<Page>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB/A
                                 Amendment No. 1

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

                For the quarterly period ended December 31, 2006.

|_|    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 |_|

Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| 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 |_|

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the issuer's Common Stock as of February 14,
2007 was 25,872,592 Transitional Small Business Disclosure Format (Check One):
Yes |_| No |X|




<Page>

                                EXPLANATORY NOTE

This Amendment No. 1 to the company's Form 10-QSB for the quarterly period ended
December 31, 2006 is being filed in conjunction with our decision to restate the
financial statements contained in our report on form 10-QSB for the quarterly
period ended December 31, 2006, filed with the Securities and Exchange
Commission on February 14, 2007. Our board of directors determined, on July 7,
2007, that the original financial statements for the period in question should
no longer be relied upon. We have filed a form 8-K on Item 4.02 Non-Reliance on
Previously Issued financial Statements or a Related Audit Report or Completed
Interim Review for the restatement.

                                      INDEX

                                                                           PAGE

                           PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)                                    2

           Consolidated Balance Sheet -December 31, 2006 (restated)            2

           Consolidated Statements of Operations -
           For the Three and Six Months ended December 31, 2006
           (restated) and 2005                                                 3

           Consolidated Statements of Cash Flows
           For the Six Months ended December 31, 2006 (restated)
           and 2005                                                            4

           Notes to Financial Statements                                       5

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          19

Item 3.    Controls and Procedures                                            29

                             PART II - OTHER INFORMATION

Item 1.    Legal Proceedings                                                  32
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds        32
Item 3.    Defaults Upon Senior Securities                                    34
Item 4.    Submission of Matters to a Vote of Security Holders                34
Item 5.    Other Information                                                  34
Item 6.    Exhibits                                                           34

SIGNATURES                                                                    35




<Page>
<TABLE>
<CAPTION>
<S>                                                                           <C>
                               PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                R.G. GLOBAL LIFESTYLES, INC.
                                 CONSOLIDATED BALANCE SHEET
                                         (UNAUDITED)

                                                                              December 31
                                                                                 2006
                                                                            ---------------
                                                                              As restated

ASSETS

Current assets:
   Cash and cash equivalents                                                 $     151,617
   Accounts receivable                                                                  63
   Subscription receivable                                                         250,000
   Prepaid expenses                                                                167,991
                                                                            ---------------
       Total current assets                                                        569,671
                                                                            ---------------

   Fixed assets, net                                                                10,578

   Debt issuance costs                                                             707,378
   Deposits held                                                                   361,016
                                                                            ---------------
   Total other assets                                                            1,068,394

                                                                            ---------------
Total Assets                                                                 $   1,648,643
                                                                            ===============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
   Accounts payable                                                                 48,009
   Payroll taxes payable                                                            18,901
   Accrued liabilities                                                              47,541
   Notes payable others ($550,000 net of $277,549 discount)                        272,451
                                                                            ---------------
       Total current liabilities                                                   386,902
                                                                            ---------------

Long term liabilities
   Liability associated with detachable warrants-conv. notes                     3,992,302
   Accrued derivative liability-convertible notes                               14,227,029
   Convertible notes payable ($1,927,332 net of $1,732,005 discount)               195,327
                                                                            ---------------
Total long term liabilities:                                                    18,414,658
                                                                            ---------------

                                                                            ---------------
       Total liabilities                                                        18,801,560
                                                                            ---------------
STOCKHOLDERS' (DEFICIT)

   Preferred stock, $0.001, 10,000,000 shares
      authorized, no shares issued and outstanding                                       -
   Common stock, $0.001 par value, 100,000,000 shares
      authorized, 24,182,150 shares issued
      and outstanding as of December 31, 2006                                       24,183
   Additional paid-in capital                                                    8,876,782
   Accumulated (deficit)                                                       (26,053,882)
                                                                            ---------------
       Total stockholders' (deficit)                                           (17,152,917)
                                                                            ---------------

       Total Liabilities & Stockholders' (deficit)                           $   1,648,643
                                                                            ===============


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

                                             2



<Page>

                                                  R.G. GLOBAL LIFESTYLES, INC.
                                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                                          (UNAUDITED)

                                                          For the Three Months ended            For the Nine Months ended
                                                                 December 31                           December 31
                                                     -----------------------------------   -----------------------------------
                                                           2006              2005                2006               2005
                                                     ----------------   ----------------   ----------------   ----------------
Revenue                                                As restated          Restated         As restated          Restated
   Product Sales                                      $        4,243     $       58,500     $        4,668     $       69,340
   Cost of sales                                               1,445             31,211             65,973             39,491
                                                     ----------------   ----------------   ----------------   ----------------
     Gross profit                                              2,798             27,289            (61,305)            29,849

Expenses:
   Advertising and marketing                                  19,536              3,070             44,594              3,070
   Commissions                                                 7,500              1,971             22,500             26,051
   Consulting services                                      (603,456)           101,170           (168,530)           149,412
   Depreciation and amortization                              (2,612)                 -                732                  -
   General and administrative expenses                       207,103             86,402            480,711            144,504
   Professional fees                                          61,747             45,367            276,440            133,871
   Rent - related party                                       21,000             25,068            114,715             92,890
   Salaries and wages                                         75,312                  -            169,034                  -
   Stock compensation - related party                      1,763,752                  -          2,379,790                  -
   Stock compensation-consultants                            878,399                               878,399
                                                     ----------------   ----------------   ----------------   ----------------
     Total expenses                                        2,428,281            263,048          4,198,385            549,798
                                                     ----------------   ----------------   ----------------   ----------------

Operating (loss)                                          (2,425,483)          (235,759)        (4,259,690)          (519,949)
                                                     ----------------   ----------------   ----------------   ----------------

Other income (expense)
   Sale of asset (OLS)                                             -             10,000                  -              10000
   Interest Income                                                 -                  -                  -                283
   Income tax refund                                               -                  -                  -                  -
   Change in Fair value of warrants
     re: convertible notes                                  (235,941)                 -           (504,253)                 -
   Change in fair value of derivative
     liability-convertible notes                          (8,693,158)                 -        (10,593,125)                 -
   Interest and Financing related to
     convertible notes                                    (4,003,074)                 -         (8,632,514)                 -
   Interest and financing expense-related
     party                                                   247,531                  -            (14,279)                 -
   Interest and financing expense-other                        7,985           (110,939)          (355,394)          (123,073)
                                                     ----------------   ----------------   ----------------   ----------------
Total other income (expense)                             (12,676,657)          (100,939)       (20,099,565)          (112,790)

                                                         (15,102,140)          (336,698)       (24,359,255)          (632,739)
                                                     ----------------   ----------------   ----------------   ----------------

Provision for income taxes
   Current federal                                                               (2,151)                               (4,025)
   Current state                                                   -                  -               (800)              (314)
                                                     ----------------   ----------------   ----------------   ----------------
     Total income taxes                                            -             (2,151)              (800)            (4,339)

Net (loss) from continuing operations                    (15,102,140)          (338,849)       (24,360,055)          (637,078)
                                                     ----------------   ----------------   ----------------   ----------------

Discontinued operations
   Income (loss) from discontinued operations,
     net of tax                                                    -                  -                  -            371,868
   Loss on distribution of discontinued
     operations, net of tax                                                  (1,209,636)                 -         (1,209,636)
                                                     ----------------   ----------------   ----------------   ----------------
Net income (loss) from discontinued operations                     -         (1,209,636)                 -           (837,768)
                                                     ----------------   ----------------   ----------------   ----------------

                                                     ----------------   ----------------   ----------------   ----------------
Net income (loss)                                     $  (15,102,140)    $   (1,548,485)    $  (24,360,055)    $   (1,474,846)
                                                     ================   ================   ================   ================

Weighted average number of
   common shares outstanding - basic and
   fully diluted                                          24,182,150         17,650,000         24,182,150         17,650,000
                                                     ================   ================   ================   ================

Net income (loss) per share - basic and
   fully diluted
   Continuing Operations                              $        (0.62)    $        (0.02)    $        (1.01)    $        (0.04)
   Discontinued Operations                                         -              (0.07)                 -              (0.05)
                                                     ----------------   ----------------   ----------------   ----------------
                                                      $        (0.62)    $        (0.09)    $        (1.01)    $        (0.08)
                                                     ================   ================   ================   ================

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

                                                               3


<Page>

                                           R.G. GLOBAL LIFESTYLES, INC.
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (UNAUDITED)

