UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


For the
quarterly period ended December 31, 2008.





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 issuer as specified in its charter)





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





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





Issuer’s
telephone number: 949-888-9500





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant 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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large accelerated filer   ̈
            Accelerated filer   ̈Non-accelerated filer  ̈ (Do not check if a smaller reporting company)
            Smaller reporting company  x





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





As of
December 31, 2008, there were 46,597,793 shares of the Registrant’s common stock
issued and outstanding.





INDEX





PagePART
      I - FINANCIAL INFORMATIONItem
      1.
                      Financial
      StatementsConsolidated
      Balance Sheets –December 31, 2008 and March 31, 2008
                      3Consolidated
      Statements of OperationsFor
      the Three and Nine Months ended December 31, 2008 and 2007
                      4Consolidated
      Statements of Cash FlowsFor
      the Three and Nine Months ended December 31, 2008 and 2007
                      5Notes
      to Financial Statements
                      6Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition andResults
      of Operations
                      17Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      25Item
      4
                      Controls
      and Procedures
                      25PART
      II – OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      25Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      26Item
      3.
                      Defaults
      Upon Senior Securities
                      26Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      26Item
      5.
                      Other
      Information
                      26Item
      6.
                      Exhibits
                      26SIGNATURES
                      27


2


PART
I — FINANCIAL INFORMATION





Item
1. Financial Statements




RG
Global Lifestyles, Inc.
 Consolidated
Balance Sheets
 
 As of
                                          December 31,
                                        
                                        
                                        As of
                                          March 31,2008
                                        
                                        
                                        2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        72,983
                                        
                                        
                                        $
                                        12,319Accounts
      receivable
                                        
                                        
                                        12,653
                                        
                                        
                                        
                                        6,087Inventory
      - finished goods
                                        
                                        
                                        54,482
                                        
                                        
                                        
                                        86,864Federal
      income tax refund receivable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        143,775Prepaids
      and other current assets
                                        
                                        
                                        38,643
                                        
                                        
                                        
                                        -Total
      current assets
                                        
                                        
                                        178,761
                                        
                                        
                                        
                                        249,045Property
      and equipment, net
                                        
                                        
                                        40,319
                                        
                                        
                                        
                                        44,623Assets
      held for sale
                                        
                                        
                                        2,663,822
                                        
                                        
                                        
                                        3,016,261Intangible
      assets, net
                                        
                                        
                                        3,947,239
                                        
                                        
                                        
                                        4,195,645Other
      assets
                                        
                                        
                                        260,134
                                        
                                        
                                        
                                        252,613Total
      Assets
                                        
                                        $
                                        7,090,275
                                        
                                        
                                        $
                                        7,758,187Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
                                        
                                        $
                                        1,359,067
                                        
                                        
                                        $
                                        954,500Accrued
      liabilities
                                        
                                        
                                        1,061,329
                                        
                                        
                                        
                                        459,273State
      income taxes payable
                                        
                                        
                                        97,890
                                        
                                        
                                        
                                        97,890Convertible
      notes payable
                                        
                                        
                                        447,407
                                        
                                        
                                        
                                        864,074Notes
      payable - related party
                                        
                                        
                                        99,933
                                        
                                        
                                        
                                        102,700Notes
      payable
                                        
                                        
                                        455,500
                                        
                                        
                                        
                                        410,500Total
      current liabilities
                                        
                                        
                                        3,521,126
                                        
                                        
                                        
                                        2,888,937Accrued
      liabilities
                                        
                                        
                                        70,000
                                        
                                        
                                        
                                        70,000Total
      liabilities
                                        
                                        
                                        3,591,126
                                        
                                        
                                        
                                        2,958,937Commitments
      and ContingenciesStockholders'
      Equity:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized; none issued and
      outstanding
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Common
      stock, $0.001 par value, 100,000,000 shares authorized authorized,
      46,597,793 and 36,400,410 issued; 45,424,495 and 34,500,410 outstanding at
      December 31, 2008 and March 31, 2008
                                        
                                        
                                        45,424
                                        
                                        
                                        
                                        34,501Common
      stock to be issued
                                        
                                        
                                        168,000
                                        
                                        
                                        
                                        2,113,904Preferred
      stock to be issued
                                        
                                        
                                        505,733
                                        
                                        
                                        
                                        -Additional
      paid-in capital
                                        
                                        
                                        36,187,449
                                        
                                        
                                        
                                        32,159,232Accumulated
      deficit
                                        
                                        
                                        (33,407,457
                                        )
                                        
                                        
                                        (29,508,387
                                        )Total
      stockholders' equity
                                        
                                        
                                        3,499,149
                                        
                                        
                                        
