UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB




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




For
      the
      quarterly period ended September 30, 2006.





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





Commission
      File Number: 000-254888





RG
      GLOBAL LIFESTYLES, INC.


(Exact
      Name of small business issuer as specified in its charter)





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





30021
                Tomas, Ste 200, Rancho Santa Margarita, CA
            92688(Address
                of principal executive offices)
            (Zip
                Code)





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





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





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





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





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





APPLICABLE
      ONLY TO CORPORATE ISSUERS





The
      number of shares outstanding of the issuer’s Common Stock as of November 17,
      2006 was 17,900,000.





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








**INDEX**





**Page****PART
                I - FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)
            2Consolidated
                Balance Sheet -September 30, 2006
            2Consolidated
                Statements of Operations -For
                the Three and Six Months ended September 30, 2006 and 2005
            3Consolidated
                Statements of Cash FlowsFor
                the Six Months ended September 30, 2006 and 2005
            4Notes
                to Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results
                of Operations
            16Item
                3.
            Controls
                and Procedures
            25**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            27Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            28Item
                3.
            Defaults
                Upon Senior Securities
            29Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            29Item
                5.
            Other
                Information
            29Item
                6.
            Exhibits
            29SIGNATURES
            30








**PART
      I — FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





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


**Consolidated
      Balance Sheet**


**(unaudited)**




September
                  302006**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              320,294Accounts
                  receivable
              
              
              120,600Prepaid
                  expenses
              
              
              165,978Total
                  current assets
              
              
              606,872Fixed
                  assets, net
              
              
              5,369Intangible
                  assets, net
              
              
              196,895Deposits
                  held
              
              
              162,016Total
                  other assets
              
              
              358,911Total
                  Assets
              
              $
              971,152**Liabilities
                  and Stockholders' (Deficit)**Current
                  LiabilitiesAccounts
                  payable
              
              
              70,704Payroll
                  taxes payable
              
              
              1,233Accrued
                  liabilities
              
              
              139,482Notes
                  payable-related party ($708,132 net of $48,318 discount)
              
              
              659,814Notes
                  payable others ($905,808 net of $126,384 discount)
              
              
              779,424Total
                  current liabilities
              
              
              1,650,657Long
                  term liabilitiesLiability
                  associated with detachable warrants-conv. notes
              
              
              3,756,361Accrued
                  derivative liability-convertible notes
              
              
              2,416,798Convertible
                  notes payable ($1,300,000 net of $1,189,174 discount)
              
              
              110,826Total
                  long term liabilities:
              
              
              6,283,985Total
                  liabilities
              
              
              7,934,642**Stockholders'
                  (deficit)**Preferred
                  stock, $0.001, 10,000,000 sharesauthorized,
                  no shares issued and outstanding
              
              
              -Common
                  stock, $0.001 par value, 100,000,000 sharesauthorized,
                  17,650,000 shares issuedand
                  outstanding as of September 30, 2006
              
              
              17,650Additional
                  paid-in capital
              
              
              8,682,011Prepaid
                  share-based compensation-related party
              
              
              (5,919,177
              )Prepaid
                  share-based compensation
              
              
              (15,180
              )Accumulated
                  (deficit)
              
              
              (9,728,794
              )Total
                  stockholders' (deficit)
              
              
              (6,963,490
              )Total
                  Liabilities & Stockholders' (deficit)
              
              $
              971,152




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


2


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


**Consolidated
      Statements of Operations**


**(unaudited)**




For
                  the Three Months ended
              
              For
                  the Six Months endedSeptember
                  30
              
              September
                  302006
              
              2005
              
              2006
              
              2005RevenueProduct
                  Sales
              
              $
              119,700
              
              $
              6,240
              
              $
              120,125
              
              $
              10,840Cost
                  of sales
              
              
              58,600
              
              
              7,150
              
              
              64,528
              
              
              9,381Gross
                  profit
              
              
              61,100
              
              
              (910
              )
              
              55,597
              
              
              1,459Expenses:Advertising
                  and marketing
              
              
              21,714
              
              
              -
              
              
              25,058
              
              
              -Commissions
              
              
              15,000
              
              
              16,081
              
              
              15,000
              
              
              28,081Consulting
                  services
              
              
              293,135
              
              
              66,380
              
              
              1,045,964
              
              
              79,937Depreciation
                  and amortization
              
              
              3,314
              
              
              -
              
              
              3,344
              
              
              -General
                  and administrative expenses
              
              
              170,170
              
              
              16,370
              
              
              273,608
              
              
              9,274Professional
                  fees
              
              
              134,362
              
              
              77,519
              
              
              214,692
              
              
              141,692Rent
                  - related party
              
              
              51,915
              
              
              18,000
              
              
              93,715
              
              
              36,000Salaries
                  and wages
              
              
              69,221
              
              
              -
              
              
              93,721
              
              
              -Stock
                  compensation - related party
              
              
              417,679
              
              
              -
              
              
              616,038
              
              
              -Total
                  expenses
              
              
              1,176,510
              
              
              194,350
              
              
              2,381,140
              
              
              294,984Operating
                  (loss)
              
              
              (1,115,410
              )
              
              (195,260
              )
              
              (2,325,543
              )
              
              (293,525
              )Other
                  income (expense)Interest
                  Income
              
              
              -
              
              
              284
              
              
              -
              
              
              284Income
                  tax refund
              
              
              -
              
              
              -
              
              
              -
              
              
              1,551Change
                  in Fair value of warrants re: convertible notes
              
              
              75,256
              
              
              -
              
              
              268,312
              
              
              -Change
                  in fair value of derivative liability-convertible notes
              
              
              91,657
              
              
              -
              
              
              97,920
              
              
              -Interest
                  and Financing related to convertible notes
              
              
              558,024
              
              
              -
              
              
              4,717,206
              
              
              -Interest
                  and financing expense-related party
              
              
              133,665
              
              
              -
              
              
              261,810
              
              
              -Interest
                  and financing expense-other
              
              
              220,302
              
              
              (12,133
              )
              
              363,379
              
              
              (12,133
              )Total
                  other income (expense)
              
              
              (1,078,904
              )
              
              (11,849
              )
              
              (5,708,627
              )
              
              (10,298
              )(2,194,314
              )
              
              (207,109
              )
              
              (8,034,170
              )
              
              (303,823
              )Provision
                  for income taxesCurrent
                  state
              
              
              -
              
              
              -
              
              
              (800
              )
              
              (1,865
              )Total
                  income taxes
              
              
              -
              
              
              -
              
              
              (800
              )
              
              (1,865
              )Net
                  (loss) from continuing operations
              
              
              (2,194,314
              )
              
              (207,109
              )
              
              (8,034,970
              )
              
              (305,688
              )Discontinued
                  operationsIncome
                  (loss) from discontinued operations, net of tax
              
              
              -
              
              
              385,611
              
              
              -
              
              
              406,828Loss
                  on distribution of discontinued operations, net of tax
              
              
              
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss) from discontinued operations
              
              
              -
              
              
              385,611
              
              
              -
              
              
              406,828Net
                  income (loss)
              
              $
              (2,194,314
              )
              $
              178,502
              
              $
              (8,034,970
              )
              $
              101,140Weighted
                  average number ofcommon
                  shares outstanding - basic and fully diluted
              
              
              17,650,000
              
              
              25,150,000
              
              
              17,650,000
              
              
              25,150,000Net
                  income (loss) per share - basic and fully dilutedContinuing
                  Operations
              
              $
              (0.12
              )
              $
              (0.01
              )
              $
              (0.46
              )
              $
              (0.01
              )Discontinued
                  Operations
              
              
              -
              
              
              0.02
              
              
              -
              
              
              0.02$
              (0.12
              )
              $
              0.01
              
              $
              (0.46
              )
              $
              0.00
  The
      accompanying notes are an integral part of these financial
      statements.