                                                                               For the nine months ended
                                                                                      December 31
                                                                        ----------------------------------------
                                                                              2006                   2005
                                                                        -----------------      -----------------
CASH FLOWS FROM OPERATING ACTIVITIES                                      As restated
CONTINUING OPERATIONS
Net (loss) from continuing operations                                    $   (24,360,055)       $    (1,474,846)
                                                                        -----------------      -----------------
Adjustments to reconcile net loss from continuing
   operations to net cash (used) by continuing operations:                   (24,360,055)            (1,474,846)
     Depreciation & amortization                                                                              -
     Warrants issued with notes payable                                          443,949                 81,601
     Interest and financing charges-related party                                 14,279
     (Income) from discontinued operations                                                             (371,868)
     Loss on distribution of discontinued operations                                                  1,209,636
     Non-cash expenses associated with convertible debt                       10,428,069                      -
     Stock based compensation - related party                                  2,379,790                      -
     Stock based compensation - consultants and legal                          1,067,809                 52,247
     Change in Fair Value of warrant liability                                   504,253                      -
     Change in Derivative liability                                           10,593,125                      -
Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable                                      837                503,393
     (Increase) in subscriptions receivable                                     (250,000)
     (Increase) decrease in inventory                                                  -                140,168
     (Increase) decrease in prepaid expenses                                       8,031                (87,390)
     (Increase) decrease in deposits held                                            519                      -
     Increase (decrease) in accounts payable                                        (836)              (244,072)
     Increase (decrease) in accrued liabilities                                        -               (243,448)
     (Decrease) in short term notes payable                                   (1,063,940)                     -
     Increase (decrease) in due to affiliate                                           -                      -
                                                                        -----------------      -----------------
Net cash provided (used) in continuing operations                               (234,170)              (434,579)
                                                                        -----------------      -----------------
Net cash provided (used) by operating activities                                (234,170)              (434,579)
                                                                        -----------------      -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of fixed assets                                                      (11,310)                     -
   Purchase of intangible assets                                                (200,000)                20,000
                                                                        -----------------      -----------------
Net cash provided (used) in continuing operations                               (211,310)                20,000
Net cash provided (used) from investing activities-loss
   on distribution of disc. Ops.                                                                       (735,591)
Net cash provided (used) by investing activities                                (211,310)              (715,591)
                                                                        -----------------      -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from notes payable                                                   700,000              1,300,000
   Payments on notes payable                                                    (223,284)
   Payment of debt issuance costs                                               (226,280)                86,085
Net cash provided (used) by financing activities                                 250,436              1,386,085
                                                                        -----------------      -----------------

Net increase (decrease) in cash provided by
   continuing operations                                                        (195,044)               235,915
Cash - beginning                                                                 346,661                159,661
                                                                        -----------------      -----------------
Cash - ending                                                            $       151,617        $       395,576
                                                                        =================      =================


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

                                                        4
</TABLE>




<Page>

                          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 - Restatement of Prior Period Financial Statements due to error

During fiscal 2008, the Company determined that the manner in which it
historically accounted for debt issuance costs related to the convertible debt
that was issued during fiscal 2007 was not in accordance with generally accepted
accounting principles of the United States of America. The Company determined
that the costs incurred related to is offering of convertible notes, should be
properly capitalized on the consolidated balances and then amortized on a
straight-line basis to interest expense over the term of the convertible debt.
The Company had previously not capitalized the debt issuance costs, but rather
expensed them in the period incurred.

During fiscal 2008, the Company determined that the manner in which it
historically accounted for its derivative liability associated with the
beneficial conversion feature of its convertible notes issued during fiscal 2007
was not in accordance with SFAS No. 133, as amended, and EITF Issue No. 00-19.
Any change in fair value was required to be recorded as non-operating, non-cash
income or expense at each balance sheet date. If the fair value of the
derivatives was higher at the subsequent balance sheet date, the Company was
required to record a non-operating, non-cash charge. If the fair value of the
derivative was lower at the subsequent balance sheet date, the Company was
required to record non-operating, non-cash income. Accordingly, in connection
with the restatement adjustments, the Company has appropriately reflected the
non-operating, non-cash income or expense resulting from the changes in fair
value. The Company had previously not recorded the correct fair value of the
derivative instrument.

During fiscal 2008, the Company determined that it had historically disclosed
amounts related to deferred compensation not in accordance with generally
accepted accounting principles of the United States of America. The Company
determined that such amounts should not be recorded as an off-set to the
Company's equity balances, but rather recorded to expense over the requisite
service period. The Company had previously recorded such amounts to prepaid
stock based compensation in the equity section of the consolidated balance
sheet.

During fiscal 2008, the Company determined that the sale it had recorded to IMN
during the nine months ended December 31, 2006 was not properly recorded. As a
result the Company reversed the sale to IMN as part of its restatement of the
financial statements as of and for the nine months ended December 31, 2006.

During 2008, the Company determined that it had not appropriately valued the
modification of the Company's outstanding stock options in November 2006 in
accordance with FASB Statement No. 123(R), Share-Based Payments. The Company
determined that an adjustment should have been recorded in accordance with the
provisions of Statement No. 123(R) for the modifications of the terms of the
underlying stock options. The Company had previously not recorded the correct
adjustment related to this modification.

                                       5



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

During 2008, the Company determined that it had not appropriately recorded the
Beneficial Conversion Feature ("BCF") related to two separate convertible
debentures entered into during the nine months ended December 31, 2006. The BCF
had not been properly calculated and recorded in accordance with EITF Issue No.
98-5, Accounting For Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios, and EITF Issue No. 00-27,
Application of EITF Issue No. 98-5 To Certain Convertible Instruments, and
recorded as a debt discount. The Company determined that it had not properly
recorded the BCF related to two separate convertible debentures. Additionally
the Company did not record the appropriate amount of amortization expense
related to the debt discount for the BCF to interest expense for the three and
nine months ended December 31, 2006.

During 2008, the Company determined that it had not properly accounted for the
excess value of shares of common stock that were issued to note holders for the
conversion of their debentures in accordance with generally accepted accounting
principles of the United States of America.

The following tables present a summary of effects of the restatement adjustments
on the Company's consolidated balance sheet at December 31, 2006, the
consolidated statements of operations for three months and nine months ended
December 31, 2006, and the consolidated statement of cash flows for the nine
months ended December 31, 2006:

<TABLE>
<CAPTION>
                                                                               Consolidated Balance Sheet
                                                            -------------------------------------------------------------
                                                               As Previously
                                                                  Reported           Adjustments          As Restated
                                                            -------------------  -------------------  -------------------
<S>                                                          <C>                  <C>                  <C>
As of December 31, 2006
Accounts receivable                                          $         119,763    $        (119,700)   $              63
Prepaid assets                                               $         161,578    $           6,413    $         167,991
Total current assets                                         $         682,958    $        (113,287)   $         569,671
Intangible assets, net                                       $         193,535    $        (193,535)   $               -
Deposits held                                                $         167,428    $         193,588    $         361,016
Debt issuance costs                                          $               -    $         707,378    $         707,378
Total other assets                                           $         360,963    $         707,431    $       1,068,394
Total assets                                                 $       1,054,499    $         594,144    $       1,648,643
Notes payable others                                         $         426,099    $        (153,648)   $         272,451
Total current liabilities                                    $         540,549    $        (153,647)   $         386,902
Accrued derivative liability - convertible notes             $       3,836,682    $      10,390,347    $      14,227,029
Total long term liabilities                                  $       8,024,311    $      10,390,347    $      18,414,658
Total liabilities                                            $       8,564,860    $      10,236,700    $      18,801,560
Additional paid in capital                                   $      13,651,815    $      (4,775,033)   $       8,876,782
Prepaid share-based compensation - related party             $      (8,285,976)   $       8,285,976    $               -
Prepaid share-based compensation                             $        (736,028)   $         736,028    $               -
Accumulated (deficit)                                        $     (12,164,355)   $     (13,889,527)   $     (26,053,882)
Total stockholders' (deficit)                                $      (7,510,361)   $      (9,642,556)   $     (17,152,917)
Total liabilities & stockholders' (deficit)                  $       1,054,499    $         594,144    $       1,648,643