                                        4,799,250Total
      Liabilities and Stockholders' Equity
                                        
                                        $
                                        7,090,275
                                        
                                        
                                        $
                                        7,758,187
  The
accompanying notes are an integral part of these financial
statements.
 3
  RG
Global Lifestyles, Inc.
 Consolidated
Statements of Operations
 (unaudited)
 
 For the Three Months Ended
                                
                                
                                For the Nine Months EndedDecember 31
                                
                                
                                December 312008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Revenue:Product
      related
                                
                                $
                                11,008
                                
                                
                                $
                                85,230
                                
                                
                                $
                                47,477
                                
                                
                                $
                                231,873Water
      treatment related
                                
                                
                                100,131
                                
                                
                                
                                59,368
                                
                                
                                
                                190,550
                                
                                
                                
                                737,576Total
      revenues
                                
                                
                                111,139
                                
                                
                                
                                144,598
                                
                                
                                
                                238,027
                                
                                
                                
                                969,449Cost
      of revenues:Product
      related
                                
                                
                                24,897
                                
                                
                                
                                53,890
                                
                                
                                
                                57,985
                                
                                
                                
                                174,744Water
      treatment related
                                
                                
                                218,516
                                
                                
                                
                                305,804
                                
                                
                                
                                651,795
                                
                                
                                
                                937,205Total
      cost of revenue
                                
                                
                                243,413
                                
                                
                                
                                359,694
                                
                                
                                
                                709,780
                                
                                
                                
                                1,111,949Gross
      loss
                                
                                
                                (132,274
                                )
                                
                                
                                (215,096
                                )
                                
                                
                                (471,753
                                )
                                
                                
                                (142,500
                                )Expenses:General
      and administrative
                                
                                
                                818,139
                                
                                
                                
                                1,334,584
                                
                                
                                
                                2,804,568
                                
                                
                                
                                3,922,892Selling
      and marketing
                                
                                
                                (6,660
                                )
                                
                                
                                88,504
                                
                                
                                
                                40,200
                                
                                
                                
                                180,243Project
      cost
                                
                                
                                147,396
                                
                                
                                
                                -
                                
                                
                                
                                387,930
                                
                                
                                
                                -Total
      expenses
                                
                                
                                958,875
                                
                                
                                
                                1,423,088
                                
                                
                                
                                3,232,698
                                
                                
                                
                                4,103,135Operating
      loss
                                
                                
                                (1,091,149
                                )
                                
                                
                                (1,638,184
                                )
                                
                                
                                (3,704,451
                                )
                                
                                
                                (4,245,635
                                )Other
      income (expense):Interest
      income
                                
                                
                                -
                                
                                
                                
                                73,885
                                
                                
                                
                                64
                                
                                
                                
                                77,494Interest
      income (expense) - related party
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (25,643
                                )Interest
      expense
                                
                                
                                (39,765
                                )
                                
                                
                                (183,079
                                )
                                
                                
                                (193,384
                                )
                                
                                
                                (2,220,582
                                )Change
      in fair value of derivative liabilities
                                
                                
                                -
                                
                                
                                
                                244,556
                                
                                
                                
                                -
                                
                                
                                
                                4,775,062Proceeds
      from Key Man Life Insurance policy
                                
                                
                                -
                                
                                
                                
                                3,000,000
                                
                                
                                
                                -
                                
                                
                                
                                3,000,000Other
      income (expense)
                                
                                
                                (7,271
                                )
                                
                                
                                9,769
                                
                                
                                
                                (1,299
                                )
                                
                                
                                5,678Total
      other income (expense)
                                
                                
                                (47,036
                                )
                                
                                
                                3,145,131
                                
                                
                                
                                (194,619
                                )
                                
                                
                                5,612,009Net
      income (loss) before provision for income taxes
                                
                                
                                (1,138,185
                                )
                                
                                
                                1,506,947
                                
                                
                                
                                (3,899,070
                                )
                                
                                
                                1,366,374Provision
      for income taxes
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Net
      income (loss) before minority interest
                                
                                
                                (1,138,185
                                )
                                
                                
                                1,506,947
                                
                                
                                
                                (3,899,070
                                )
                                
                                
                                1,366,374Minority
      interest
                                
                                
                                -
                                
                                
                                
                                25,318
                                
                                
                                
                                -
                                
                                
                                
                                43,903Net
      income (loss)
                                
                                $
                                (1,138,185
                                )
                                
                                $
                                1,532,265
                                
                                
                                $
                                (3,899,070
                                )
                                
                                $
                                1,410,277Weighted
      average number of common shares:Basic
                                
                                
                                46,133,879
                                
                                
                                
                                28,846,155
                                
                                
                                
                                44,049,773
                                
                                
                                
                                27,803,297Diluted
                                
                                
                                46,133,879
                                
                                
                                
                                50,079,463
                                
                                
                                
                                44,049,773
                                
                                
                                
                                46,121,827Net
      income (loss) per share:Basic
                                
                                $
                                (0.02
                                )
                                