3


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


**Consolidated
      Statements of Cash Flows**


**(unaudited)**




For
                  the six months endedSeptember
                  302006
              
              
              2005**Cash
                  flows from operating activities****Continuing
                  Operations**Net
                  (loss) from continuing operations
              
              $
              (8,034,970
              )
              $
              (305,688
              )Adjustments
                  to reconcile net loss from continuing operations to
              
              
              (8,034,970
              )
              
              (305,688
              )net
                  cash (used) by continuing operations:Depreciation
                  & amortization
              
              
              3,374
              
              
              -Warrants
                  Discount amortization-related party
              
              
              233,211
              
              
              -Warrants
                  Discount amortization-unrelated party
              
              
              257,226
              
              
              -Non-cash
                  expenses associated with convertible debt
              
              
              4,617,693
              
              
              -Stock
                  based compensation - related party
              
              
              616,038
              
              
              -Stock
                  based compensation - consultants and legal
              
              
              815,944
              
              
              -Change
                  in Fair Value of warrant liability
              
              
              268,312
              
              
              -Change
                  in Derivative liability
              
              
              97,920
              
              
              -(Increase)
                  decrease in prepaid compensation
              
              
              -
              
              
              (26,123
              )Changes
                  in operating assets and liabilities:(Increase)
                  in accounts receivable
              
              
              (119,700
              )
              
              -(Increase)
                  decrease in inventory
              
              
              -
              
              
              12,278(Increase)
                  decrease in prepaid expenses
              
              
              10,044
              
              
              (32,642
              )(Increase)
                  decrease in deposits held
              
              
              (481
              )
              
              (149,990
              )Increase
                  in accounts payable
              
              
              21,859
              
              
              13,775Increase
                  in accrued liabilities
              
              
              92,919
              
              
              32,995(Decrease)
                  in payroll tax payable
              
              
              (148
              )
              
              -Increase
                  (decrease) in due to affiliate
              
              
              -
              
              
              (239,062
              )Net
                  cash (used) in continuing operations
              
              
              (1,120,759
              )
              
              (694,457
              )Net
                  cash provided (used) in discontinued operations
              
              
              -
              
              
              (73,939
              )Net
                  cash provided (used) by operating activities
              
              
              (1,120,759
              )
              
              (768,396
              )**Cash
                  flows from investing activities:**Purchase
                  of fixed assets
              
              
              (5,608
              )
              
              (350
              )Purchase
                  of intangible assets
              
              
              (200,000
              )
              
              -Net
                  cash provided (used) in continuing operations
              
              
              (205,608
              )
              
              (350
              )Net
                  cash (used) in discontinued operationsNet
                  cash provided (used) by investing activities
              
              
              (205,608
              )
              
              (350
              )**Cash
                  flows from financing activities**Proceeds
                  from notes payable
              
              
              1,300,000
              
              
              600,000Donated
                  Capital
              
              
              -
              
              
              96,443Net
                  cash provided by financing in continuing operations
              
              
              1,300,000
              
              
              696,443Net
                  cash provided (used) in discontinued operations
              
              
              -
              
              
              -Net
                  cash provided (used) by financing activities
              
              
              1,300,000
              
              
              696,443Net
                  increase (decrease) in cash provided by continuing
                  operations
              
              
              (26,367
              )
              
              (72,303
              )Cash
                  - beginning
              
              
              346,661
              
              
              159,661Cash
                  - ending
              
              $
              320,294
              
              $
              87,358




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


4




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


Notes
      to
      consolidated financial statements


**Note
          1 - Basis of Presentation**
 
 The
          financial statements included herein, presented in accordance with United
          States
          generally accepted accounting principles and stated in US dollars, have
          been
          prepared by the Company, without audit, pursuant to the rules and regulations
          of
          the Securities and Exchange Commission. Certain information and footnote
          disclosures normally included in financial statements prepared in accordance
          with generally accepted accounting principles have been condensed or omitted
          pursuant to such rules and regulations, although the Company believes that
          the
          disclosures are adequate to make the information presented not
          misleading.
 
 These
          statements reflect all adjustments, consisting of normal recurring adjustments,
          which, in the opinion of management, are necessary for fair presentation
          of the
          information contained therein. It is suggested that these consolidated
          interim
          financial statements be read in conjunction with the financial statements
          and
          notes thereto of the Company for the year ended March 31, 2006 included
          in the
          Company’s 10-KSB annual report. The Company follows the same accounting policies
          in the preparation of interim reports .
 
 **Note
          2 - Discontinued Operations**
 
 During
          the fiscal quarter ended December 31, 2005, the Company entered into an
          agreement with a group of its shareholders to distribute Amerikal in exchange
          for 7,500,000 shares of the Company’s common stock. The effective date of this
          transaction was October 1, 2005. The distribution of Amerikal qualified
          for
          treatment as discontinued operations in accordance with FASB Statement
          No. 144
          (“SFAS No. 144”), Accounting for the Impairment or Disposal of Long-Lived
          Assets. Therefore, the operating results of Amerikal were not included
          in
          results from continuing operations. In addition, all operating results
          of
          Amerikal previously reported in the consolidated financial statements were
          reflected as “Discontinued Operations” for all periods prior to the effective
          date of the distribution. The following is a summary of the net assets
          distributed as of the end of the period immediately prior to the effective
          date
          of the Distribution Agreement:
  As
                    of September 30,2005Assets
                    DistributedCash
                    and cash equivalents
                
                $
                45,287Accounts
                    receivable
                
                
                1,039,684Inventory
                
                
                131,120Property
                    and equipment, net
                
                
                17,037Other
                    assets
                
                
                315,780Total
                    assets of discontinued operations
                
                
                1,548,907Liabilities
                    DistributedAccounts
                    payable
                
                
                106,657Accrued
                    liabilities
                
                
                240,420Total
                    liabilities of discontinued operations
                
                
                347,077Net
                    assets of discontinued operations distributed
                
                $
                1,201,830
 
 Net
          income (loss) from discontinued operations as reported on the consolidated
          statements of operations, including the (loss) on the distribution of
          discontinued operations, consists of the following:
 
 5
 
  **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 
 As
                    of Sept. 30,2005Summary
                    of IncomeRevenues
                
                $
                1,923,877Cost
                    of revenues
                
                
                786,964Gross
                    profit
                
                
                1,136,913Total
                    operating expenses
                
                
                670,655Total
                    other (income) expenses
                
                
                (441
                )Provision
                    for income tax
                
                
                94,831Income
                    from operations of Amerikal, net of tax
                
                $
                371,868
 
 As
          a
          result of the foregoing distribution of Amerikal, the Company recognized
          a loss
          from discontinued operations in the quarter ended December 31, 2005 of
          ($837,768). There were no sales from Amerikal included in the periods from
          October 1, 2005 to September 30, 2006.
 