                                                                          Consolidated Statement of Operations
                                                            -------------------------------------------------------------
                                                               As Previously
                                                                  Reported           Adjustments          As Restated
                                                            -------------------  -------------------  -------------------
Three months ended December 31, 2006
Consulting services                                          $         147,461    $        (750,919)   $        (603,458)
Depreciation and amortization                                $           3,853    $          (6,465)   $          (2,612)
General and administrative expenses                          $         207,095    $               8    $         207,103
Stock compensation - related party                           $         371,759    $       1,391,993    $       1,763,752
Stock compensation - consultants                             $         127,481    $         750,918    $         878,399
Total expenses                                               $       1,042,744    $       1,385,537    $       2,428,281
Operating (loss)                                             $      (1,039,946)   $      (1,385,537)   $      (2,425,483)
Change in fair value of derivative liability -
  convertible notes                                          $        (104,858)   $      (8,588,300)   $      (8,693,158)
Interest and financing related to convertible notes          $        (773,514)   $      (3,229,560)   $      (4,003,074)
Interest and financing expense - related party               $               -    $         247,531    $         247,531
Interest and financing expense - other                       $        (281,302)   $         289,197    $           7,895
Total other income (expense)                                 $      (1,395,615)   $     (11,281,042)   $     (12,676,657)
Net (loss) before provision for income taxes                 $      (2,435,561)   $     (12,666,579)   $     (15,102,140)
Net (loss) from continuing operations                        $      (2,435,561)   $     (12,666,579)   $     (15,102,140)
Net income (loss)                                            $      (2,435,561)   $     (12,666,579)   $     (15,102,140)
Net income (loss) per share - basic and fully diluted
  Continuing operations                                      $           (0.10)   $           (0.52)   $           (0.62)

                                       6



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)


                                                                           Consolidated Statement of Operations
                                                            -------------------------------------------------------------
                                                               As Previously
                                                                  Reported           Adjustments          As Restated
                                                            -------------------  -------------------  -------------------
Nine months ended December 31, 2006
Product sales                                                $         124,360    $        (119,692)   $           4,668
Gross profit (loss)                                          $          58,395    $        (119,700)   $         (61,305)
Consulting services                                          $         442,506    $        (611,036)   $        (168,530)
Depreciation and amortization                                $           7,197    $          (6,465)   $             732
Stock compensation - related party                           $         987,790    $       1,392,000    $       2,379,790
Total expenses                                               $       3,423,885    $         765,500    $       4,189,385
Operating (loss)                                             $      (3,365,490)   $        (894,200)   $      (4,259,690)
Change in fair value of derivative liability -
  convertible notes                                          $        (202,778)   $     (10,390,347)   $     (10,593,125)
Interest and financing related to convertible notes          $      (6,027,567)   $      (2,604,947)   $      (8,632,514)
Total other income (expense)                                 $      (7,104,271)   $     (12,995,294)   $     (20,099,565)
Net (loss) before provision for income taxes                 $     (10,469,761)   $     (13,889,494)   $     (24,359,255)
Net (loss) from continuing operations                        $     (10,470,561)   $     (13,889,494)   $     (24,360,055)
Net income (loss)                                            $     (10,470,561)   $     (13,889,494)   $     (24,360,055)
Net income (loss) per share - basic and fully diluted
  Continuing operations                                      $           (0.43)   $           (0.58)   $           (1.01)


                                                                         Consolidated Statement of Cash Flows
                                                            -------------------------------------------------------------
                                                               As Previously
                                                                  Reported           Adjustments          As Restated
                                                            -------------------  -------------------  -------------------
Nine months ended December 31, 2006
Net (loss) from continuing operations                        $     (10,470,561)   $     (13,889,494)   $     (24,360,055)
Depreciation and amortization                                $           7,197    $         436,752    $         443,949
Non-cash expenses associated with convertible debt           $       8,853,987    $       1,574,082    $      10,428,069
Stock based compensation - related party                     $         987,790    $       1,392,000    $       2,379,790
Stock based compensation - consultants and legal             $         878,399    $         189,410    $       1,067,809
Change in derivative liability                               $         202,778    $      10,390,347    $      10,593,125
(Decrease) in prepaid compensation                           $         (13,403)   $          13,403    $               -
(Increase) decrease in accounts receivable                   $        (118,863)   $         119,700    $             837
(Increase) decrease in prepaid expenses                      $          14,444    $          (6,413)   $           8,031
(Increase) decrease in deposits held                         $          (5,893)   $           6,412    $             519
Increase (decrease) in accounts payable                      $            (837)   $               1    $            (836)
Net cash (used) in continuing operations                     $        (460,450)   $         226,280    $        (234,170)
Net cash provided by (used) by operating activities          $        (460,450)   $         226,280    $        (234,170)
Payment of debt issuance costs                               $               -    $        (226,280)   $        (226,280)
Net cash provided by financing in continuing operations      $         476,716    $        (226,280)   $         250,436
Net cash provided (used) by financing activities             $         476,716    $        (226,280)   $         250,436
</TABLE>

                                       7



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

In addition to the foregoing, the Company has restated its previously issued
Consolidated Financial Statements as of December 31, 2005 for matters related to
the following previously reported items: Allocation of Value attributable to
Warrants issued in connection with notes payable and discounts on notes payable,
amortization of discount on notes payable, loss on distribution of discontinued
operations, and net income or loss on discontinued operations. The change
results from the following changes in previously reported items:

First, on the financial statements for the three and nine months ended December
31, 2005, the Company had previously recorded the loss on distribution of its
wholly-owned subsidiary in the 9 months year-to-date column of the statement of
operations, but omitted to include the same loss on distribution in the three
months ended December 31, 2005 on its statement of operations.

Second, during the audit of the Company's financial statements at March 31,
2006, the Company determined that the loss on distribution of the Amerikal
Nutraceutical Corporation subsidiary was incorrectly set forth in the financial
statements for the period ended December 31, 2005, based upon adjustments to the
net income of the distributed subsidiary and the total of net assets
distributed. The foregoing errors have been corrected in the restated Statement
of Operations of the Company for the three months ended December 31, 2005.

The third reason for restatement relates to an error in calculating the value of
warrants issued in connection with promissory notes issued during the
restatement period. At the time of the annual audit of its financial statements,
the Company determined that it had incorrectly applied too short of a look-back
period in connection with the use of Black Scholes calculations in valuing the
warrants issued in connection with promissory notes issued during the quarter
ended December 31, 2005. The resulting change in warrant valuation changes the
allocation of value between debt and the value of the warrants, which are
reflected as a discount to the debt. The debt discount is being amortized over
the one year term of the various notes, and accordingly, the amount of expense
attributed to the amortization of debt discount changed by $14,450 during the
period, as a result of the change in estimated value of the warrants. The
Company subsequently revised it estimate of fair market value for the warrants
using a look-back period from the date of issuance of the warrants to the
inception of trading of the Company's common stock. This valuation method has
been consistently applied in all reporting periods subsequent to December 31,
2005. The accompanying financial statements have been restated to reflect the
corrections.

For the three and nine months ended December 31, 2005, respectively, the finance
charge attributable to the amortization of the debt discount and accrued
interest on the notes has been increased to $110,939 and $123,073, respectively.
In addition, the amounts of the current liabilities attributable to the short
term notes payable and the amount of APIC booked upon issuance of the warrants
have been adjusted in accordance with the change in valuation of the warrants.

The Company made these changes to better reflect the fair value of the warrants
issued in connection with the short term notes, and to more appropriately value
the amount of the debt discount reflected on the balance sheet. This in turn has
an effect of increasing the amortization expense on the debt discount in the
amounts as shown on the restated financial statements.

The Company has not amended its filing for the quarterly report on form 10-QSB
for the period ended December 31, 2005 as the errors were corrected at the time
of the audited financial statements at the issuance of the Form 10-KSB for the
fiscal year ended March 31, 2006, and the restatement period is therefore stale.
However, in order to conform the financial statements to correctly reflect
financial condition and results of operations, the Company has made the
restatement of the affected period as a change to prior period financial
statements for the comparative period in the current form 10-QSB.