                                $
                                0.05
                                
                                
                                $
                                (0.09
                                )
                                
                                $
                                0.05Diluted
                                
                                $
                                (0.02
                                )
                                
                                $
                                0.03
                                
                                
                                $
                                (0.09
                                )
                                
                                $
                                0.03
  The
accompanying notes are an integral part of these financial
statements.
 4
  RGGlobal Lifestyles,
Inc.
 Consolidated
Statements of Cash Flows
 (unaudited)
 
 For the Nine Months EndedDecember 312008
                          
                          
                          2007Cash
      flows from operating activities:Net
      Income (loss)
                          
                          $
                          (3,899,070
                          )
                          
                          $
                          1,410,276Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Amortization
      of debt discounts related to beneficial conversion features and
      warrants
                          
                          
                          33,333
                          
                          
                          
                          448,630Proceeds
      from ex-officer's life insurance policy
                          
                          
                          -
                          
                          
                          
                          (3,000,000
                          )Change
      in fair value of derivative liabilities
                          
                          
                          -
                          
                          
                          
                          (4,775,062
                          )Stock
      issued for services
                          
                          
                          127,179
                          
                          
                          
                          -Fair
      value of common stock in excess of notes payable converted
                          
                          
                          67,610
                          
                          
                          
                          1,656,152Depreciation
      and amortization
                          
                          
                          697,629
                          
                          
                          
                          262,884Stock-based
      compensation
                          
                          
                          1,049,446
                          
                          
                          
                          2,080,277Minority
      interest in subsidiary
                          
                          
                          -
                          
                          
                          
                          (43,903
                          )Change
      in operating assets and liabities:Accounts
      receivable
                          
                          
                          (6,566
                          )
                          
                          
                          (774,079
                          )Inventory
                          
                          
                          32,382
                          
                          
                          
                          170,483Income
      tax refund
                          
                          
                          143,775
                          
                          
                          
                          -Prepaid
      expenses
                          
                          
                          (38,642
                          )
                          
                          
                          25,976Accounts
      payable
                          
                          
                          404,566
                          
                          
                          
                          192,462Accrued
      liabilities
                          
                          
                          502,056
                          
                          
                          
                          1,001,181Deferred
      revenues
                          
                          
                          -
                          
                          
                          
                          442,424Income
      taxes payable
                          
                          
                          -
                          
                          
                          
                          1,681Net
      cash used in operating activities
                          
                          
                          (886,302
                          )
                          
                          
                          (900,618
                          )Cash
      flows from investing activities:Purchase
      of fixed assets
                          
                          
                          -
                          
                          
                          
                          (35,359
                          )Construction
      in progress
                          
                          
                          -
                          
                          
                          
                          (1,677,105
                          )Other
      assets
                          
                          
                          -
                          
                          
                          
                          (17,411
                          )Net
      cash used in investing activities
                          
                          
                          -
                          
                          
                          
                          (1,729,875
                          )Cash
      flows from financing activities:Proceeds
      from notes payable
                          
                          
                          45,000
                          
                          
                          
                          -Proceeds
      from common stock issued for cash
                          
                          
                          231,000
                          
                          
                          
                          -Cash
      received for common stock to be issued
                          
                          
                          168,000
                          
                          
                          
                          2,034,404Cash
      received for preferred stock to be issued
                          
                          
                          505,733
                          
                          
                          
                          -Payments
      on related party notes
                          
                          
                          (2,767
                          )
                          
                          
                          -Proceeds
      from key man life insurance policy
                          
                          
                          -
                          
                          
                          
                          3,000,000Proceeds
      from exercise of stock options
                          
                          
                          -
                          
                          
                          
                          75,500Net
      cash provided by financing activities
                          
                          
                          946,966
                          
                          
                          
                          5,109,904Net
      increase (decrease) in cash
                          
                          
                          60,664
                          
                          
                          
                          2,479,411Cash
      - beginning of period
                          
                          
                          12,319
                          
                          
                          
                          502,278Cash
      - ending of period
                          
                          $
                          72,983
                          
                          
                          $
                          2,981,689SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
                          
                          $
                          -
                          
                          
                          $
                          -Income
      taxes
                          
                          $
                          -
                          
                          
                          $
                          -Non-cash
      investing and financing activities:Issuance
      of common stock in settlement of notes payable and accrued
      interest
                          
                          $
                          539,594
                          
                          
                          $
                          331,095Capitalization
      of amounts payable to Yates for reimbursement
                          
                          $
                          100,000
                          
                          
                          $
                          -Issuance
      of common stock for tangible and intangible assets
                          
                          $
                          -
                          
                          
                          $
                          474,828Issuance
      of OC Energy, Inc.'s interests for tangible and intangible
      assets
                          
                          $
                          -
                          
                          
                          $
                          43,903Construction
      in progress recorded in accounts payable
                          
                          $
                          -
                          
                          
                          $
                          1,233,230
  The
accompanying notes are an integral part of these financial
statements.
  5
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Note
1 – Nature of the Business
 
 RG Global
Lifestyles Inc. (the “Company”) has two distinct business segments it
operates.  Under the name, Catalyx Fluid Solutions, the Company
manufactures plants that utilize its proprietary wastewater treatment technology
(“CFS Technology”) based on an ion-exchange process for the treatment and
reclamation of wastewater associated with the production of methane in coal bed
applications.  Under the name, OC Energy Drinks, Inc., the Company
markets a line of energy drinks thru retail chains.
 
