
            
            
            1013.7
            %





The
      net
      loss from operations for the three months ended June 30, 2006 was $1,210,134
      versus a net loss of $108,655 for the three months ended June 30, 2005, an
      increase in net loss of $1,101,479 or 1013.7%. The increase in net loss as
      compared to the same period in 2005 was due the recording of a stock-based
      compensation expense-related party of $198,359 and stock based
      compensation-consultants in the amount of $632,107 in the current fiscal
      quarter, and to costs associated with diversification of the Company’s product
      lines, expansion of facilities, increased professional fees, and higher general
      and administrative expenses.





19


**Liquidity
      and Capital Resources**





We
      had
      cash and cash equivalents of $519,365 as of June 30, 2006. We also had $900
      of
      accounts receivable, prepaid expenses of $252,222, and $161,016 of cash deposits
      held by others. The Company also had net fixed assets of $1,770, making our
      total assets at June 30, 2006 equal to $935,273.





Our
      total
      current liabilities as of June 30, 2006 consisted of $68,507 of accounts
      payable, $90,333 of accrued expenses, and $1,188,077 of Notes Payable. The
      Notes
      payable portion of current liabilities consisted of notes payable to related
      parties of $708,132 less discounts of $167,704, and notes payable to others
      of
      $905,808 less discounts of $258,159. The total of current liabilities at June
      30, 2006 was $1,346,917. The company also had long term liabilities consisting
      of notes payable to unrelated parties of $19,161 ($700,000 less discounts of
      $680,839), liability attributed to the beneficial conversion feature of the
      convertible notes in the amount of $1,258,782, and liability associated with
      the
      issuance of detachable warrants in the amount of $3,681,105. The total of long-
      term liabilities at June 30, 2006 was $4,959,048. The total liabilities as
      of
      June 30, 2006 were $6,305,965.





During
      the three months ending June 30, 2006, the Company had sales revenues of $425,
      and $5,928 of direct costs of operations, resulting in gross operating deficit
      of $(5,503). The Company incurred other expenses of $1,204,631, resulting in
      a
      net loss from operations of $(1,210,134).





The
      Company has financed its operations through new financing in the form of sale
      of
      callable secured convertible notes payable to four accredited investors. During
      the fiscal quarter, the Company received proceeds from this financing, as
      described in detail in the notes to financial statements. At the end of the
      fiscal quarter, the Company had cash and cash equivalents of $519,365. The
      Company incurred direct finance charges in connection with the placement of
      the
      Convertible Notes in the amount of $96,000. In addition, the Company expensed
      finance charges attributable to the issuance of warrants in connection with
      the
      Convertible Notes in the amount of $4,040,569, amortization of the discount
      of
      the convertible debt in the amount of $19,161, and $3,452 of accrued interest
      payable on the long term note payable of $700,000.


After
      taking into account the foregoing accrued interest expenses and financing costs
      and other expenses


attributable
      to the change in fair value of warrants and value of derivative liability,
      in
      the total amount of $4,629,723, and provision for income taxes of $800, the
      financial net loss for the three months ended June 30, 2006 was
      $(5,840,657).





**PLAN
      OF OPERATION FOR THE NEXT TWELVE MONTHS.**





Over
      the
      next twelve months, the Board of Directors has determined to focus the Company
      on the development of business under its Aquair subsidiary. The Company has
      distributed its Amerikal subsidiary to a group of founding shareholders, and
      has
      sold the rights to the sole asset in its On Line Surgery subsidiary.





Currently,
      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, and licensed “anti-microbial” water cleaning and filtration
      products.





Aquair
      plans to distribute or sublicense (i) “anti-scaling” water technology; (ii)
      potable bottled water generated from commercial and industrial water generation
      and filtration technologies; (iii) potable water via mobile air to water units
      in geographic regions where no solution exists for purified drinking water;
      (v)
      carbonated energy drinks made with purified water from our licensed
      technologies; (v) water desalinization technology for use in conjunction with
      wet bed mining; and (vi) other water-related technologies.