 **Note
          3 - Going Concern**
 
 The
          accompanying financial statements have been prepared assuming the Company
          will
          continue as a going concern. As shown in the accompanying financial statements,
          the Company incurred an operating loss from continuing operations before
          income
          taxes and other expenses of $(1,115,410) for the period ended September
          30,
          2006, and had gross sales of $119,700. These conditions raise substantial
          doubt
          about the Company's ability to continue as a going concern.
 
 The
          future of the Company is dependent upon its ability to obtain equity and/or
          debt
          financing and upon future profitable operations from the development of
          its new
          business opportunities. The Company has recently completed the raising
          of
          $2,000,000 of invested capital through the placement of convertible notes.
          See
“Convertible Debt with Detachable Warrants”, Note 7, below. During the six
          months ended September 30, 2006, the Company issued $1,300,000 of the total
          of
          $2,000,000 planned issuance of convertible notes, and recorded as other
          expenses
          the following: (1) Interest and financing expenses related to convertible
          notes
          in the amount of $4,717,206; (2) Change in fair value of warrants issued
          re:
          convertible notes in the amount of $268,312; and (3) Change in the fair
          value of
          derivative liability re: convertible notes in the amount of $261,810. These
          expenses total $5,247,328 of the total of “Other Expenses” set forth in the
          attached Consolidated Statement of Operations, or 65.3% of the total net
          loss of
          ($8,034,170) reported by the Company for the six months ended September
          30,
          2006. In addition, during the six months ended September 30, 2006, the
          Company
          accrued interest and financing expenses to related parties in the amount
          of
          $261,810 and interest and financing expenses of $363,379, in connection
          with the
          issuance of short term notes payable to related parties and others, for
          a total
          of $625,189. The combined total of interest and financing charges incurred
          by
          the Company and reflected as “Other (expense)” on the Consolidated Statements of
          Operations, attached, is $5,708,627 during the six months ended September
          30,
          2006. The foregoing financing costs combined represent over 71% of the
          net loss
          from continuing operations during the most recent six month period of
          operations.
 
 There
          can
          be no assurance that this additional capital will be sufficient for the
          Company
          to achieve profitability in its operations, and it is possible that additional
          equity or debt financing may be required to continue as a going concern.
          Without
          such additional capital, there is some doubt as to whether the Company
          will
          continue as a going concern. The Company does not yet have a specific plan
          to
          raise additional funds following the issuance of the $2,000,000 in convertible
          notes.
 
 6
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 The
          financial statements do not include any adjustments relating to the
          recoverability and classification of recorded assets, or the amounts of
          and
          classification of liabilities, which might be necessary in the event the
          Company
          cannot continue in existence.
 
 **Note
          4 - Fixed Assets**
 
 Fixed
          assets of continuing operations and discontinued operations as of September
          30,
          2006 and 2005 consisted of the following:
 
 Continuing
                    Operations
                
                2006
                
                2005Office
                    equipment
                
                $
                5,608
                
                $
                -Accumulated
                    depreciation
                
                
                (
                    239
                )
                
                -$
                5,369
                
                $
                -Discontinued
                    OperationsOffice
                    equipment
                
                $
                -
                
                $
                20,873Accumulated
                    depreciation
                
                
                -
                
                
                (3,836
                )$
                -
                
                $
                17,037
 
 During
          the six months ending September 30, 2006 and 2005, the Company recorded
          $239 and $0 of depreciation expense for continuing operations and recorded
          $0
          and $2,406 for discontinued operations, respectively.
 
 **Note
          5 - Amortization Expense**
 
 During
          the quarter ended September 30, 2006 the Company acquired certain intangible
          rights (described below) in the amount of $200,000 and recorded $3,105
          of
          amortization expense. During the quarter ended September 30, 2005, the
          Company
          did not record amortization expense for continuing operations. During the
          quarters ended September 30, 2006 and 2005, the Company recorded amortization
          expense of $0 and $75,000 for discontinued operations, respectively.
 
 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. The transaction contemplates that three selected
          oil companies located in Wyoming will each produce a purchase order to
          Aquair,
          through Catalyx, for the purpose of proving the viability of the technology
          for
          the oil companies. Testing was commenced in the quarter ended September
          30, 2006
          and is underway. When testing is successfully completed, it is anticipated
          that
          contracts with one or all three of the oil companies will be generated
          for
          Aquair to process the water on a “charge by the barrel” basis. The Company has
          recorded this payment as an intangible asset and is amortizing the value
          over a
          fifteen year life.
 
 **Note
          6 - Notes Payable**
 
 On
          November 15, 2005, the Company began a private placement offering to accredited
          investors only under the terms and conditions of a Note and Warrant Agreement
          (“Offering”). The terms of the Offering are a non-convertible promissory note
          with an annual interest rate of 8%, with a maturity date of one year after
          loan
          (“Note”); and for each dollar loaned the Company via Note, the investor is
          granted a cashless warrant to purchase one share of the Company’s common stock
          at an exercise price equal to the lowest closing price of the stock as
          reported
          by the OTC:BB for the year following the date of warrant grant (“Warrant”).
          These sales are exempt from registration under the Securities Act pursuant
          to
          Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”), or
          Regulation D of the Securities Act.
 
 7
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 As
          of
          September 30, 2006, the Company had entered into eight separate investments
          totaling $1,613,940 under the terms of the Offering, of which $613,940
          was money
          already loaned to the Company and then converted into an investment in
          the
          Offering. In each instance, the Company allocated the proceeds between
          Notes and
          Warrants based upon their fair value, using the Black Scholes method of
          valuation. For purposes of determining the volatility factor in the Black
          Scholes valuation model, the company looked to the lowest price of the
          Company’s
          stock over the entire trading history of the Company’s stock from inception to
          the date of the Warrant grant. The exercise price is re-determined as of
          the
          filing date for each quarter’s financial statements, and is based upon the
          lowest price for the Company’s common stock during the look-back
          period.
 
 The
          discounts on the notes payable are being amortized over the period of one
          year.
          During the quarter ended September 30, 2006, the Company expensed $251,161
          of
          interest as finance charges attributable to the Warrant, and reduced the
          discounts on the notes payable by a similar amount.
 