 Recently,
the Company has changed its strategy from a build to sell manufacturing
environment to a royalty based model whereby the Company would license its CFS
Technology.  During the third quarter the Company entered into a
Memorandum of Understanding for the sale of its only wastewater plant to a third
party, see Note 5 for additional information. In addition, the Company is
considering discontinuing investing in its energy drink and focus its resources
on licensing its CFS Technology. However, there are no formal plans at the
moment to discontinue the operations of the energy drink segment and thus the
operations have not be reflected as held for sale or discontinued operations.
The Company will further consider these options in the fourth quarter of fiscal
year 2009.
 
 Note
2 – Basis of Presentation and Significant Accounting Policies
 
 The
consolidated 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 consolidated financial
statements and notes thereto of the Company for the year ended March 31, 2008
included in the Company's annual report on Form 10-KSB. The Company follows the
same accounting policies in the preparation of interim reports.  The
financial statements for the three and nine months ended December 31, 2008, are
not necessarily indicative of the results expected for the full
year.
 
 Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period.  Significant estimates include the valuation of derivatives,
equity instruments such as options and warrants, and the percentage of
completion related to construction contracts. Actual results could differ from
those estimates.
  6
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Concentrations
 
 Customers
 During
the three and nine months ended December 31, 2008, one customer made up 100% of
all revenues of the water treatment segment. The loss of this customer could
have a significant impact on the Company’s financial statements.
 
 Inventory
 
 At
December 31, 2008, the Company had inventory consisting of chemicals,
flavorings, and bottles related to the OC Energy Drink, Inc. segment of the
Company. Inventory is valued at cost in the amount of $54,482. Inventory is
recorded at lower of cost (first-in, first-out) or net realizable market
value.
  Impairment
of Long-Lived and Purchased Intangible Assets
 
 The
Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 144
(“SFAS 144”). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undiscounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS 144 also requires assets to be disposed or be reported at the
lower of the carrying amount or the fair value less costs to sell. During the
third quarter, the Company determined that due to the pending sale of its water
treatment plant that the estimated expected royalties for the licensing of the
Catalytix technology the intangible have not been impaired. The projected
royalties included estimated amounts from the current plant and the estimated
royalties to be generated by additional plants to be constructed  by
the licensor of the technology. The current facts and circumstances are
preliminary and are dependent upon the sale of the water treatment plant and
related royalties. The Company will reassess the projected cash flows from the
assets during the fourth quarter when the final terms of the sale are expected
to be identified.
 
 Net Income (Loss) Per
Share
 
 Net
income (loss) per share is provided in accordance with SFAS No. 128 “Earnings
Per Share” (“SFAS 128”). Basic income (loss) per share is computed by dividing
income and losses available to common stockholders by the weighted average
number of common shares outstanding during the period, after giving effect to
dilutive common stock equivalents, such as stock options, warrants and
convertible debt. The following is a summary of outstanding securities which
have been excluded from the calculation of diluted net loss per share because
the effect would have been anti-dilutive for the three and nine months ended
December 31, 2008:
 
 Three Months
                            Ended
                            December 31,
                            2008
                          
                          
                          Nine Months
                            Ended
                            December 31,
                            2008Common
      stock options
                          
                          
                          -
                          
                          
                          
                          3,520,215Common
      stock warrants
                          
                          
                          -
                          
                          
                          
                          4,180,885Totals
                          
                          
                          -
                          
                          
                          
                          7,701,100
 
 The
following is a summary of outstanding securities which have been included in the
calculation of diluted net income per share for the three and nine months ended
December 31, 2007:
  Three Months
                              Ended December
                              31, 2007
                            
                            
                            Nine Months
                              Ended December
                              31, 2007Basic
                            
                            
                            28,846,155
                            
                            
                            
                            27,803,297Common stock options
                            
                            
                            3,995,543
                            
                            
                            
                            2,769,840Common
      stock warrants
                            
                            
                            6,838,312
                            
                            
                            
                            5,149,237Secured
      convertible notes
                            
                            
                            10,399,453
                            
                            
                            
                            10,399,45321,233,308
                            
                            
                            