20


The
      Company further plans to increase its sales, marketing, and investor relations
      efforts for the Aquair brand and product line by adding personnel and/or
      consultants. The fundamental thrust of our marketing strategy will consist
      of
      reaching home shoppers, health related businesses, large business accounts,
      the
      government, hotel industry, residential and commercial pool owners, and maritime
      industry through direct response, direct sales, and strategic partnerships
      with
      manufacturers, distributors and sales agents/consultants. The Company also
      plans
      to utilize celebrity spokespersons to help establish the Aquair brand and sell
      carbonated energy drink products made from our technology’s pure
      water.





As
      of
      June 30, 2006 we had cash and cash equivalents of $519,365, and accounts
      receivable in the amount of $900. In light of the Company’s distribution of its
      Amerikal subsidiary and its corresponding revenue, in order to fully execute
      its
      business plan for the next twelve months the Company may need to raise
      additional funds for the marketing and distribution of its Aquair products.
      The
      Company has not yet decided upon the specific method of raising additional
      working capital that may be required to meet its objectives. Additional working
      capital funds may be obtained through various means, including the future sale
      of the Company’s equity securities in private or public offerings, debt
      financing, hybrid financing, trade financing, receivables financing, factoring
      or any combination of credit, equity and/or debt which the Company can obtain
      on
      terms deemed favorable to the Company by the Board of Directors.





The
      Company has continued its research and testing related to Aquair products and
      continues to evaluate new products for potential licensing, sale and
      distribution. The Company may need to purchase additional plant and equipment
      over the next twelve months, but such purchases and the amounts are contingent
      upon its business success and overall market conditions. Similarly, the Company
      may need to increase its workforce to respond to potentially growing business
      needs, but the amounts and timing cannot be ascertained with certainty at this
      time.





**Off-Balance
      Sheet Arrangements.**





None.





**Going
      Concern**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America, which contemplate that the Company will continue in business as a
      going
      concern. During the three months ended June 30, 2006 the Company showed a net
      loss from continuing operations in the amount of $(1,210,134). The financial
      net
      loss after provision for income tax, interest and financing expense is
      ($5,840,657) for the most recent fiscal quarter.





The
      Company can no longer rely on revenues from its distributed subsidiary Amerikal.
      Therefore, the Company will be developing revenues through its Aquair
      subsidiary. Aquair has commenced sales and anticipate future sales and revenues
      from its licensed atmospheric water generators and anti-microbial products.
      To
      date only minimal sales have been generated from these product-lines, as selling
      activity has only recently commenced.





The
      consolidated financial statements do not include any adjustments that might
      result from the outcome of any uncertainty as to the Company’s ability to
      continue as a going concern. The consolidated financial statements also do
      not
      include any adjustments relating to the recoverability and classification of
      recorded asset amounts, or amounts and classifications of liabilities that
      might
      be necessary should the Company be unable to continue as a going
      concern.





21


**Critical
      Accounting Policy and Estimates**





This
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations section discusses the Company’s consolidated financial statements,
      which have been prepared in accordance with accounting principles generally
      accepted in the United States of America. The preparation of these consolidated
      financial statements requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities at the date of the
      consolidated financial statements, and the reported amounts of revenues and
      expenses during the reporting period. On an ongoing basis, management evaluates
      its estimates and judgments, including those related to revenue recognition,
      accrued expenses, financing operations, and contingencies. Management bases
      its
      estimates and judgments on historical experience and on various other factors
      that are believed to be reasonable under the circumstances, the results of
      which
      form the basis for making judgments about the carrying value of assets and
      liabilities that are not readily apparent from other sources. Actual results
      may
      differ from these estimates under different assumptions or conditions. The
      most
      significant accounting estimates inherent in the preparation of the Company’s
      consolidated financial statements include estimates as to the appropriate
      carrying value of certain assets and liabilities which are not readily apparent
      from other sources, primarily stock-based compensation. The methods, estimates
      and judgments the Company uses in applying these most critical accounting
      policies have a significant impact on the results it reports in its consolidated
      financial statements.





**Equity
      - Based Compensation**





In
      the
      presentation of the consolidated financial statements, the Company has restated
      and reclassified certain aspects of the prior period statements of financial
      operations due to a change in accounting estimate. The changes are described
      in
      the notes to the financial statements attached and incorporated in this filing.
      The purpose of the change was to more accurately reflect the fair market value
      of the expense for stock-based compensation for shares issued in the previous
      accounting period.