 **Note
          7 - Convertible Debt with Detachable Warrants** .
 
 On
          June
          6, 2006, the Company entered into a definitive Securities Purchase Agreement
          and
          ancillary agreements (the “Agreements”) with four accredited investors (the
“Investors”) for the sale of $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 September 30, 2006, the Company
          had
          issued $1,300,000 of the Convertible Notes pursuant to the Agreements.
          The
          conversion rate of the Convertible Notes is based upon 50% of the Market
          Price
          of the Company’s stock at the time of conversion. Market price is defined as the
          average of the lowest three trading prices for the Company’s stock on the OTC
          Bulletin Board during the twenty day period, ending one trading day prior
          to
          conversion. The Company incurred $53,000 of direct finance charges and
          expenses
          attributable to the placement of the Convertible Notes in the period ended
          September 30, 2006. In addition, the Company accrued $17,097 of interest
          expense
          on the $1,300,000 of notes payable during the quarter ended September 30,
          2006.
          The Company also incurred finance charges attributable to the issuance
          of the
          warrants and the beneficial conversion feature issued in connection with
          the
          second tranche of Convertible Notes in the amount of $531,464.
 
 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 $2,416,798, 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 September 30, 2006 in the amount of $3,756,361.
          The warrants may be exercised at any time following issuance. During the
          quarter
          ended September 30, 2006 the Company recorded as other expenses (1) the
          change
          in fair value of the warrants between the date of issuance and September
          30,
          2006 in the amount of $75,256, and (2) the change in fair value of the
          derivative liability between date of issuance and September 30 in the amount
          of
          $91,657.
 
 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 September 30, 2006 the Company expensed
          $91,655 as finance charges attributable to the amortization of the discounts
          on
          note 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.
 
 8
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 **Note
          8** - **Options and Warrants**
 
 **Common
          Stock: Options**
 
 In
          the
          quarter ended September 30, 2005, the Company entered into a three-year
          agreement with a consultant, who later became a related party (Director
          of the
          Company). As a portion of the compensation due to the consultant under
          the
          agreement, the Company issued options to purchase 100,000 shares of the
          Company’s common stock vesting at the rate of one-third at the end of each 12
          months under the agreement. These options were not issued pursuant to the
          Company’s 2006 Incentive and Nonstatutory Stock Option Plan, described below.
          The Company determined the fair market value of the options as of the date
          of
          the grant at $346,379, using the Black Scholes valuation method with the
          following estimates: 4% risk free rate and 100% volatility of the Company’s
          common stock. In recognition of the equitable obligation to issue the options
          in
          the event of the death or disability of the consultant, the Company has
          reflected the portion of the options ratably earned between the anniversary
          date
          of the Agreement and September 30, 2006 in the amount of $23,982 in a special
          equity account entitled “Prepaid Share Based Compensation.” In July 2006, at the
          twelve-month anniversary date of the consulting agreement based upon the
          vesting
          of the options, the Company has reduced prepaid compensation in the amount
          of
          the previously earned options and increased share based compensation to
          related
          party in the amount of $115,460.
 
 On
          May 3,
          2006 the Company’s Board of Directors adopted a plan for the issuance of stock
          options to employees or others (“The 2006 Incentive and Nonstatutory Stock
          Option Plan,” hereinafter referred to as the “Plan”). Under the Plan, the
          Company has reserved ten million shares for issuance. During the quarter
          ended
          June 30, 2006, the Company granted the following stock options to four
          members
          of the Company’s management team and one consultant as
          compensation:
 
 **Date
                    Issued:**
                
                **Optionee
                    Name**
                
                **Number
                    of Options**
                
                **Exercise
                    Price**
                
                **Value***
                
                **Expiraton
                    Date**May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                4,008,000
                
                $
                0.94
                
                $
                3,073,245
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                1,992,000
                
                $
                0.50
                
                
                1,574,630
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Officer
                
                
                1,008,000
                
                $
                0.50
                
                
                796,801
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                1,008,000
                
                $
                0.50
                
                
                796,801
                
                
                May
                    3, 2011May
                    3, 2006
                
                
                Outside
                    Consultant
                
                
                201,600
                
                $
                0.50
                
                
                159,360
                
                
                May
                    3, 2011Totals
                
                
                
                
                
                8,217,600
                
                
                
                
                $
                6,400,837
 
 *The
          Company determined the fair market value of the options issued above as
          of the
          date of the grant using the Black Scholes valuation method with the following
          estimates: 5.25% risk free rate and 145% volatility of the Company’s common
          stock. The Plan provides for a vesting of the options over a five year
          term,
          with 40% of the options vesting ratably over the first two years (24 months)
          from the date of issuance. During the quarter ended September 30, 2006,
          the
          Company reduced prepaid share based compensation to related parties by
          $302,219
          and expensed as stock-based compensation-related party the vested portion
          of the
          options earned in this fiscal quarter by the same amount. In addition,
          the
          Company has reduced prepaid share-based consulting expenses in the amount
          of
          $7,716 and increased stock based compensation-consulting services by the
          same
          amount for the vested portion of consulting options during this fiscal
          quarter.
 
 9
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 The
          following is a summary of activity of outstanding stock options:
 
 WeightedAverageNumber
                
                ExerciseOf
                    Shares
                
                PriceBalance,
                    March 31, 2006
                
                
                100,000
                
                $
                2.00Options
                    granted
                
                
                8,217,600
                
                
                0.73Options
                    exercised
                
                
                -
                
                
                -Balance,
                    September 30, 2006
                
                
                8,317,600
                
                
                0.73Exercisable,
                    September 30, 2006
                
                
                701,466
                
                $
                0.73
  At
          March
          31, 2006, the range of option prices for shares and the weighted-average
          remaining contractual life is as follows:
 
 Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of
                  Option
                  Exercise
                    Prices
                
                Number
                    of
                  Options
                
                Weighted-
                  Average
                  Exercise
                  Price
                
                Weighted-
                  Average
                  Remaining
                  Contractual
                  Life
                
                Number
                  Of
                  Options
                
                Weighted-
                  Average
                  Exercise
                  Price$0.50
                    - 2.00
                
                
                8,317,600
                
                $
                0.73
                
                
                4.59
                    yrs
                
                
                701,466
                
                $
                0.73
 
 **Common
          Stock Equivalents: Warrants**
 
 In
          the
          third quarter 2005, the Company entered into a legal retainer agreement
          with
          legal counsel providing for the issuance of cashless warrants to purchase
          25,000
          shares of the Company’s common stock at $2.00 per share, in prepayment of legal
          services to be rendered by the law firm on behalf of the Company. 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 September
          30, 2006, the Company recorded $16,051 of consulting expense representing
          the
          vested portion of these warrants, and reduced prepaid compensation by the
          same
          amount.
 