                            18,318,530Totals
                            
                            
                            50,079,463
                            
                            
                            
                            46,121,827
  7
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 The
following is a summary of outstanding securities which have been excluded from
the calculation of diluted net loss per share because the effect would have been
anti-dilutive for the three and nine months ended December 31,
2007:
 
 Three Months
                                        Ended December
                                        31, 2007
                                      
                                      
                                      Nine Months
                                        Ended December
                                        31, 2007Common stock options
                                      
                                      
                                      450,500
                                      
                                      
                                      
                                      200,000Common stock warrants
                                      
                                      
                                      4,890,000
                                      
                                      
                                      
                                      4,025,000Secured
      convertible notes
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Totals
                                      
                                      
                                      5,340,500
                                      
                                      
                                      
                                      4,225,000
 
 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 during the quarter ended December 31, 2008, has limited
revenues, incurred an operating loss before income taxes of $1,138,185 and used
cash from operations of $886,302.  As of December 31, 2008, the
Company had a working capital deficit of $3,342,365.  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 ultimately achieving profitable operations from the development of
its new business opportunities. During the quarter ended December 31, 2008, the
Company funded operations through equity offerings. The Company does not have
any commitments or assurances for additional capital. The Company is considering
selling the OC Energy segment, however, there are no formal plans at the moment.
The Company will further consider this option in the fourth quarter of fiscal
year 2009.
 
 On
December 8, 2008, the Company entered into a Memorandum of Understanding to sell
its only existing water treatment plant to generate cash to continue operations,
see Note 5 for additional information. There can be no assurance that the
revenue from the sale of the plant and the continuing royalty stream 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
estimates the current cash reserves are expected to fund operations through Q4
of fiscal 2009.
 
 The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts of and
classification of liabilities, which might be necessary in the event the Company
cannot continue in existence.
 
 Note
4 – Property and Equipment
 
 Property
and equipment as of December 31, 2008 and March 31, 2008 consisted of the
following:
 
 December
                          31,
      2008
                        
                        
                        March
      31,
                          2008Office
      equipment, computer software, and furniture and fixtures
                        
                        $
                        64,174
                        
                        
                        $
                        57,974Accumulated
      depreciation
                        
                        
                        (23,855
                        )
                        
                        
                        (13,351
                        )Total
                        
                        $
                        40,319
                        
                        
                        $
                        44,623
  8
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 During
the nine months ended December 31, 2008 and 2007, the Company recorded
depreciation expense of $460,461 and $2,004, respectively.  Included
in costs of goods sold for the nine months ended December 31, 2008 was
depreciation expense of $452,429.
 
 Note
5 – Assets Held for Sale
 
 On
December 8, 2008, the Company entered into a Memorandum of Understanding (“MOU”)
to sell its only existing water treatment plant to a third party. Under the
current MOU the Company will receive future royalties based on barrels produced
and retain a percentage interest in the asset. During the third quarter, the
Company determined that under SFAS 144, $2,663,822 of its assets are required to
be classified as held for sale.  Under SFAS 144, an asset or disposal
group to be disposed of by sale must be recorded at the lower of carrying amount
or fair value less cost to sell.  As a result, the Company has
reclassified the carrying value of the water treatment plant and related assets
of $2,663,822 as Assets Held for Sale on the accompanying balance sheet. In
addition, as of the date of the determination the Company stopped depreciating
the assets.
 
 The
Company determined that the operations of the assets should not be reflected as
discontinued operations as the Company is expected to have a continued revenue
stream from the assets. To the extent the Company retains a continuing ownership
interest in the water treatment plant, the Company will account for the
investment under the cost method.
 
 Note
6 – Catalyx Technology
 
 The
Company entered into a series of agreements with Catalyx Fluid Solutions, Inc.
(“Catalyx”) pursuant to which the Company acquired certain technology, know-how,
and patent rights related to water treatment for use in the oil and gas
industry.  In addition, per the terms of the acquisition agreement the
initial $200,000 paid will be offset against future royalties of $0.01 per
barrel of water treated and 5% of equipment sold based on the Catalyx
technology.  Royalties earned by Catalyx during the three and nine
months ended December 31, 2008 were $5,550 and $10,115, respectively, and were
offset against the prepaid royalties.
 
 During
the nine months ended December 31, 2008 and 2007, the Company recorded
amortization expense of $236,631 and $235,774, respectively.
 