The
      Company records stock-based compensation to its officers, directors, and outside
      consultants at the fair market value of the services in general and
      administrative expense. In 2004, prior to being approved for quotation of its
      stock on the OTCBB, the Company recorded the expenses of stock based
      compensation issued to related parties (officers and directors), as well as
      stock based compensation issued to consultants, at $0.05 per share based upon
      a
      valuation study conducted at the request of the Board of Directors. Subsequent
      to the listing of the Company’s common stock on the OTCBB, it issued shares of
      unregistered common stock to two attorneys in exchange for legal services.
      As of
      the date of this share issuance in March 2005, the Company’s common stock was
      trading at approximately $1.51 per share, and it therefore recorded the stock
      issuance as of that date as an expense at the fair market value of the stock
      issued.





The
      Company granted stock options pursuant to a consulting agreement dated July
      18,
      2005 among the Company, Aquair, Inc. and General Steve Ritchie. In exchange
      for
      sales and marketing services to be rendered for Aquair, Inc. and as partial
      compensation for services, General Ritchie was granted an option to purchase
      100,000 shares of the Company’s common stock, vesting over a three-year period
      with one third vesting at twelve months from date of execution of the Agreement,
      one third at twenty-four months, and the final third at thirty six months.
      As of
      the date of this agreement, the Company’s common stock was trading at
      approximately $3.00 per share. Based upon the Black Scholes method of
      calculation, the Company determined that the fair value of the options granted
      would be $346,379. In this quarter, the Company recorded prepaid compensation
      of
      $ 27,468 attributable to the grant of these options. From inception of the
      options grant to June 30, 2006, the Company has recorded $105,838 of the value
      of these options as prepaid compensation, based upon the fair value of that
      proportion of options deemed earned to date. At the annual vesting dates under
      the Agreement, the Company will expense the options as compensation and reduce
      prepaid compensation.





On
      May 3,
      2006 the Company’s Board of Directors has adopted a plan for issuance of stock
      options to employees or others (2006 Incentive and Non-statutory Stock Option
      Plan, referred to as the “Plan”). Under the Plan, the Company has reserved ten
      million shares for issuance. During the three months ended June 30, 2006, the
      Company granted the following stock options to four members of the Company’s
      management team and one consultant as compensation.





22


**Date
                Issued**
            
            **Optionee
                Name**
            
            **Number
                of Options**
            
            **Exercise
                Price**
            
            **Expiration
                Date**May
                3, 2006
            
            
            Officer
                and director
            
            
            4,008,000
            
            $
            0.94
            
            
            May
                3, 2011May
                3, 2006
            
            
            Officer
                and director
            
            
            1,992,000
            
            $
            0.50
            
            
            May
                3, 2011May
                3, 2006
            
            
            Officer
            
            
            1,008,000
            
            $
            0.50
            
            
            May
                3, 2011May
                3, 2006
            
            
            Officer
                and director
            
            
            1,008,000
            
            $
            0.50
            
            
            May
                3, 2011May
                3, 2006
            
            
            Outside
                consultant
            
            
            201,600
            
            $
            0.50
            
            
            May
                3, 2011





The
      Plan
      provides for a vesting of the foregoing option grants over a five year term,
      with 40% of the options vesting ratably over the first two years from the date
      of issuance. The Company determined the fair market value of the options granted
      under the Plan as of the grant date using the Black Scholes valuation method,
      and has recorded an expense of $198,359 as stock-based compensation to related
      parties, and $5,065 of stock based compensation to consultants, representing
      the
      portion of the options vested in the period ended June 30, 2006. The Company
      also recorded the unamortized portion of these options as prepaid share-based
      compensation-related party on the balance sheet, in the amount of $6,197,414.
      See the accompanying Financial Statements and Notes to Financial Statements,,
      Note 9-Options and Warrants.





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





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





RISKS
      RELATING WITH OUR BUSINESS AND MARKETPLACE





***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.





23


***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.





***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:





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





24


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.***





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
      3. Controls and Procedures**





As
      required by SEC rules, the Company regularly
      evaluates the effectiveness of disclosure controls and procedures and report
      our
      conclusions about the effectiveness of the disclosure controls quarterly on
      our
      Forms 10-QSB and annually on our Forms 10-KSB.