                                       8



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

The following is a summary of the restatement for the nine months ending
December 31, 2005:

<TABLE>
<CAPTION>
<S>                                                                          <C>
     Increase in finance charges re: amortization of debt discount           $     14,450
     Decrease in current liabilities due to change in debt discount              (131,528)
     Increase in additional paid in capital                                       163,488
     Increase in income of discontinued operations                                 87,947
     Increase in loss re: distribution of subsidiary                              (41,537)
     Decrease in accumulated earnings                                             (31,960)
     Income tax effect of restatement                                                   0
     Decrease in December 31, 2005 net income                                      31,960

The effect on the Company's previously issued December 31, 2005 consolidated
financial statements are summarized as follows:

  Balance Sheet as of December 31, 2005:

                                                    Previously         Increase
                                                     Reported         (Decrease)         Restated
                                                 ----------------  ----------------  ----------------
  Total Assets                                    $      693,520    $            -    $      693,520

  Liabilities:
       Current liabilities                                35,216                              35,216
                                                 ----------------  ----------------  ----------------
       Long term liabilities                             704,400          (131,528)          572,872
                                                 ----------------  ----------------  ----------------
  Total Liabilities                                      739,616          (131,528)          608,088
                                                 ----------------  ----------------  ----------------

  Stockholders' Equity:
       Common stock                                       17,650                 -            17,650
       Additional paid-in capital                      1,106,027           163,488         1,269,515
       Prepaid compensation                              (52,247)                -           (52,247)
       Accumulated earnings (deficit)                 (1,117,526)          (31,960)       (1,149,486)
                                                 ----------------  ----------------  ----------------
  Total Stockholders' Equity                             (46,096)          131,528            85,432
                                                 ----------------  ----------------  ----------------
  Total Liabilities and
       Stockholders' Equity                       $      693,520                 -           693,520

  Statement of Operations for the nine months ended December 31, 2005:

                                                    Previously         Increase
                                                     Reported         (Decrease)         Restated
                                                 ----------------  ----------------  ----------------
  Interest and financing expense                        (108,623)          (14,450)         (123,073)
  Income from discontinued ops net of tax                283,921            87,947           371,868
  Loss on distribution of disc. ops net of tax        (1,168,099)          (41,537)       (1,209,636)
  Net income (loss)                                   (1,506,806)           31,960        (1,474,846)
</TABLE>

                                       9



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

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 a net operating loss of ($2,425,483) for
the fiscal quarter ended December 31, 2006, and only had $4,243 in sales. After
taking into account interest and financing expenses and expenses related to the
issuance of convertible notes, the total financial net loss for the three months
ended December 31, 2006 was ($15,102,140). 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. There are no assurances that the Company will be
successful and without sufficient financing it would be unlikely for the Company
to continue as a going concern.

There are two significant developments in the area of equity and/or debt
financing in the current fiscal quarter: First, as of December 31, 2006 the
Company had issued two new note agreements resulting in a subscription
receivable for cash in the amount of $250,000. See Note 11 - Commitments and
Contingencies, below. Second, on December 26, 2006 the Company issued 6,282,150
shares of its $.001 par value common stock at $0.20 per share in payment of
notes and accrued interest due in the amount of $1,256,430. See Note 7, Notes
Payable, and Note 8, Common Stock, below.

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 that might be necessary in the event the Company
cannot continue in existence.

Note 4 - Fixed Assets

Fixed assets of continuing operations as of December 31, 2006 consisted of the
following:

                                                        2006
                                                 -----------------
         Office equipment                         $        11,310
         Accumulated depreciation                            (732)
                                                 -----------------
                                                  $        10,578
                                                 =================

During the three and nine months ended December 31, 2006 the Company recorded
$493 and $732 of depreciation expense, respectively.

Note 5 - Amortization Expense

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 paid $200,000 cash for this right. Testing was commenced in the quarter
ended September 30, 2006 and has been successfully completed for one location.
The Company initially recorded this payment as an intangible asset during the
three months ended December 31, 2006. The company reversed previously recorded
amortization expense totaling $6,465 and reclassified the $200,000 the company
paid to a deposit as a result of the execution of the technology transfer
agreement executed with Catalyx Fluid Solutions, Inc.

Note 6 - Deposits

At December 31, 2006, the Company has a deposit with various vendors totaling
$361.016 comprised of the following:

                                                    December 31,
                                                        2006
                                                 -----------------
         Refundable Deposit                       $        24,990
         Legal Retainer Deposits                           10,808
         Deposit equipment purchase                       125,000
         Deposit for future Catalyx royalties             200,000
         Refundable Deposit                                   218
                                                 -----------------
         Total                                    $       361,016
                                                 =================

                                       10



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

Note 7 - Notes Payable

Short term 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 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 December 31, 2005, the Company had entered into seven separate investments
totaling $1,313,940 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. Subsequently on March 31, 2006 the Company issued another note in the
amount of $300,000 to an unrelated party under the terms of the Offering.

The Company determined the fair value of warrants issued in connection with the
above notes as of the date of issuance using the Black Scholes method of
valuation, and allocated the value attributed to the warrants as a discount of
the short term notes payable. The discount is being amortized over the term of
the notes. As of December 31, 2006 seven of these notes had matured and
accordingly the discount had been fully amortized and expensed. The Company
accrued interest on the above notes until their respective due dates in
accordance with the terms of the notes. The Company paid one note in full in
cash, together with all accrued interest due, in the amount of $162,479, and
paid accrued interest payable on another short term note in the amount of
$16,000. On December 26, 2006, the Company issued 6,282,151 shares of its $.001
par value common stock at $0.20 per share in full payment of the balance due on
six other short term notes totaling $1,256,430. Of this amount, 3,801,278 shares
were issued to related parties in payment of three outstanding notes and accrued
interest in the total amount of $760,255. The remaining 2,480,872 shares were
issued to un-related parties in satisfaction of three notes and accrued interest
in the total amount of $496,174.

Also on December 26, 2006 the Company entered into two new note warrant
agreements with accredited investors under the terms and conditions set forth
above. The Company issued one warrants to the investors for each dollar loaned
to the Company via the notes (a total of 250,000 warrants), determined the value
of the warrants as of the date of issuance using the Black Scholes method of
valuation, and allocated the value attributed to the warrants as a discount
against the new notes payable. At December 31, 2006 the Company reflected the
remaining short term notes payable on the balance sheet as $272,451 ($550,000
net of applicable discount of $277,549). The discounts on the respective notes
are being amortized over the remaining term of the notes.

Long Term Notes Payable: 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 $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 December 31, 2006, the
Company had issued $2,000,000 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 accrued $27,972 of interest expense on the
$2,000,000 of notes payable during the quarter ended December 31, 2006. The
Company also incurred direct finance charges of $77,280 and finance charges
related to the beneficial conversion feature in the amount of $615,025
attributable to the receipt of the third tranche of Convertible Notes in the
amount of $700,000 on October 17, 2006.

                                       11



<Page>

                          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 $14,227,029, 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 December 31, 2006 in the amount of
$3,992,302. The warrants may be exercised at any time following issuance. During
the quarter ended December 31, 2006 the Company recorded as other expenses (1)
the change in fair value of the warrants in the amount of $235,941, and (2) the
change in fair value of the derivative liability in the amount of $8,693,158.

Related to the issuance of the Convertible Notes, the Company incurred a total
of $837,316 in debt issuance costs. These costs will be amortized over 36
months. For the nine months ended December 31, 2006, the Company recorded
$129,938 related to amortization of debt issuance costs. These amounts have been
included in interest expense in the accompanying statement of operations.

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 December 31, 2006 the Company expensed
$207,218 as finance charges attributable to the amortization of the discounts on
the convertible notes payable, 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 already met the
requirement with respect to the first tranche notes, and has timely filed the
second 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.

During the three months ended December 31, 2006, certain note holders converted
their debentures to shares of common stock. The Company issued 6,282,151 shares
of its $.001 par value common stock at $0.20 per share in full payment of the
balance due on six other short term notes totaling $1,256,430. Of this amount,
3,801,278 shares were issued to related parties in payment of three outstanding
notes and accrued interest in the total amount of $760,255. The remaining
2,480,872 shares were issued to un-related parties in satisfaction of three
notes and accrued interest in the total amount of $496,174. Related to the
conversion of these notes, the Company recorded an adjustment of $2,701,323 to
interest expense for excess value of stock issued in the transaction.

Note 8 - Common Stock

During the quarter ended December 31, 2006, the Company issued 250,000 shares of
its $.001 par value common stock to holders of the Callable Secured Convertible
Notes pursuant to the terms of the agreements with such note holders permitting
conversion of the notes to stock of the Company.

On December 26, 2006 the Company issued 6,282,150 shares of its $.001 par value
common stock to holders of short term notes payable, in payment of 1,256,430 of
principal and interest due under the terms of the notes.

                                       12



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

There were no other issuances of common stock in the fiscal quarter ended
December 31, 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 Non-statutory 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 in the fiscal quarter ended
December 31, 2006 in the amount of $27,770 as stock compensation expense-related
party in the accompanying statement of operations for the period ended December
31, 2006. In July 2007, at the next twelve-month anniversary date of the
consulting agreement based upon the vesting of the options, the Company will
record compensation expense attributable to the grant of these options by the
amount of the vested portion of the options for the year.