 Note
7 – Certain Balance Sheet Elements
 
 Other
Assets
 
 At
December 31, 2008 and March 31, 2008, the Company had deposits with various
vendors comprised of the following:
 
 December,
                              31,
      2008
                            
                            
                            March
      31,
                              2008Rental
      deposits
                            
                            $
                            31,798
                            
                            
                            $
                            32,557Deposit
      future Catalyx royalty
                            
                            
                            189,885
                            
                            
                            
                            200,000Other
                            
                            
                            38,451
                            
                            
                            
                            20,056Totals:
                            
                            $
                            260,134
                            
                            
                            $
                            252,613
  9
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Accrued
Liabilities
 
 At
December 31, 2008 and March 31, 2008, the Company had accrued expenses as
follows:
 
 December,
                              31,
      2008
                            
                            
                            March
      31,
                              2008Salaries
      and wages
                            
                            $
                            760,900
                            
                            
                            $
                            239,384Amounts
      due to YPC (see Note 11)
                            
                            
                            100,000
                            
                            
                            
                            -Accrued
      interest
                            
                            
                            54,590
                            
                            
                            
                            44,663Other
                            
                            
                            145,839
                            
                            
                            
                            175,226Totals:
                            
                            $
                            1,061,329
                            
                            
                            $
                            459,273
 
 Note
8 – Notes Payable
 
 2007 Notes
Payable
 On
January 12, 2007, the Company entered into a note agreement with an accredited
investor for proceeds totaling $350,000.  This note matured on January
12, 2008 and is currently in default as the holder had demanded payment. In
connection with the default, the interest rate increased to 11% per annum. As of
December 31, 2008, accrued interest recorded in accrued liabilities related to
this note was $4,071.  See Note 11 for discussion of a lawsuit
filed by holder of the note against the Company and the payment of accrued
interest by Company.
 
 $600,000 Promissory
Note
 In
connection with the settlement of the $2,000,000 secured convertible notes in
fiscal 2008, the Company issued a $600,000 promissory note with an interest rate
of 10%, with payments due in 12 equal $50,000 monthly payments commencing on
March 3, 2008. Initially, the Company issued 2,000,000 shares of common stock to
an escrow account in which secures the promissory note, during the nine months
ended December 31, 2008, the Company issued an additional 2,000,000 shares of
common stock to the escrow account. The promissory note can be paid in cash or
the Company’s common stock at the election of the Company. If paid in common
stock, the common stock will be issued at a equal to $55,000 divided by the
lesser of the weighted average price (“VWAP”) over the five days preceding the
due date of payment or the day on which the note is transmitted to the escrow
agent.  If the VWAP is lower than $0.10 or the there are insufficient
shares in escrow the Company cannot settle the monthly obligation in common
shares.
 
 Since the
$600,000 promissory note does not incur interest the Company recorded a discount
of $44,444 to the promissory notes. During the three and nine months ended
December 31, 2008, the Company amortized $11,111 and $33,333 respectively, of
the discount to interest expense. As of December 31, 2008, the remaining
discount was $2,593.
 
 During
the nine months ended December 31, 2008, the Company issued 2,726,702 of common
stock from the escrow account to satisfy payments for the nine months ending
December 31, 2008 totaling $450,000.  As of December 31, 2008,
1,173,298 shares of common stock are held in escrow.
 
 Note Payable to
Vendor
 On
January 29, 2008, the Company the issued a promissory note to a vendor in
settlement of $780,500 in accounts payable. The vendor manufactured and
installed the Company’s water treatment facility.  The note bears
interest at 10% per annum and is secured by the Company’s contract with Yates
Petroleum Corporation and the equipment that was manufactured by the
vendor.  The note calls for an initial payment of $270,000 due on
February 1, 2008 with monthly principal payments of $100,000 due each month
until paid off.  The balance due on this note at December 31, 2008 was
$410,500 with accrued interest of $39,997.  The Company did not make
its July, August or December 2008 payment and is technically in default on this
note.  At this time, there is no known action being taken by the
vendor to obtain payment on this note.
  10
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
Payable
 On
December 17, 2008, the Company issued a promissory note in connection with the
MOU to purchase its water treatment plant.  The funds were used for
operations.  The note bears interest at 10% with a default rate of 18% and
is to be drawn on in two advances, one for $45,000 and the other for
$30,000.  The note matures on March 8, 2009 or if the Company
terminates the MOU.  See Note 5 for more disclosure regarding the
MOU.  As of December 31, 2008, the Company has not elected to draw the
additional $30,000
 
 Note
9 – Stockholders’ Deficit
 
 Common
Stock
 
 During
the nine months ended December 31, 2008, the Company sold 770,000 shares of
common stock to accredited investors at a price of $0.30 per share for total net
cash proceeds of $231,000.   As of December 31, 2008, the Company
has not issued 560,000 shares of common stock related to subscriptions of
$168,000. Thus, the proceeds received are recorded as “common stock to be
issued” on the accompanying balance sheet. In addition, for each dollar invested
the investor received a warrant to purchase one share of the Company’s common
stock at an exercise price of $0.40 per share. The warrants vest immediately and
expire in five years. The warrants were valued at $164,628 based upon the Black
Scholes valuation model using the following weighted average estimates: 3.34%
risk free rate, 303% volatility, an expected life of five years and no
dividends.
 