 10
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 During
          the quarter ended September 30, 2006 the Company issued 100,000 and 5,000
          warrants respectively to two consultants for past services. The Company
          valued
          these warrants at $90,519 and $4,526 respectively using the Black Scholes
          method
          of valuation using the following estimates: 5.25% risk free interest rate,
          163%
          volatility of the Company’s common stock and an expected life of 5 years. Since
          the warrants were vested immediately, the Company recorded an expense in
          the
          amount of the value of the issued warrants as stock-based
          compensation-consulting services.
 
 **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 $3,756,361 as of September
          30,
          2006 attributable to the issuance of these warrants.
 
 In
          addition to the foregoing, pursuant to an engagement agreement for financial
          advisory services and as compensation for the Convertible Note financing,
          the
          Company issued 640,000 warrants to purchase shares of the Company’s common stock
          to Ascendiant Securities, LLC. These warrants bear an exercise price of
          $0.80
          per share, and are exercisable for a term of seven (7) years from the date
          of
          issuance. The Company determined the value of the warrants to be $611,036
          based
          upon the Black Scholes method of valuation, using the following estimates:
          5.25%
          risk free interest rate, 150% volatility of the Company’s common stock, and an
          expected life of 7 years. Since the services for which these warrants were
          issued have been fully performed, the Company recorded the entire value
          of the
          warrants as stock based consulting expense in the quarter ended June 30,
          2006.
 
 The
          issuance of the warrants was accounted for in accordance with Financial
          Accounting Standards Board Statements using the Black-Scholes option pricing
          model (with the same assumptions as those used for the 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:
 
 WeightedAverageNumber
                
                ExerciseOf
                    Shares
                
                PriceBalance,
                    March 31, 2006
                
                $
                1,758,940
                
                $
                0.63Warrants
                    granted
                
                
                4,745,000
                
                
                1.02Warrants
                    exercised
                
                
                -
                
                
                -Balance,
                    September 30, 2006
                
                
                6,503,940
                
                
                0.86Exercisable,
                    September 30, 2006
                
                $
                4,745,000
                
                $
                1.06
  11
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 At
          June
          30, 2006, the range of warrant prices for shares under warrants and the
          weighted-average remaining contractual life is as follows:
 
 Warrants
                    Outstanding
                
                Warrants
                    ExercisableRange
                    of
                  Warrant
                  Exercise
                    Prices
                
                Number
                    of
                  Warrants
                
                Weighted-
                  Average
                  Exercise
                  Price
                
                Weighted-
                  Average
                  Remaining
                  Contractual
                  Life
                
                Number
                  Of
                  Warrants
                
                Weighted-
                  Average
                  Exercise
                  Price$
                    0.60 - 2.00
                
                
                6,503,940
                
                $
                0.86
                
                
                8.7
                    yrs
                
                
                4,745,000
                
                $
                1.02
 
 There
          have been no other issuances of options or warrants by the Company in the
          quarter ended September 30, 2006.
  **Note
          9 - Commitments and Contingencies**
 
 **Legal
          Proceedings**
 
 On
          August
          30, 2005, the Company was served with a lawsuit filed as Case No. 05CC09548
          in
          Orange County, California Superior Court. In the complaint, Universal
          Communications Systems, Inc. and its subsidiary Atmospheric Water Technologies,
          Inc. allege defamation, interference with prospective economic advantage,
          and
          false advertising, and seek compensatory and punitive damages, and costs
          against
          the Company. The Board of Directors believes these claims to be without
          merit,
          and has engaged legal counsel to strongly defend these claims. Through
          its legal
          counsel, the Company has filed an answer and alleged over twenty affirmative
          defenses to the remaining charging allegations in the plaintiff’s complaint.
          Legal counsel for the Company has recently filed a motion for summary judgment
          in this case. The hearing on the motion for summary judgment 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 and declaratory
          relief and damages” filed by plaintiffs H2O Liquid Air, LLC and H2O Liquid Air
          of Florida, LLC on June 10, 2006 in the United States district Court, Southern
          district of Florida, Miami Division, against the Company and eight other
          defendants. The complaint alleges ten “counts” although only three of these
          counts are directed against the Company: unfair competition under common
          law,
          statutory infringement under Section 32 of the Lanham Act, and interference
          with
          a distribution agreement. The Company will be defended by legal counsel
          engaged
          by co-defendant Munters Corporation. The Company will strongly defend these
          claims through its legal counsel. The Company further believes that any
          liability it may incur in connection with this case will not have a material
          adverse effect upon its financial condition or its results of
          operations.
 
 Other
          than the foregoing, the Company is not aware of any litigation, either
          pending
          or threatened, and has not been the defendant or a plaintiff in any litigation,
          since the discharge from bankruptcy attributable to its precedessor L.L.
          Knickerbocker Company, Inc.
 
 **Commitments**
 
 On
          June
          1, 2006, the company acquired the rights to distribute certain licensed
          anti-microbial products, currently sold under the brand name Hydrosil,
          from
          Apcan Distribution, LLC. The Agreement provides for the exclusive license
          to
          distribute Hydrosil and related licensed technology, over a perpetual term.
 
 On
          June
          1, 2006, the Company engaged Intercontinental Management of Nevada (“IMN” as a
          consultant to head up sales and marketing, and provide product support,
          training
          and maintenance services to customers of Hydrosil. The consulting agreement
          obligates the Company to pay consulting fees of up to $7,500 per month
          for the
          sales, product support, training, and maintenance services to be performed
          by
          IMN over the ten-year term. In addition, the Agreement provides for commissions
          on sale of products licensed to the Company under the Apcan Distributors,
          LLC
          agreements discussed above, and provides for IMN to earn options to purchase
          common stock of the Company based upon realization of stated sales
          objectives.
 
 12
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 
 **Note** **10
          - Segment reporting and concentrations**
 
 Up
          until
          the end of the quarter ended September 30, 2005, the Company operated in
          a
          business segment that included the manufacture and sale of natural supplements,
          health and beauty aid products for the nutraceutical industry. Effective
          as of
          the quarter ended December 31, 2005 the Company completed the distribution
          of
          Amerikal, and has subsequently concentrated solely upon Aquair for its
          revenue
          activity. The Company is therefore again operating in a single business
          segment
          for the sales of its products. In the quarter ended September 30, 2006
          the
          Company made gross sales of $119,700 of its Hydrosil chemical products
          to a
          single customer (IMN).
 
 **Note
          1** **1
          - Related party transactions**
 
 During
          the fiscal year ended March 31, 2005, the Company entered into an agreement
          with
          a company wholly owned by an officer and director of the Company. This
          Agreement
          continued in force for the entire fiscal year ended March 31, 2006. Effective
          as
          of April 1, 2006, the Company amended the previous agreement between its
          Aquair
          subsidiary and the related party, to increase the amount of monthly rental
          space
          and support services provided. The amended agreement provides for 1000
          square
          feet of office space at a fair market rate of $3.00 per square foot, including
          maintenance, utilities and base telephone, for a total rent payment of
          $4,000
          per month, and expanded support services including administrative and
          secretarial support staff at a rate of $7,500 per month. In addition, in
          order
          to provide more space for its increased staff, the Company entered into
          a new
          month to month rental and support services agreement with the same related
          party, to provide an additional 667 square feet of rental space on a full
          service basis, including maintenance, utilities and base telephone, at
          the fair
          market rental rate of $3.00 per square foot, for a total monthly space
          rental
          charge of $3,000 per month. The second rent and support services agreement
          also
          provides for additional support services in the form of secretarial staff,
          at a
          rate of $5,200 per month. The agreements are not binding and may be cancelled
          by
          either party at any time. During the quarter ended September 30, 2006,
          the
          Company expensed $51,915 under this agreement.
 