On May 3, 2006 the Company's Board of Directors adopted a plan for issuance of
stock options to employees or others (2006 Incentive and Non-statutory Stock
Option Plan, referred to as the "2006 Plan"). Under the Plan, the Company has
reserved ten million shares for issuance. During the three months ended
September 30, 2006, the Company granted the following stock options to four
members of the Company's management team and one consultant as compensation.
During the three months ended December 31, 2006, the Company re-priced the
options previously issued under the 2006 Plan from their previous prices to the
following, and booked the increase in value of the re-priced options to prepaid
stock based compensation-related party as further described in the Notes to
Financial Statements, "Options and Warrants". The Company also issued 240,000
options to two consultants under the 2006 plan as of December 26, 2006. A
summary of the options issued under the 2006 Plan and the exercise prices as
re-priced, is as follows:

<TABLE>
<CAPTION>
                                              Number of
  Date Issued      Optionee Name               Options          Exercise Price      Expiration Date
<S>                <C>                          <C>              <C>                  <C>
  May 3, 2006      Lou Knickerbocker            4,008,000        $       0.28         May 3, 2011
  May 3, 2006      Grant King                   1,992,000        $       0.20         May 3, 2011
  May 3, 2006      Will Hitchcock               1,008,000        $       0.20         May 3, 2011
  May 3, 2006      Joseph Murray                1,008,000        $       0.20         May 3, 2011
  May 3, 2006      Scott Olson                    201,600        $       0.20         May 3, 2011
 Dec. 26, 2006     Mark King                      120,000        $       0.20        Dec. 26, 2011
 Dec. 26, 2006     Michael Kruger                 120,000        $       0.20        Dec. 26, 2011
---------------------------------------------------------      -------------------------------------
</TABLE>

The 2006 Plan provides for a vesting of the foregoing option grants over a five
year term, with 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 2006 Plan as of the grant date, as re-priced by the Company by
action of the Board of Directors, using the Black Scholes valuation method.

During the fiscal quarter ended December 31, 2006, based upon the portion of
options vested during this period under the 2006 plan, the issuance of the
240,000 new options, and the revaluation of the options vesting from inception
to December 31, 2006, the Company booked an expense of $353,192 as stock based
compensation-related party and $68,483 as stock based consulting fees.

                                       13



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

During the quarter ended December 31, 2006, as a result of the re-pricing
modification of options under the 2006 Plan as described above, in accordance
with the provisions of FASB Statement No. 123(R), the Company recorded a
one-time charge of $1,392,000 to stock compensation expense during the nine
months ended December 31, 2006.

On December 26, 2006 the Board of Directors authorized the issuance of 5,254,800
options under its 2007 Incentive and Non-statutory Stock Option Plan, referred
to as the "2007 Plan." The 2007 Plan provides for a vesting of the following
option grants over a five year term, with the options vesting ratably over the
first two years from the date of issuance. The Company determined the fair
market value of the options granted under the 2007 Plan as of the grant date,
using the Black Scholes valuation method. The Company recorded the value of the
options issued under the 2007 Plan in a special equity account entitled prepaid
share-based compensation-related party in the amount of $2,709,685 and $580,701
as prepaid consulting fees.

A summary of the options issued under the 2007 Plan is as follows:

<TABLE>
<CAPTION>
<S>                                                                           <C>
--------------------- ---------------------- ------------- ------------ ------------------
                       2007 Plan
--------------------- ---------------------- ------------- ------------ ------------------
 Date Issued           Option Holder          Shares        Exercise     Expiration Date
                                                            Price
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Louis Knickerbocker    2,004,000     $0.69        Dec., 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Grant King             996,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Will Hitchcock         504,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Joseph Murray          720,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Scott Olson            100,800       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Christen Currie        100,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Taylor Mossman         50,000        $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Juzer Jangbarwala      500,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Michael Kruger         120,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Steve Ritchie          100,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Mark King              60,000        $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
</TABLE>

During the period ended December 31, 2006, based upon the portion of options
vested during this period under the 2007 Plan, the Company recorded an expense
of $18,559 as stock-based compensation to related parties, and $3,977 of share
based compensation to consultants under the Plan.

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.

                                       14



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

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

                                                                Weighted
                                                                Average
                                                 Number         Exercise
                                               Of Shares         Price
                                             --------------  --------------
     Balance, March 31, 2006                       100,000    $       2.00

     Options granted                            13,712,400            0.35
     Options exercised                                   -               -
                                             --------------  --------------

     Balance, December 31, 2006                 13,812,400            0.35
                                             ==============  ==============
     Exercisable, December 31, 2006              3,032,174    $       0.35
                                             ==============  ==============

At March 31, 2006, the range of option prices for shares and the
weighted-average remaining contractual life is as follows:

<TABLE>
<CAPTION>
                                Options Outstanding                       Options Exercisable
                     ------------------------------------------      ----------------------------
                                                   Weighted-
     Range of                         Weighted-      Average                           Weighted-
      Option          Number of       Average       Remaining            Number        Average
  Exercise Prices      Options        Exercise     Contractual             Of          Exercise
                                       Price          Life              Options         Price
-------------------  ------------  -------------  -------------      -------------  -------------
<S>                  <C>               <C>          <C>                <C>             <C>
   $0.20 - 2.00      13,812,400        $0.35        4.79 yrs           3,032,174       $ 0.35
</TABLE>

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. Pursuant
to the agreement, 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. At the anniversary vesting date
in September, 2006, the Company reduced prepaid compensation in the amount of
the earned portion of the vested warrants, issued the warrants, and recorded an
expense of $66,963 as legal fees. 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 December 31,
2006, the Company recorded $16,051 of consulting expense representing the vested
portion of these warrants.

During the quarter ended December 31, 2006 the Company issued 100,000 warrants
to a consultant for services. The Company recorded as prepaid share based
consulting the value of these warrants at $116,909 using the Black Scholes
method of valuation incorporating the following estimates: 5.25% risk free
interest rate, 243% volatility of the Company's common stock and an expected
life of 5 years. Since one third of the warrants were vested immediately, the
Company recorded an expense in the amount of $38,969 as stock-based
compensation-consulting services, and reduced prepaid share based consulting by
a similar amount.

                                       15



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

WARRANTS ISSUED IN CONNECTION WITH SHORT TERM NOTES:

At December 26, 2006 the Company issued warrants to purchase 250,000 shares of
the Company's common stock, concomitant with the sale of two short term note
agreements. These warrants have an exercise price of $0.20 per share and expire
on December 26, 2011. The Company has determined the valuation of these warrants
based upon the Black Scholes method of valuation using the following estimates:
5.25% risk free interest rate, 243% volatility of the Company's common stock,
and a life of one (1) year. The Company has allocated the value of the warrants
between the notes and the warrants, and recorded the value attributed to the
warrants as a discount against the short term notes payable. The discount is
being amortized over the term of the notes (one year.)

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, 193% volatility of the Company's common stock, and an expected life of ten
years. The Company recorded a liability in the amount of $3,992,302 as of
December 31, 2006 attributable to the issuance of these warrants.

In addition to the foregoing, pursuant to the 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 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. The value of the warrants was recorded as debt
issuance costs in the accompanying balance sheet. (See Note 7)

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 options), 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:

                                                                Weighted
                                                                Average
                                                 Number         Exercise
                                               Of Shares         Price
                                             --------------  --------------
     Balance, March 31, 2006                  $  1,758,940    $       0.63

     Warrants granted                            5,015,000            1.02
     Warrants exercised                                  -               -
                                             --------------  --------------

Balance, December 31, 2006                       6,773,940            0.80
                                             ==============  ==============
Exercisable, December 31, 2006                $  4,778,333    $       1.02
                                             ==============  ==============

At December 31, 2006, the range of warrant prices for shares under warrants and
the weighted-average remaining contractual life is as follows:

                                       16



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

<TABLE>
<CAPTION>
                               Warrants Outstanding                      Warrants Exercisable
                     ------------------------------------------      ----------------------------
     Range of                         Weighted-      Average                           Weighted-
     Warrant          Number of       Average       Remaining            Number        Average
  Exercise Prices     Warrants        Exercise     Contractual             Of          Exercise
                                       Price          Life              Warrants        Price
-------------------  ------------  -------------  -------------      -------------  -------------
<S>                  <C>               <C>          <C>                <C>             <C>
   $0.60 - 2.00       6,773,940        $0.80         8.5 yrs           4,778,333       $ 1.02
</TABLE>

There have been no other issuances of options or warrants by the Company in the
quarter ended December 31, 2006.

Note 10 - 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.
The agreement provides for office space as well as administrative services at a
fair market rate of $7,000 per month. The agreement is not binding and may be
cancelled by either party at any time. During the quarter ended December 31,
2006, the Company expensed $21,000 under this agreement.

As described in detail in Note 7 (Notes Payable-Short Term Notes Payable) above,
during the quarter ended December 31, 2006, the Company issued 3,801,278 shares
of its $.001 par value common stock to related parties in payment of three
outstanding notes and accrued interest due to related parties, in the total
amount of $760,255.