In
      the
      course of the audit of our consolidated financial statements for the fiscal
      year
      ended March 31, 2006, based upon the evaluation for the period ended December
      31, 2005, for the reasons described below, our chief executive officer and
      chief
      financial officer concluded that our disclosure controls and procedures were
      not
      effective, as of the end of the third fiscal quarter for the period ended
      December 31, 2005, in ensuring that material information relating to the Company
      required to be disclosed by the Company in reports that it files or submits
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the SEC's rules and forms and that such
      information is accumulated and communicated to management, including the chief
      executive officer and the chief financial officer, as appropriate, to allow
      timely decisions regarding required disclosure. In the course of the audit
      of
      our consolidated financial statements for the fiscal year ended March 31, 2006,
      we determined that there were errors in the accounting treatment and reported
      amounts in our previously filed consolidated financial statements for the
      quarter ended December 31, 2005. The errors related to two areas: (1) in the
      presentation of the Company’s financial statements we recorded a loss on
      distribution of the Company’s wholly owned subsidiary in the nine months
      year-to-date period, but omitted to include the accounting effect of this event
      in the three-month period ended December 31, 2005. (2) Second, in the course
      of
      the year-end audit of our consolidated financial statements, the Company
      determined that the Black Scholes valuation calculation was incorrectly
      calculated as to certain warrants issued to related parties and others, as
      a
      result of which the allocation of value as between the notes and warrants was
      incorrectly stated. The Company has not yet restated its consolidated financial
      statements for the quarter ended December 31, 2005 but intends to do so. The
      Company has noted the following weaknesses in its internal controls which
      allowed the foregoing errors to occur. Accordingly, the consolidated financial
      statements contained in the previously filed Quarterly Report on Form 10-QSB
      for
      the period ended December 31, 2005 should no longer be relied upon.





25


Notwithstanding
      the material weaknesses described below, the Company's management has concluded
      that the consolidated financial statements included in this Report on Form
      10-QSB for the period ended June 30, 2006 fairly state, in all material
      respects, the Company's financial condition, results of operations and cash
      flows for the periods presented in conformity with generally accepted accounting
      principles. The reason for this conclusion is that the Company ascertained
      the
      errors associated with the presentation of the financial information in the
      course of the audit of its consolidated financial statements for the fiscal
      year
      ended March 31, 2006, filed with the Form 10-KSB on June 30, 2006.





Based
      on
      the definition of “material weakness” in the Public Company Accounting Oversight
      Board's Auditing Standard No. 2, An Audit of Internal Control Over Financial
      Reporting Performed in Conjunction With an Audit of Financial Statements,
      restatement of financial statements in prior filings with the SEC is a strong
      indicator of the existence of a “material weakness” in the design or operation
      of internal control over financial reporting. The Company has concluded that
      it
      did not maintain effective controls. The Company determined that because
      effective controls were not in place, the recognition of certain items was
      inconsistent with its accounting policies and that a material weakness existed
      in the Company's internal control over financial reporting, and disclosed this
      to the Board of Directors and to the independent registered public accountants.
      In addition, the Company has determined that a material weakness exists in
      the
      Company's internal controls over financial reporting related to the limited
      number of accounting personnel in the Company. The Company disclosed this to
      its
      Board of Directors and to its independent registered public
      accountants.





**Plan
      for Remediation of Material Weaknesses**





As
      noted
      above, the Company intends to restate and amend its previously filed Quarterly
      report for the affected period ending December 31, 2005. This amendment and
      restatement will take place as soon as practicable given the requirements for
      appropriate accounting review of the proposed restatements. The Company has
      included the foregoing matter in the agenda of its Audit Committee for its
      meeting in September, 2006,, at which time the Company intends to implement
      and
      promulgate new policies that improve these controls. Also, the Company has
      retained qualified personnel and consultants for its accounting and reporting
      functions.





**Changes
      in Internal Controls**





Changes
      in our internal controls are currently being designed and will be implemented
      on
      an ongoing basis as designed.