 During
the nine months ended December 31, 2008, the Company issued 380,800 shares of
common stock for services rendered by consultants and employees. The services
related to general corporate duties and equipment purchased for the Yates
plant.  The Company valued the shares on the date of issuance as there
were no future performance conditions. The shares were valued at $127,179 based
on the closing market price of the Company’s common stock on the date of
issuance.
 
 During
the nine months ended December 31, 2008, the Company issued 2,726,702 shares of
common stock for payment on notes payable due to the NIR Group.  The
shares were valued at $539,593 based on the closing market price of the
Company’s common stock on the date of issuance which resulted in additional
interest expense of $89,593.
 
 See Notes
8 for discussion of common stock issuances and other items impacting
stockholders’ deficit during the nine month period ending December 31, 2008 and
2007.
 
 Series A Preferred
Stock
 
 During
the nine months ended December 31, 2008, the Company received proceeds of
$505,733 for the purchase of 3,371,554 shares of Series A preferred stock
(“Series A”) at $0.15 per share.  As of December 31, 2008, the Company
had not issued the required stock and has recorded as preferred stock to be
issued on the accompanying balance sheet.
 
 On
January 27, 2009, the Company filed an Amended Certificate of Determination with
the Secretary of State of the State of California increasing the number of
shares of Series A authorized from 300,000 to 5,000,000, no par value. Each
Series A share is convertible into six shares of the Company’s common stock one
year after issuance. In additions, the Series A has preference over the common
stock related to dividends and liquidation. Upon the issuance of 1,000,000
shares of Series A, the Company shall not, either directly or indirectly by
amendment, merger, consolidation or otherwise, do any of the following without
(in addition to any other vote required by law or the Articles of Incorporation)
the written consent or affirmative vote of the holders of at least 75% of the
then outstanding shares of Series A, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a
class.
  11
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 In the
event the Company shall at any time after the Series A original issue date and
prior to three years from such date, issue additional shares of common stock,
without consideration or for a consideration per share less than the applicable
Series A conversion price ($0.05/share) in effect immediately prior to such
issue, then the Series A conversion price shall be reduced, concurrently with
such issue, to the consideration per share received by the Company for such
issue or deemed issue of the additional shares of common stock; provided that if
such issuance or deemed issuance was without consideration, then the Company
shall be deemed to have received an aggregate of $.001 of consideration for all
such additional shares of common stock issued or deemed to be issued, and the
conversion ratio will be changed accordingly.
 
 Note
10 – Options and Warrants
 
 Options
 On May 3,
2006 and December 26, 2006, the Company’s Board of Directors adopted the 2006
and 2007 Incentive and Non-statutory Stock Option Plan (“2006 Plan”) for
issuance of stock options to employees and others.  Compensation
expense for these plans recorded during the three and nine months ended December
31, 2008 was $285,054 and $1,049,446, respectively.  Compensation
expense for these plans recorded during the three and nine months ended December
31, 2007 was $655,042 and $1,431,072, respectively.
 
 The
following is a summary of activity of outstanding stock option activity for the
nine months ended December 31, 2008:
 
 Numberof
      SharesBalance,
      March 31, 2008
                            
                            
                            7,903,579Options
      granted
                            
                            
                            300,000Options
      exercised
                            
                            
                            -Options
      cancelled or forfeited
                            
                            
                            (300,000
                            )Balance,
      December 31, 2008
                            
                            
                            7,903,579
 
 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.
 
 Warrants
 
 Along
every dollar received from an investor for the purchase of its common stock, the
Company grants the investor a warrant to purchase an additional share of the
Company’s common stock.  The warrants, which have an exercise price of
$0.40 per share and a vesting period of two to three years, have an expiration
date of five years after the date of issuance.  The following is a
summary of activity of outstanding common stock warrants for the nine months
ended December 31, 2008:
  12
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NumberOf
      SharesBalance,
      March 31, 2008
                              
                              
                              17,163,344Warrants
      granted
                              
                              
                              394,000Warrants
      exercised
                              
                              
                              (1,606,904
                              )Balance,
      December 31, 2008
                              
                              
                              15,950,440
 
 Note
11 – Commitments and Contingencies
 
 Legal
Proceedings
 
 On June
11, 2008, the Company and Grant King was served a lawsuit from one of its note
holders claiming that the Company defaulted on repayment on a note payable in
the amount of $350,000 plus interest at 8%.  The complaint asks for
payment of these amounts plus damages.  On August 12, 2008, the
parties agreed to stipulated order whereby Grant King was dismissed from the
lawsuit and the Company was granted a 90-day extension to respond to the
complaint (until November 10, 2008) in exchange the Company paid $49,530 which
represents the interest due on the note through July 18, 2008. On January
30, 2009, the Company paid $8,016 of additional interest on the note, the
Company has until February 19, 2009 to satisfy this obligation.  No
amounts for damages have been accrued in the accompanying consolidated financial
statement other than the note payable and accrued interest.
 