Also as described in detail in Note 9 (Options and Warrants-Common Stock:
Options) above, during the fiscal quarter ended December 31, 2006, the Company
granted options to purchase common stock of the company to related parties and
others in accordance with the terms of the 2007 Incentive and Non-Statutory
Stock Option Plan (the "2007 Plan"). In addition, the Company re-priced options
previously granted under the Company's 2006 Incentive and Non-Statutory Stock
Option Plan (the "2006 Plan"). See discussion in Note 9, above.

Note 11 - Commitments and Contingencies

Contingencies: Litigation

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. As of February 12, 2007, the
Company is informed and believes that this litigation has been settled with no
liability to the Company.

                                       17



<Page>

                          R.G. GLOBAL LIFESTYLES, INC.
                   Notes to consolidated financial statements
                                   (unaudited)

The Company is aware of a dispute that has arisen between the Company and the
Holders of its Callable Secured Convertible Notes concerning the rights of such
note holders to convert into shares of common stock of the Company. The Company
believes that the Holders of the Notes are in violation of the agreement between
the Company and the Note Holders, and that any liability it may incur in
connection with this dispute will not have a material adverse effect upon its
financial condition or its results of operations. The Company has not yet been
formally served with legal action in connection with this dispute, but has
commenced informal settlement discussions through legal counsel in order to
amicably resolve the matter.

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.

Commitments: Subscriptions Receivable

As of December 31, 2006 the Company had received written confirmation of
commitment by two accredited investors to invest a total of $250,000 in
connection with the issuance of promissory notes by the Company as of December
26, 2006. The subscriptions were paid in cash during the month of January, 2007.

Note 12 - Reclassification

Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.



                                       18



<Page>

                           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:

      o     Increased competitive pressures from existing competitors and new
            entrants;
      o     Deterioration in general or regional economic conditions;
      o     Adverse state or federal legislation or regulation that increases
            the costs of compliance, or adverse findings by a regulator with
            respect to existing operations;
      o     Ability to grow business in its OC Energy Drink lines and RGBL Water
            Solutions products and services 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;
      o     Ability to successfully replace revenues of its distributed
            subsidiary Amerikal;
      o     If acquisitions are made, the costs and successful integration of
            acquisitions;
      o     Barriers in trade with foreign countries or tariff regulations and
            other United States and foreign laws;
      o     Political and economic instability and changes in monetary policy of
            the foreign countries we currently do business in;
      o     Loss of customers or sales weakness;
      o     Inability to achieve future sales levels or other operating results;
      o     Ability to locate suitable new products for distribution within our
            business sector, and retain licensing rights to such new products on
            acceptable terms;
      o     The continuation of favorable trends, including the drop in
            affordable potable water globally;
      o     Outcomes and costs associated with litigation and potential
            compliance matters;
      o     Inadequacies in the Company's internal control over financial
            reporting, which could result in inaccurate or incomplete financial
            reporting;
      o     Dilution to Shareholders from convertible debt financings;
      o     Loss of key management or other unanticipated personnel changes;
      o     The unavailability of funds for capital expenditures; and
      o     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.

                                       19



<Page>

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.

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; (iv) energy drinks made with oxygenated water; and (v) other
water-related technologies.

OC ENERGY DRINKS

On October 7, 2006 the Company launched it line of "OC ENERGY" tm drinks
fashioned for the OC lifestyle. Aquair began development of the oxygenated water
and the energy drinks in early 2005. Presently there are three Energy Drinks and
one Highly Oxygenated Water. The Energy Drinks consist of a 2-oz high-powered
"shot" energy drink ("Insane" tm), a 10-oz energy drink ("KIK-IT" tm) and a
10-oz diet energy drink ("KIK-IT Diet" tm) in addition to a 17-oz ("O2" tm)
bottle of 100% pure oxygenated structured water. The energy drinks are low in
natural sugar and high in vitamins and minerals. The bottles are
custom-designed. The Company anticipates sales of the products to commence in
the first fiscal quarter of 2007.

ATMOSPHERIC PURE WATER GENERATORS

Currently, Aquair distributes licensed environmentally-friendly 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 has acquired the rights to market and distribute water generators that
precipitate drinking water from air. The various water generating machines have
been tested in various locations. As of December, 2006, the Company has sold
units to customers in the U.S. and Asia, and anticipates further sales, however
the Company is currently dedicating less resources towards the sales of
atmospheric water generators as in the past, as it is focusing on sales and
marketing OC Energy Drinks and RGBL Water Solutions products.

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.

                                       20



<Page>

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.

RGBL WATER SOLUTIONS

RGBL Water Solutions is a division of the Company dedicated to the sale and
professional support of a proprietary wastewater treatment technology usable in
coal bed methane (CBM) applications.

IN THE QUARTER ENDED DECEMBER 31, 2006, THE COMPANY PURSUED MULTIPLE ENERGY
COMPANIES IN WYOMING FOR THE CONSTRUCTION, USE AND SUPPORT OF SUCH TECHNOLOGY
AND ANTICIPATES EXECUTING DEFINITIVE AGREEMENTS. The Company has commenced
testing of this technology and anticipates sales in this area on either a flat
contractual fee basis or a "charge per barrel" basis.

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 December 31, 2006.

                                       21



<Page>

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.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 (RESTATED)
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.

<TABLE>
<CAPTION>
                                                      Three Months Ended December 31
                                                        2006
                                                     As restated           2005
                                                 ------------------ ------------------
<S>                                               <C>                <C>
Product Sales                                     $          4,243   $         58,500

Cost of sales                                     $          1,445   $         31,211

Gross Profit                                      $          2,798   $         27,289

General and administrative expenses               $        207,103   $         86,402

Consulting services                               $       (603,458)  $        101,170
Stock based Compensation-related party                   1,763,752                  0
Stock based compensation-consultants                       878,399                  0
Depreciation and Amortization                     $         (2,612)  $              0

Total Expenses                                    $      2,428,281   $        263,048
                                                 ------------------ ------------------

Operating Loss                                    $     (2,425,483)  $       (235,759)
                                                 ================== ==================

REVENUES AND COST OF SALES

                                                                                      INCREASE/(DECREASE)
                                                      2006           2005              $               %
----------------------------------------------- --------------- --------------- --------------- ---------------
For the three months ended December 31
Gross Profit                                     $       2,798   $      27,289   $     (24,491)      90.00%
</TABLE>

During the three months ending December 31, 2006, the Company generated gross
profit of $2,798 on net product sales of $4,243 and cost of sales totaling
$1,445, compared to $27,289 of gross profit on net product sales of $58,500 and
costs of sales of $31,211 in the three months ending December 31, 2005. This
resulted in a decrease in gross profits of $24,491, or 90%, from the same period
one year ago. The primary reason for the decrease in revenues is that sales of
the OC Energy Drinks and RGBL Water Solutions products have not yet commenced,
and the company generated no sales of atmospheric water generating equipment in
the current fiscal quarter.

                                       22



<Page>
<TABLE>
<CAPTION>
<S>                                                                           <C>
GENERAL AND ADMINISTRATIVE EXPENSES

                                                                                      INCREASE/(DECREASE)
                                                      2006           2005              $               %
----------------------------------------------- --------------- --------------- --------------- ---------------
For the three months ended December 31
General & Administrative Expenses                $     207,103   $      86,402   $     120,701       139.7%

General and administrative expenses were $207,103 for the three months ended
December 31, 2006 versus $86,402 for continuing operations for the three months
ended December 31, 2005, which resulted in an increase of $120,701 or 139.7%.
General and administrative expenses increased comparatively for the three months
ended December 31, 2006 to the comparative period in 2005 as a result of costs
associated with the diversification of the Company's product line.

TOTAL OPERATING EXPENSES

                                                                                      INCREASE/(DECREASE)
                                                      2006           2005              $               %
----------------------------------------------- --------------- --------------- --------------- ---------------
For the three months ended December 31
Total Operating Expenses                         $   2,428,281   $     263,048   $   2,165,233       823.1%

Our operating expenses for the three months ended December 31, 2006 were
$2,428,281 compared to $263,048 for the three months ended December 31, 2005.
The primary reason for the increase in operating expense is the stock based
compensation expense to related parties of $1,763,752 and $878,399 of stock
based compensation to consultants recorded by the Company in the current fiscal
quarter, as a result of the issuance of options under the 2006 and 2007
Non-statutory Stock option plans and a stock option agreement with a consultant
who later became a related party. For both periods, we incurred expenses for
general management and legal and accounting fees related to continuing
operations. For the three months ended December 31, 2006, the Company expended
$21,000 in rent paid to a related party, and paid $61,747 in legal and
accounting fees, compared to $25,068 and $45,367 respectively for these expenses
in the three months ended December 31, 2005. During the three months ended
December 31, 2006, the company incurred total general and administrative
expenses of $207,103, compared to $86,402 of similar expenses in the same period
last year.