 As
          described in detail in Note 6-Notes Payable, above, during the year ended
          March
          31, 2006, the Company also entered into three transactions with related
          parties
          whereby the Company issued Notes with Warrants to officers and directors
          of the
          Company.
 
 The
          Company also entered into an agreement to issue options to purchase stock
          of the
          Company with a Consultant who later became a related party (Director of
          the
          Company). The Company expensed as stock based compensation-related party
          the
          vested portion of options issued pursuant to this agreement on the vesting
          anniversary date in July, 2006 in the amount of $115,460.
 
 On
          May 3,
          2006, the Company also adopted a stock option plan (the “Plan”) pursuant to
          which it granted options to four members of its management team, three
          of whom
          are officers and directors, and one of whom is an officer of the Company.
          During
          the quarter ended September 30, 2006 the Company recorded the vested portion
          of
          these options as an expense entitled “Stock-based compensation-related party” in
          the amount of $302,219. See Note 8 - Options and Warrants, above .
 
 13
 
 **R.G.
              Global Lifestyles, Inc.**
 Notes
              to
              consolidated financial statements
 **Note
          12 - Subsequent Events**
 
 The
          Company has filed a shelf resale registration statement on Form SB-2 covering
          2,640,000 shares of the Company common stock in connection with the financing
          transaction described in Note 7 - Convertible Notes, above - which the
          SEC
          declared effective on October 12, 2006.
 
 On
          October 20, 2006, the Board of Directors re-priced the exercise price of
          the
          following stock options granted under the Plan:
 
 **Date
                    Issued:**
                
                **Optionee
                    Name**
                
                **Number
                    of Options**
                
                **Original
                    Exercise Price**
                
                **Re-Price**May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                4,008,000
                
                $
                0.94
                
                $
                0.28May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                1,992,000
                
                $
                0.50
                
                $
                0.20May
                    3, 2006
                
                
                Officer
                
                
                1,008,000
                
                $
                0.50
                
                $
                0.20May
                    3, 2006
                
                
                Officer
                    and Director
                
                
                1,008,000
                
                $
                0.50
                
                $
                0.20May
                    3, 2006
                
                
                Outside
                    Consultant
                
                
                201,600
                
                $
                0.50
                
                $
                0.20
  In
          addition, the Company has commenced product development of a line of natural
          energy drinks in connection with its plan to diversify its customers and
          product
          lines.
  14


**FORWARD-LOOKING
      STATEMENTS**





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





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





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




·
            Increased
                competitive pressures from existing competitors and new
                entrants;·
            Deterioration
                in general or regional economic conditions;·
            Adverse
                state or federal legislation or regulation that increases the costs
                of
                compliance, or adverse findings by a regulator with respect to existing
                operations;·
            Ability
                to grow business in its Aquair subsidiary and meet or exceed its
                return on
                shareholders’ equity target, which will depend on the Company’s ability to
                manage its capital needs and the effect of business and/or
                acquisitions;·
            Ability
                to successfully replace revenues of its distributed subsidiary
                Amerikal;·
            Any
                unforeseen liabilities in value beyond the escrowed reserve resulting
                from
                the Amerikal distribution;·
            If
                acquisitions are made, the costs and successful integration of
                acquisitions;·
            Barriers
                in trade with foreign countries or tariff regulations and other United
                States and foreign laws;·
            Political
                and economic instability and changes in monetary policy of the foreign
                countries we currently do business in;·
            Loss
                of customers or sales weakness;·
            Inability
                to achieve future sales levels or other operating
                results;·
            Ability
                to locate suitable new products for distribution within our business
                sector, and retain licensing rights to such new products on acceptable
                terms;·
            The
                continuation of favorable trends, including the drop in affordable
                potable
                water globally;·
            Outcomes
                and costs associated with litigation and potential compliance
                matters;·
            Inadequacies
                in the Company’s internal control over financial reporting, which could
                result in inaccurate or incomplete financial reporting;Dilution
                to Shareholders from convertible debt financings;·
            Key
                management or other unanticipated personnel changes;·
            The
                unavailability of funds for capital expenditures; and·
            Operational
                inefficiencies in distribution or other
                systems.




15




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.





**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; (v) water desalinization technology
      for use in conjunction with wet bed mining; and (vi) other water-related
      technologies.








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 machine has
      been tested in various locations. As of September, 2006, the Company has sold
      units to customers in the U.S. and Asia, and anticipates further
      sales.





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





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





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


Aquair’s
      marketing strategy for its atmospheric pure water generators will focus on
      customers in medical related businesses, home shoppers via television and
      internet, pharmaceutical related businesses, large businesses within office
      buildings, large construction companies, maritime vessels and offshore rigs,
      and
      large restaurant and grocery store chains. Additionally, the Company will pursue
      government agencies through its agent Policy Impact. Aquair’s marketing strategy
      for its anti-microbial water cleaning agents will initially focus on residential
      and commercial pool owners and hotel chains.





16




Anti-Microbial
      Products





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





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





Desalinization
      Technology for Wet Bed Methane Mining





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 for this right. The transaction contemplates that selected oil
      companies located in Wyoming will test the feasibility of the technology for
      the
      oil companies. Testing commenced during the fiscal quarter ended September
      30,
      2006 and is underway. If the testing is successfully completed, the Company
      plans to enter into contracts with one or more of the oil companies to process
      the water on a “charge by barrel” basis.





OC
      Energy Drinks





On
      October 7, 2006 the Company launched its 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. Befitting the OC lifestyle, the energy drinks
      are low in natural sugar and high in vitamins and minerals. The bottles are
      custom-designed. Bulk deliveries of the bottled drinks will commence in
      mid-December and sales are not anticipated until first quarter of
      2007.





***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.





17




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 endedSeptember 30, 2006.