**Limitations
      on the Effectiveness of Controls**





Our
      management, including our chief executive officer and chief financial officer,
      does not expect that our disclosure controls and internal controls will prevent
      all error and all fraud. A control system, no matter how well conceived and
      operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. Further, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. Due to the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within the Company have been detected. These inherent limitations include
      the realities that judgments in decision making can be faulty, and that
      breakdowns can occur because of simple error or mistake. Additionally, controls
      can be circumvented by the individual acts of some persons, by collusion of
      two
      or more people, or by management override of the control.





26


The
      design of any system of controls is also based in part upon certain assumptions
      about the likelihood of future events occurring. There can be no assurance
      that
      any design will succeed in achieving its stated goals under all potential future
      conditions; over time, a control may become inadequate because of changes in
      conditions, or the degree of compliance with the policies or procedures may
      deteriorate. Due to the inherent limitations in a cost-effective control system,
      misstatements due to error or fraud may occur and not be detected.





27




**PART
      II — OTHER INFORMATION**





**Item
      1. 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.





On
      July
      7, 2006, the Company was served with a lawsuit for “injunctive, declaratory
      relief and damages” filed by plaintiffs H2O Liquid Air, LLC and H2O Liquid Air
      of Florida, LLC on June 10, 2006 in the United States District Court, Southern
      District of Florida, Miami Division against the Company and eight other
      defendants. The complaint alleges ten “counts”, although only three counts are
      directed at the Company: unfair competition under common law, statutory
      infringement under section 32 of the Lanham Act, and interference with a
      distribution agreement. The Board of Directors believes these claims to be
      without merit, and will be defended by legal counsel engaged by co-defendant
      Munters Corp. to strongly defend these claims. Through our legal counsel, the
      Company will cause the appropriate legal pleadings to be filed to dismiss the
      Company from the 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 incident or occurrence, the Company is not aware of any
      litigation, either pending or threatened, and has not been the defendant or
      plaintiff in any litigation, since the discharge from bankruptcy attributable
      to
      its predecessor L.L. Knickerbocker Company, Inc.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





On
      June
      6, 2006, to obtain funding for the purpose of payment of general corporate
      and
      operating purposes, we entered into a definitive Securities Purchase Agreement
      and ancillary agreements with four accredited investors for the sale of
      $2,000,000 of 6.0% Callable Secured Convertible Notes due June 6, 2009 (the
      "Convertible Notes"). The Convertible Notes are convertible at the option of
      the
      holder at any time prior to maturity into shares of our Common Stock at a
      conversion price of the market price as defined in the agreements. Our
      obligations under these notes are secured by certain of our assets.





The
      shares of common stock being sold will be issued to the investors upon
      conversion of the principal amount plus interest accrued thereon of the Notes
      in
      the collective principal amount of $2,000,000. As of June 30, 2006, we had
      issued $700,000 of the total $2,000,000 Notes. On July 20, 2006 an additional
      $600,000 of Notes was issued upon the filing of a registration statement for
      the
      shares underlying the Notes, and the remaining $700,000 is issuable upon the
      effectiveness of this registration statement.





The
      conversion rate of the Notes is based upon 50% of the Market Price of our stock
      at the time of conversion. "Market Price" means the average of the lowest three
      trading prices for the Common Stock during the twenty day period ending one
      trading day prior to conversion as reported on the OTC Bulletin Board. As a
      result of the beneficial conversion feature of the Notes, the Company has
      determined the valuation of the value of the maximum shares issuable to satisfy
      the issued convertible Notes based upon the Black Scholes method of valuation,
      and allocated the valuation of the derivative between the Convertible Note
      Payable and the Value of the derivative as a discount on the Note payable.
      The
      Company recorded the value attributed to the accrued derivative as a liability
      in the amount of $1,258,782. The discount on the Convertible Note payable is
      being amortized over the term of the notes (three years). During the period
      ended June 30, 2006, the Company expensed $19,161 as finance charges
      attributable to this amortization, and reduced the discount on convertible
      Note
      Payable in a similar amount.





28


In
      addition to the foregoing, the convertible note investors were issued warrants
      to purchase 4,000,000 shares of our common stock concomitant with the sale
      of
      the Notes. These warrants have an exercise price of $1.10 per share, expire
      on
      June 6, 2016, and were not registered as a part of the SB-2 Registration
      Statement filed by the Company during this fiscal quarter. However, since the
      warrants may be exercised at any time during their ten year term, the Company
      has determined the valuation of these warrants under the Black Scholes method
      of
      valuation as of the date of the grant of the warrants, and recorded a liability
      attributable to the warrants in the amount of $3,681,105. The Company has
      recorded finance charges, interest expenses, and expenses attributed to change
      in fair value of warrants and derivative liability in a total amount of
      $4,358,501 in the period ended June 30, 2006.