OPERATING (LOSS)

                                                                                      INCREASE/(DECREASE)
                                                      2006           2005              $               %
----------------------------------------------- --------------- --------------- --------------- ---------------
For the three months ended December 31
Net income                                       $  (2,425,483)  $    (235,759)  $   2,189,724       928.8%
</TABLE>

The net loss from operations for the three months ended December 31, 2006 was
($2,425,483), versus a net loss of ($235,279) for the three months ended
December 31, 2005, an increase in net loss of $2,189,724 or 928.8%. The increase
in net loss as compared to the same period in 2005 was primarily due the
recording of stock-based compensation expenses of $2,642,151 as of December 31,
2006. We also had $63 of accounts receivable, subscriptions receivable in the
amount of $250,000, prepaid expenses of $167,991, Debt Issuance Costs of
$707,378, and $361,016 of cash deposits held by others. The Company also had net
fixed assets of $10,578, making our total assets at December 31, 2006 equal to
$1,648,643.

                                       23



<Page>

Our total current liabilities as of December 31, 2006 consisted of $48,009 of
accounts payable, $66,442 of accrued expenses, and $272,451 of Notes Payable
(net of applicable discount). The Notes payable portion of current liabilities
consisted of notes payable unrelated parties of $550,000 less discounts of
$277,549. The total of current liabilities at December 31, 2006 was $386,902.
The company also had long term liabilities consisting of notes payable to
unrelated parties of $195,327 ($1,927,332 less discounts of $1,732,005),
liability attributed to the beneficial conversion feature of the convertible
notes in the amount of $14,227,029, and liability associated with the issuance
of detachable warrants in the amount of $3,992,302. The total of long- term
liabilities at December 31, 2006 was $18,414,658. The total liabilities as of
December 31, 2006 were $18,801,560.

During the three months ending December 31, 2006, the Company had sales revenues
of $4,243, and $1,445 of direct costs of operations, resulting in gross
operating profit of $2,798. The Company incurred other expenses of $2,428,281,
resulting in a net loss from operations of $(2,425,483).

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 $151,617, and a
subscription receivable from investors in the amount of $250,000 as described in
the notes to financial statements, "Subsequent Events". After taking into
account 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 $12,676,657, the financial net loss for the
three months ended December 31, 2006 was $(15,102,140).

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 December 31, 2006 the Company
showed a net loss from continuing operations in the amount of $(2,425,483). The
financial net loss after provision for income tax, interest and financing
expense is ($15,102,140) for the most recent fiscal quarter.

During the three months ended December 31, 2006 the Company incurred interest
and financing charges and other expense related to the issuance of convertible
notes and short-term notes to related parties and others, in the total amount of
$12,676,657. This total financing cost represents over 83% of the total net
(loss) reported by the Company for the three months ended December 31, 2006 on
the attached Consolidated Statements of Operations. The total financial net loss
of the Company for the most recent nine months, taking into account total
financing costs of $20,099,565 and taxes of $800, was ($24,360,055).

The Company can no longer rely on revenues from its distributed subsidiary
Amerikal. Therefore, the Company will be developing revenues through its Aquair
subsidiary and RGBL Water Solutions division.. Aquair has commenced sales, and
the Company anticipates future sales and revenues from its licensed atmospheric
water generators, anti-microbial products, OC Energy Drinks and RGBL Water
Solutions products.

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.

                                       24



<Page>

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

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 an expense of $27,770
attributable to the grant of these options. At the anniversary vesting date
under the agreement, the Company recorded share-based compensation to related
party in the amount of $115,460, representing the vested portion of the options
under this Agreement.

2006 STOCK OPTION PLAN

On May 3, 2006 the Company's Board of Directors adopted a plan for issuance of
stock options to employees or others (2006 Incentive and Non-statutory Stock
Option Plan, referred to as the "2006 Plan" - adopted by the Company's
shareholders in October 2006). Under the Plan, the Company has reserved ten
million shares for issuance. During the three months ended September 30, 2006,
the Company granted the following stock options to four members of the Company's
management team and one consultant as compensation. During the three months
ended December 31, 2006, due to a decrease in the Company's stock price and to
keep personnel incentivized, the Company re-priced the options issued in May
2006 under the 2006 Plan from their previous prices to the following, and booked
the increase in value of the re-priced options to prepaid stock based
compensation-related party as further described in the Notes to Financial
Statements, "Options and Warrants". The Company also issued 240,000 options to
two consultants under the 2006 plan as of December 26, 2006. As a result of the
foregoing price modification, the Company recorded a one time charge to share
based compensation in the amount of $1,392,000 in the quarter ended December 31,
2006. A summary of the options issued under the 2006 Plan and the exercise
prices as re-priced, if applicable, is as follows:

                                       25



<Page>

<TABLE>
<CAPTION>
                                              Number of
  Date Issued      Optionee Name               Options          Exercise Price      Expiration Date
<S>                <C>                          <C>              <C>                  <C>
  May 3, 2006      Lou Knickerbocker            4,008,000        $       0.28         May 3, 2011
  May 3, 2006      Grant King                   1,992,000        $       0.20         May 3, 2011
  May 3, 2006      Will Hitchcock               1,008,000        $       0.20         May 3, 2011
  May 3, 2006      Joseph Murray                1,008,000        $       0.20         May 3, 2011
  May 3, 2006      Scott Olson                    201,600        $       0.20         May 3, 2011
 Dec. 26, 2006     Mark King                      120,000        $       0.20        Dec. 26, 2011
 Dec. 26, 2006     Michael Kruger                 120,000        $       0.20        Dec. 26, 2011
---------------------------------------------------------      -------------------------------------
</TABLE>

The foregoing May 2006 option grants vest monthly over a two year term from the
date of issuance, the two December 2006 option grants vest eight months
immediately upon issuance and then monthly over an eighteen month period. The
Company determined the fair market value of the options granted under the 2006
Plan as of the grant date, as re-priced by the Company by action of the Board of
Directors if applicable, using the Black Scholes valuation method.

During the fiscal quarter ended December 31, 2006, based upon the portion of
options vested during this period under the 2006 plan, the issuance of the
240,000 new options, and the revaluation of the options vesting from inception
to December 31, 2006, the Company booked an expense of $353,192 as stock based
compensation-related party and $68,483 as stock based consulting fees.

2007 STOCK OPTION PLAN

On December 26, 2006 the Board of Directors adopted a plan for issuance of stock
options to employees or others (2007 Incentive and Non-statutory Stock Option
Plan, referred to as the "2007 Plan" - not yet approved by the Company's
shareholders). Under the Plan, the Company has reserved six million shares for
issuance.

On December 26, the Board of Directors authorized the issuance of 5,254,800
options under its 2007 Plan. The following options granted under the 2007 Plan
vest monthly over two years from the date of issuance. The Company determined
the fair market value of the options granted under the 2007 Plan as of the grant
date, using the Black Scholes valuation method. The Company recorded the value
of the options issued under the 2007 Plan as share based compensation in the
accompanying consolidated statement of operations.

A summary of the options issued under the 2007 Plan is as follows:

<TABLE>
<CAPTION>
<S>                                                                           <C>
--------------------- ---------------------- ------------- ------------ ------------------
                       2007 Plan
--------------------- ---------------------- ------------- ------------ ------------------
 Date Issued           Option Holder          Shares        Exercise     Expiration Date
                                                            Price
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Louis Knickerbocker    2,004,000     $0.69        Dec., 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Grant King             996,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Will Hitchcock         504,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Joseph Murray          720,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Scott Olson            100,800       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Christen Currie        100,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Taylor Mossman         50,000        $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Juzer Jangbarwala      500,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Michael Kruger         120,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Steve Ritchie          100,000       $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
 December 26, 2006     Mark King              60,000        $0.40        Dec. 26, 2011
--------------------- ---------------------- ------------- ------------ ------------------
</TABLE>

                                       26



<Page>

During the period ended December 31, 2006, based upon the portion of options
vested during this period under the 2007 Plan, the Company recorded an expense
of $18,559 as stock-based compensation to related parties, and $3,977 of share
based compensation to consultants under the Plan. See the discussion in Note 9:
"Options and Warrants" in Notes to Financial Statements.

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 OC ENERGY DRINKS
AND RGBL WATER SOLUTIONS PRODUCTS.

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 OC Energy Drinks and RGBL Water Solutions products. 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 current 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.