***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 September 30, 2006 and
      2005**





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





Three
                Months Ended September 302006
            
            2005Product
                Sales
            
            $
            119,700
            
            $
            6,240Cost
                of sales
            
            $
            58,600
            
            $
            7,150Gross
                Profit
            
            $
            61,100
            
            $
            (910
            )General
                and
              administrative
                expenses
            
            $
            170,170
            
            $
            16,370Consulting
                services
            
            $
            174,323
            
            $
            66,380Stock
                based Compensation-related party
            
            
            417,679
            
            
            0Depreciation
                and
              Amortization
            
            $
            3,314
            
            $
            0Total
                Expenses
            
            $
            1,176,510
            
            $
            194,350Operating
                Loss
            
            $
            (1,115,410
            )
            $
            (195,260
            )





18




**Revenues
      and Cost of Sales**





**Increase/(decrease)**2006
            
            2005
            
            $
            
            %For
                the three months ended September 30Gross
                Profit
            
            $
            61,100
            
            $
            (910
            )
            $
            62,010
            )
            
            6814.3
            %





During
      the three months ending September 30, 2006, the Company generated gross profit
      of 61,100 on net product sales of $119,700 and cost of sales totaling $58,600,
      compared to $(910) of gross (loss) on net product sales of $6,240 and costs
      of
      sales of $7,150 in the three months ending September 30, 2005. This resulted
      in
      an increase in gross profits of $62,010, or 6814.3%, from the same period one
      year ago. The primary reason for the increase in revenues is due to the
      commencement of sales of Hydrosil chemicals through its Aquair
      subsidiary.





**General
      and Administrative Expenses**





**Increase/(decrease)**2006
            
            2005
            
            $
            
            %For
                the three months ended September 30General
                & Administrative Expenses
            
            $
            170,170
            
            $
            16,370
            
            $
            153,800
            
            
            939.5
            %





General
      and administrative expenses were $170,170 for the three months ended September
      30, 2006 versus $16,370 for continuing operations for the three months ended
      September 30, 2005, which resulted in an increase of $153,800 or 939.5%. General
      and administrative expenses increased comparatively for the three months ended
      September 30, 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 September 30Total
                Operating Expenses
            
            $
            1,176,510
            
            $
            194,350
            
            $
            982,160
            
            
            505
            %





Our
      operating expenses for the three months ended September 30, 2006 were $1,176,510
      compared to $194,350 for the three months ended September 30, 2005. The primary
      reason for the increase in operating expense is the stock based compensation
      expense of $417,679 recorded by the Company in the current fiscal quarter,
      as a
      result of the issuance of options under the 2006 Non-statutory Stock option
      plan
      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
      September 30, 2006, the Company expended $51,915 in rent paid to a related
      party, and paid $134,362 in legal and accounting fees, compared to $18,000
      and
      $77,519 respectively for these expenses in the three months ended September
      30,
      2005. During the three months ended September 30, 2006, the company incurred
      total general and administrative expenses of $170,170, compared to $16,370
      of
      similar expenses in the same period last year.





19




**Operating
      (Loss)**





**Increase/(decrease)**2006
            
            2005
            
            $
            
            %For
                the three months ended September 30Net
                income
            
            $
            (1,115,410
            )
            $
            (195,260)
            )
            $
            (920,150
            )
            
            471.2
            %





The
      net
      loss from operations for the three months ended September 30, 2006 was
      ($1,115,410), versus a net loss of ($195,260) for the three months ended
      September 30, 2005, an increase in net loss of ($920,150) or 471.2%. The
      increase in net loss as compared to the same period in 2005 was due the
      recording of a stock-based compensation expense of $417,679 in the current
      fiscal quarter, and to costs associated with diversification of the Company’s
      product lines, expansion of facilities, increased professional fees, and higher
      general and administrative expenses.





**Liquidity
      and Capital Resources**





We
      had
      cash and cash equivalents of $320,294 as of September 30, 2006. We also had
      $120,600 of accounts receivable, prepaid expenses of $165,978, and $162,016
      of
      cash deposits held by others. The Company also had net fixed assets of $5,369
      and net intangible assets of $196,895, making our total assets at September
      30,
      2006 equal to $971,152.





Our
      total
      current liabilities as of September 30, 2006 consisted of $70,704 of accounts
      payable, $140,715 of accrued expenses, and $1,439,238 of Notes Payable. The
      Notes payable portion of current liabilities consisted of notes payable to
      related parties of $708,132 less discounts of $48,318, and notes payable to
      others of $905,808 less discounts of $126,384. The total of current liabilities
      at September 30, 2006 was $1,650,657. The company also had long term liabilities
      consisting of notes payable to unrelated parties of $110,826 ($1,300,000 less
      discounts of $1,189,174), liability attributed to the beneficial conversion
      feature of the convertible notes in the amount of $2,416,798, and liability
      associated with the issuance of detachable warrants in the amount of $3,756,361.
      The total of long- term liabilities at September 30, 2006 was $6,283,985. The
      total liabilities as of September 30, 2006 were $7,934,642.





During
      the three months ending September 30, 2006, the Company had sales revenues
      of
      $119,700, and $58,600 of direct costs of operations, resulting in gross
      operating profit of $61,100. The Company incurred other expenses of $1,176,510,
      resulting in a net loss from operations of $(1,115,410).





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 $320,294. 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 $1,078,904, the financial net
      loss
      for the three months ended September 30, 2006 was $(2,194,314).





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





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





20




Currently,
      Aquair distributes licensed environmentally-friendly atmospheric water
      generating equipment that creates purified drinking water from air for
      residential and commercial uses, and converts brackish, polluted, or grey water
      to purified water, and licensed “anti-microbial” water cleaning and filtration
      products.





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





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





As
      of
      September 30, 2006 we had cash and cash equivalents of $320,294, and accounts
      receivable in the amount of $120,600. In light of the Company’s distribution of
      its Amerikal subsidiary and its corresponding revenue, in order to fully execute
      its business plan for the next twelve months the Company may need to raise
      additional funds for the marketing and distribution of its Aquair products.
      The
      Company has not yet decided upon the specific method of raising additional
      working capital that may be required to meet its objectives. Additional working
      capital funds may be obtained through various means, including the future sale
      of the Company’s equity securities in private or public offerings, debt
      financing, hybrid financing, trade financing, receivables financing, factoring
      or any combination of credit, equity and/or debt which the Company can obtain
      on
      terms deemed favorable to the Company by the Board of Directors.





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





**Off-Balance
      Sheet Arrangements.**





None.





**Going
      Concern**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America, which contemplate that the Company will continue in business as a
      going
      concern. During the three months ended September 30, 2006 the Company showed
      a
      net loss from continuing operations in the amount of $(1,115,410). The financial
      net loss after provision for income tax, interest and financing expense is
      ($2,194,314) for the most recent fiscal quarter.





During
      the six months ended September 30, 2006 the Company incurred interest and
      financing charges related to the issuance of convertible notes and short-term
      notes to related parties and others, in the total amount of $5,708,627. This
      total financing cost represents over 71% of the total net (loss) reported by
      the
      Company for the six months ended September 30, 2006 on the attached Consolidated
      Statements of Operations. The total financial net loss of the Company for the
      most recent six months, taking into account the above financing costs and taxes,
      was ($8,034,970).