Pursuant
      to an engagement agreement for financial advisory services and as compensation
      for the Note financing, the Company issued 640,000 warrants, each to purchase
      on
      share of the Company’s common stock to Ascendiant Securities, LLC. Each warrant
      is exercisable to purchase one share of our common stock for an exercise price
      of $0.80, through the date which is seven years from the date of issuance.
      The
      warrants carry standard anti-dilution and protective provisions. The Company
      determined the value of the warrants so issued to be $611,036 based upon the
      Black Scholes method of valuation, and since the services for which these
      warrants were issued have been fully performed, the Company has recorded the
      entire value of the warrants as stock based compensation-consultants in the
      quarter ended June 30, 2006.





The
      issuance of the foregoing warrants was accounted for in accordance with
      Financial Accounting Standards Board Statements using the Black-Scholes option
      pricing model, as further described in Notes to Financial Statements, Note
      6
“Notes Payable”, Note 7 “Convertible Debt with Detachable Warrants, and Note 9
“Options and Warrants”, attached. Although management believes its estimate
      regarding the fair value of the warrants so determined to be reasonable, there
      can be no assurance that all of the subjective assumptions will remain constant,
      and therefore the valuation of the warrants may not be a reliable measure of
      the
      fair value of the prepaid compensation, accrued liabilities, and finance charges
      recorded by the Company.





**Item
      3. Defaults Upon Senior Securities**





None.





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





None.





**Item
      5. Other Information**





None.





**Item
      6. Exhibits.**





3.1
            Articles
                of Incorporation of International Beauty Supply Ltd. (“IBS”) filed July
                12, 1985. (1)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)





29


3.5
            Certificate
                of Amendment of the Articles of Incorporation of LLK, filed September
                1,
                1995. (3)3.6
            Certificate
                of Amendment of the Articles of Incorporation of LLK, filed June
                19, 1996.
                (3)


3.7
            Certificate
                of Amendment to the Articles of Incorporation of LLK filed April
                22, 1999.
                (2)3.8
            Certificate
                of Amendment to the Articles of Incorporation of the L.L. Knickerbocker
                Company Inc. filed January 9, 2003.(3)


3.9
            Bylaws
                of the L.L. Knickerbocker Company Inc. (4)10.1
            Consulting
                Agreement between Aquair, Inc. and Brig. General Steve Ritchie dated
                July
                18, 2005, filed November 14, 2005.
                (5)


10.2
            Master
                Separation and Distribution Agreement dated November 15, 2005, filed
                November 16, 2005 (6)10.3
            Distribution
                Agreement entered into between Aquair, Inc. and Locke Media dated
                August
                30, 2005 filed November 14, 2005. (5)10.4
            Agreement
                entered into between Aquair and Entech Sales dated November 2005,
                filed
                February 15, 2006. (7)


31.1
            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 2002, filed
                herewith.


31.2
            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 2002, filed herewith.32
            Certification
                pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes Oxley Act of 2002, filed
                herewith.





1
            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.


2
            Incorporated
                by reference to L.L. Knickerbocker Co., Inc. Form 10-K as filed on
                April
                14, 2000.


3
            Incorporated
                by reference to the Company’s Form 10-KSB, as filed on June 29,
                2005.


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 Form 10-QSB, as filed on November 14,
                2005.


6
            Incorporated
                by reference to the Company’s Form 8-K, as filed on November 16,
                2005.


7
            Incorporated
                by reference to the Company’s Form 10-QSB, as filed on February 15,
                2006.




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, thereunto duly
      authorized.





R
      G
      Global Lifestyles, Inc.








Signature
            
            Title
            
            Date/s/
                  Louis L. KnickerbockerLouis
                L. Knickerbocker
            
            Chairman
                of the Board, CEO
            
            August
                21, 2006/s/
                  William C. HitchcockWilliam
                C. Hitchcock
            
            Chief
                Financial Officer
            
            August
                21, 2006






30