                                       27



<Page>

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:

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

                                       28



<Page>

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 its 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. Thee 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. Further, the calculation of
the net income from discontinued operations for the prior period ended December
31, 2005 was incorrectly stated due to incorrect classification of certain
accounts receivable. (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 the valuation of certain
warrants issued to related parties and others, as a result of which the
allocation of value as between the notes and the warrants was incorrectly
stated. The Company has restated its consolidated financial statements for the
quarter ended December 31, 2005 in the attached financial statements as of
December 31, 2006. The Company's audit committee has addressed the weaknesses in
its internal controls which allowed the foregoing errors to occur. Pursuant to
the recommendations of the audit committee, we have engaged qualified outside
consultants to review certain financial disclosures and calculations and have
strengthened the internal review process. The Company cautions that the
consolidated financial statements contained in the previously filed Quarterly
Report on Form 10-QSB for the period ended December 31, 2005, is incorrect and
that such statements should no longer be relied upon.

                                       29



<Page>

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 December 31, 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.

Also in the course of the audit of our consolidated financial statements for the
fiscal year ended March 31, 2007, based upon the evaluation for the period ended
December 31, 2006, 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, 2006, 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,
2007, 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, 2006. Thee errors related to three areas: (1) in
the presentation of the Company's financial statements we failed to record as
interest expense the excess costs of issuing common stock in payment of notes
payable; (2) Second, in the course of the year-end audit of our consolidated
financial statements at March 31, 2007, the Company determined that the Black
Scholes valuation calculation of the amount of the accrued derivative liability
attributable to the Convertible Notes was incorrectly calculated. (3) The
Company has further determined that the amount of share based compensation
expense incurred upon the re-pricing of options granted to related parties and
others under the 2006 Plan was understated. The Company has restated its
consolidated financial statements for the quarter ended December 31, 2006 in the
attached financial statements as of December 31, 2006 The Company's audit
committee has addressed the weaknesses in its internal controls which allowed
the foregoing errors to occur. Pursuant to the recommendations of the audit
committee, we have engaged qualified outside consultants to review certain
financial disclosures and calculations and have strengthened the internal review
process. The Company cautions that the consolidated financial statements
contained in the previously filed Quarterly Report on Form 10-QSB for the period
ended December 31, 2006, is incorrect and that such statements should no longer
be relied upon.

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/A for the period ended December 31, 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, 2007, which will be filed with the Form
10-KSB on or before July 16, 2007.

                                       30



<Page>

Based upon 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 financing 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 further
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 existed 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 has restated its results of operations for the
period ending December 31, 2006 and the comparative prior period ending December
31, 2005 in the accompanying consolidated financial statements, as further
described in Note 2 to the financial statements.

Subsequent to the discovery and report of the foregoing material weaknesses, the
Company's Audit Committee has met, reviewed the internal controls over financial
reporting and the above material weaknesses, and has made certain
recommendations regarding the use of qualified independent accounting
consultants to assist in the review of financial statements and the calculation
and presentation of complex financial transactions, which the Company has
implemented effective as of the current fiscal quarter.

CHANGES IN INTERNAL CONTROLS

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

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, and 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.

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. Management of the Company is committed to continually review and
redesign its internal controls to ensure compliance by the Company with all
applicable rules and standards regarding disclosures and financial reporting.

                                       31



<Page>

                          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. Legal counsel has
filed a motion for summary judgment in this case, which is scheduled to be heard
by the Court in January, 2007. 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, is being defended by legal counsel engaged by co-defendant
Munters Corp. to strongly defend these claims. 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. As of
February 12, 2007, the Company is informed and believes that this litigation has
been settled with no liability to the Company.

Other than the foregoing incidents or occurrences and as disclosed in Item 5,
Other Information, 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

CONVERTIBLE NOTE OFFERING

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 "Notes"). The Notes are convertible at the option of the holder, in
accordance with the limitations set forth in the agreements, 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 the 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 December 31, 2006, we had
issued $2,000,000 of Notes. On October 13, 2006 the Company issued 250,000
shares of its .001 par value common stock in conversion of a portion of the
principal balance and accrued interest payable under the Notes. At this date the
principal balance of the Notes was reduced by $36,675.01. On November 7, 2006
the Company made a payment in lieu of conversion to the Holders of the Notes,
further reducing the principal balance of the Notes in the amount of $58,300.14.

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 on the issued
notes as a liability as of the dates of the various tranches of funding
received. As of December 31, 2006 the total amount of the accrued derivative
liability was calculated by the Company at $14,227,029. The discount on the
Convertible Note payable in the total amount of $1,732,005 is being amortized
over the term of the notes (three years). During the three months ended December
31, 2006, the Company expensed $157,169 as finance charges attributable to this
amortization, and reduced the discount on convertible Note Payable in a similar
amount.

                                       32



<Page>

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 and recorded a liability attributable to the warrants in the
amount of $3,992,302 as of December 31, 2006.

Pursuant to the 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 valued the warrants in connection with the Black Scholes
valuation model, and has reflected this value along with other costs associated
with the convertible notes, as Debt Issuance Costs on the consolidated financial
statements attached. These debt issuance costs are being amortized over the
three year term of the Convertible Notes.

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" 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.

PRIVATE OFFERING

On December 26, 2006 the Company issued 6,282,150 shares of its restricted $.001
par value common stock at $0.20 per share, in consideration as re-payment of the
outstanding amounts due under six notes to related parties and others, including
accrued interest, in the total amount of $1,256,430. Of the total shares issued
in settlement of the notes, 3,801,278 shares were issued to related parties in
repayment of principal and interest due of $769,985. The remaining 2,480,872
shares were issued to un-related parties in repayment of principal and interest
due in the amount of $486,445. Upon this issuance, the Company recorded as
additional interest expense the amount of $2,701,323 representing the difference
between the fair market value of the shares issued on the date of conversion
versus the amount of principal and interest repaid. This private offering was
exempt from registration under the Securities Act of 1933.

CONVERTIBLE NOTE AND WARRANT OFFERING

Also on December 26, 2006 the Company entered into two new one year promissory
notes bearing interest at the rate of eight percent per annum, with accredited
investors as described in Notes to the Financial Statements, Note 7 "Short Term
Notes Payable", and Note 9 "Options and Warrants". These notes contain a
conversion feature allowing the Holders to convert the principal and accrued
interest due on the notes into shares of the Company's common stock. This
private offering was exempt from registration under the Securities Act of 1933.

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The Company issued one warrant to the investors for each dollar loaned to the
Company via the notes (a total of 250,000 warrants), determined the value of the
warrants as of the date of issuance using the Black Scholes method of valuation,
and allocated the value attributed to the warrants as a discount against the new
notes payable. The Company also valued the Beneficial Conversion Feature as of
the date of issuance, and attributed this value as a further discount against
the notes payable. Both of the foregoing discounts are being amortized over the
one year term of the notes. At December 31, 2006 the Company reflected the
remaining short term notes payable on the balance sheet as $272,451 ($550,000
net of applicable discount of $277,549). The discounts on the respective notes
are being amortized over the remaining term of the notes. As of December 31,
2006 the Company had not yet received the subscription amounts in cash, and
accordingly reflected the written commitment of the investors to complete the
funding of these loans as a subscription receivable on the accompanying balance
sheet. The investors completed the funding of the loans to the Company in
January, 2007.

COMPENSATION WARRANTS

During the quarter ended December 31, 2006 the Company issued a warrant to
purchase 100,000 shares of the Company Stock to a consultant for services. The
Company recorded share based consulting fees the value of these warrants at
$116,909 using the Black Scholes method of valuation incorporating the following
estimates: 5.25% risk free interest rate, 243% volatility of the Company's
common stock and an expected life of 5 years. Since one third of the warrants
were vested immediately, the Company recorded an expense in the amount of
$38,969 as stock-based compensation-consulting services.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

In January 2007, the Company had a disagreement with the Note Holders discussed
in Item 2. Convertible Note Offering above regarding the conversion of the
Company's common stock and a potential breach of the Note Holders' warranties
under the agreements. In connection with this disagreement, the Company has been
served with a lawsuit in the County of New York Supreme Court by the Note
Holders for default of the Notes and other causes of action, with damages to be
determined. The parties are currently negotiating a settlement of all issues.
The Company believes the claims are without merit, and if necessary, the Company
will defend itself and file the appropriate counterclaims against the Note
Holders.

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)
          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)

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          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)
          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)(.)

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/ Grant King
---------------------------
Grant King                        CEO                             July 12, 2007

/s/ William C. Hitchcock
---------------------------
William C. Hitchcock              Chief Financial Officer         July 12, 2007


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