21




The
      Company can no longer rely on revenues from its distributed subsidiary Amerikal.
      Therefore, the Company will be developing revenues through its Aquair
      subsidiary. Aquair has commenced sales and anticipate future sales and revenues
      from its licensed atmospheric water generators and anti-microbial products.
      In
      addition, the Company has commenced testing of its licensed water processing
      technology for the wet bed mining industry, and anticipates sales in this area
      on a “charge per barrel” basis. However, there is no certainty as to the
      commencement of this revenue.





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.





**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 as prepaid compensation
      an expense of $23,982 attributable to the grant of these options. At the
      anniversary vesting date under the agreement, the Company reduced prepaid
      compensation and increased share-based compensation to related party in the
      amount of $115,460, representing the vested portion of the options under this
      Agreement.





22




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 “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.





**Date
                Issued**
            
            **Optionee
                Name**
            
            **Number
                of Options**
            
            **Exercise
                Price**
            
            **Expiration
                Date**May
                3, 2006
            
            
            Lou
                Knickerbocker
            
            
            4,008,000
            
            $
            0.94
            
            
            May
                3, 2011May
                3, 2006
            
            
            Grant
                King
            
            
            1,992,000
            
            $
            0.50
            
            
            May
                3, 2011May
                3, 2006
            
            
            Will
                Hitchcock
            
            
            1,008,000
            
            $
            0.50
            
            
            May
                3, 2011May
                3, 2006
            
            
            Joseph
                Murray
            
            
            1,008,000
            
            $
            0.50
            
            
            May
                3, 2011May
                3, 2006
            
            
            Scott
                Olson
            
            
            201,600
            
            $
            0.50
            
            
            May
                3, 2011





The
      Plan
      provides for a vesting of the foregoing option grants over a five year term,
      with 40% of the options vesting ratably over the first two years from the date
      of issuance. The Company determined the fair market value of the options granted
      under the Plan as of the grant date using the Black Scholes valuation method.
      During the period ended September 30, 2006, based upon the portion of options
      vested during this period, the Company recorded an expense of $302,219 as
      stock-based compensation to related parties, and $7,716 of share based
      compensation to a consultant 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 its Aquair
      subsidiary.***





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





23




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





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





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





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





***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:




24




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





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. (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 not yet restated its
      consolidated financial statements for the quarter ended December 31, 2005 but
      intends to do so. 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. Until the company has restated its
      consolidated financial statements contained in the previously filed Quarterly
      Report on Form 10-QSB for the period ended December 31, 2005, such statements
      should no longer be relied upon.





25




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





Based
      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 intends to restate and amend its previously filed Quarterly
      report for the affected period ending December 31, 2005. The Company has
      completed its internal review of the proposed restatements, and the amendment
      and restatement will take place as soon as practicable following the appropriate
      accounting review of the proposed restatements.





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.





26




**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.





**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, and will be defended by legal counsel engaged by co-defendant
      Munters Corp. to strongly defend these claims. Through our legal counsel, the
      Company will cause the appropriate legal pleadings to be filed to dismiss the
      Company from the case. The Company believes that any liability it may incur
      in
      connection with this case will not have a material adverse effect upon its
      financial condition or its results of operations.





Other
      than the foregoing incident or occurrence, the Company is not aware of any
      litigation, either pending or threatened, and has not been the defendant or
      plaintiff in any litigation, since the discharge from bankruptcy attributable
      to
      its predecessor L.L. Knickerbocker Company, Inc.





27




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





On
      June
      6, 2006, to obtain funding for the purpose of payment of general corporate
      and
      operating purposes, we entered into a definitive Securities Purchase Agreement
      and ancillary agreements with four accredited investors for the sale of
      $2,000,000 of 6.0% Callable Secured Convertible Notes due June 6, 2009 (the
      "Notes"). The Notes are convertible at the option of the holder at any time
      prior to maturity into shares of our Common Stock at a conversion price of
      the
      market price as defined in the agreements. Our obligations under 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 June 30, 2006, we had
      issued $700,000 of the total $2,000,000 Notes. On July 26, 2006 an additional
      $600,000 of Notes was issued upon the filing of a registration statement for
      the
      shares underlying the Notes, and the remaining $700,000 was issued subsequent
      to
      the close of this fical quarter upon the effectiveness of this registration
      statement.





The
      conversion rate of the Notes is based upon 50% of the Market Price of our stock
      at the time of conversion. "Market Price" means the average of the lowest three
      trading prices for the Common Stock during the twenty day period ending one
      trading day prior to conversion as reported on the OTC Bulletin Board. As a
      result of the beneficial conversion feature of the Notes, the Company has
      determined the valuation of the value of the maximum shares issuable to satisfy
      the issued convertible Notes based upon the Black Scholes method of valuation,
      and allocated the valuation of the derivative between the Convertible Note
      Payable and the Value of the derivative as a discount on the Note payable.
      The
      Company recorded the value attributed to the accrued derivative on the issued
      notes as a liability in the amount of $2,416,798. The discount on the
      Convertible Note payable in the total amount of $1,189,174 is being amortized
      over the term of the notes (three years). During the six months ended September
      30, 2006, the Company expensed $110,826 as finance charges attributable to
      this
      amortization, and reduced the discount on convertible Note Payable in a similar
      amount.





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
      $3,756,361. The Company has recorded a finance charge in the current fiscal
      quarter in the amount of $558,024 attributable to the issuance of these
      warrants.





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
      determined the value of the warrants so issued based upon the Black Scholes
      method of valuation, and since these warrants are exercisable immediately,
      the
      Company recorded the entire value of the warrants as prepaid compensation in
      the
      quarter ended June 30, 2006.





The
      issuance of the foregoing warrants was accounted for in accordance with
      Financial Accounting Standards Board Statements using the Black-Scholes option
      pricing model, as further described in Notes to Financial Statements, Note
      6
“Notes Payable” 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.





28




**Item
      3. Defaults Upon Senior Securities**





None.





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





None.





**Item
      5. Other Information**





None.





**Item
      6. Exhibits.**





3.1
            Articles
                of Incorporation of International Beauty Supply Ltd. (“IBS”) filed July
                12, 1985. (1)3.2
            Amendment
                to Articles of Incorporation of IBS filed May 28, 1993.
                (2)


3.3
            Certificate
                of Amendment to Articles of Incorporation of the L.L. Knickerbocker
                Company Inc. (“LLK”) filed June 27, 1994. (2)3.4
            Certificate
                of Amendment to Articles of Incorporation of LLK filed September
                29, 1994.
                (2)


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


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


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


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


31.1
            Certification
                of Chief Executive Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002, filed
                herewith.


31.2
            Certification
                of Chief Financial Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002, filed herewith.32
            Certification
                pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes Oxley Act of 2002, filed herewith.




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


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


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


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


5
      Incorporated by reference to the Company’s Form 10-QSB, as filed on November 14,
      2005.


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


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


__________________________________________





29




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___________________________Louis
                L. Knickerbocker
            Chairman
                of the Board, CEO
            November
                17, 2006___________________________William
                C. Hitchcock
            Chief
                Financial Officer
            November
                17, 2006




30