 On July
11, 2008, the Company received notice that one of the Company’s vendors used in
the construction of the Company’s water treatment facility filed a lien against
the project for past due amounts. On September 4, 2008, the vendor filed a
formal lawsuit and the litigation is now in its discovery phase. As of December
31, 2008, the vendor is due $136,691, which is included in accounts
payable.
 
 Water
Treatment Contracts
 
 On June
25, 2007, the Company entered into contract with Yates Petroleum Corporation
(“YPC”) to engineer, design, and install a water treatment system (“System”) of
Coal Bed Methane (“CBM”) produced water provided by YPC. The Company will own
and operate the System and regeneration waste pond. The Company will receive a
base rate under the contract of $0.125 (12.50 cents) per barrel (42 US gallons)
of water discharged by the System. The term of the contract is for 60 months
from the start of the first billing cycle.
 
 YPC is
responsible for constructing the inflow pond and will receive a credit from the
Company of $50,000 each month for the first three months of operation. In
addition, YPC will receive credits on current billings for future repairs and
maintenance to the inflow pond of which were incurred but, none were paid during
the three and nine month periods ended December 31, 2008 due to concessions made
by YPC.  The Company has accrued $100,000 towards this liability as of
December 31, 2008 and increased the carrying value of the water treatment plant
by the same amount.
 
 Note
12 – Segment Reporting and Concentrations
 
 The
Company’s segments consist of the sale of energy drinks and the licensing of
water treatment technology.  Currently, the Company operates in a
single geographical segment.
 
 The
following is a summary of revenues generated by segment for the three months and
nine months ended December 31, 2008:
  13
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Three
                                  Months
                                  Ended
                                  December
                                  31,
      2008
                                
                                
                                Nine Months
                                  Ended
                                  December
                                  31,
      2008Water
      treatment segment
                                
                                $
                                100,131
                                
                                
                                $
                                190,550OC
      energy drink segment
                                
                                
                                11,008
                                
                                
                                
                                47,477Total
                                
                                $
                                111,139
                                
                                
                                $
                                238,027
 
 During
the nine three and nine months ended December 31, 2008 and 2007, one customer
accounted for 100% of water treatment revenues.
 
 A summary
of operating loss by segment for the three and nine months ended December 31,
2008 is as follows:
 
 Three
                                  Months
                                  Ended
                                  December
                                  31,
      2008
                                
                                
                                Nine Months
                                  Ended
                                  December
                                  31,
      2008Water
      treatment segment
                                
                                $
                                (265,781
                                )
                                
                                $
                                (849,174
                                )OC
      energy drink segment
                                
                                
                                (39,724
                                )
                                
                                
                                (293,329
                                )Corporate
      segment
                                
                                
                                (785,644
                                )
                                
                                
                                (2,561,948
                                )Total
                                
                                $
                                (1,091,149
                                )
                                
                                $
                                (3,704,451
                                )
 
 A summary
of the net assets as of December 31, 2008 related to the Company’s segments,
after eliminating all inter-company assets, are as follows:
  Water
      treatment segment
                      
                      $
                      6,512,072OC
      energy drink segment
                      
                      
                      333,325Corporate
      segment
                      
                      
                      244,878Total
                      
                      $
                      7,090,275
 
 A summary
of revenues generated by segment for the three and nine months ended December
31, 2007, is as follows:
 
 Three Months
                                Ended
                              
                              
                              Nine Months
                                EndedDecember 31,
                                2007
                              
                              
                              December 31,
                                2007Water
      treatment segment
                              
                              $
                              85,230
                              
                              
                              $
                              231,873OC
      energy drink segment
                              
                              
                              59,368
                              
                              
                              
                              737,576Total
                              
                              $
                              144,598
                              
                              
                              $
                              969,449
  14
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 A summary
of operating income or (loss) by segment for the three and nine months ended
December 31, 2007, is as follows:
 
 Three Months
                              Ended
                            
                            
                            Nine Months
                              EndedDecember 31,
                              2007
                            
                            
                            December 31,
                              2007Water
      treatment segment
                            
                            $
                            (246,436
                            )
                            
                            $
                            (199,629
                            )OC
      energy drink segment
                            
                            
                            13,096
                            
                            
                            
                            44,667Corporate
      segment
                            
                            
                            (1,404,844
                            )
                            
                            
                            (4,090,673
                            )Total
                            
                            $
                            (1,638,184
                            )
                            
                            $
                            (4,245,635
                            )
  During
the quarter ended December 31, 2007, sales to a single customer were 100% and
44% of total sales for revenues related to water-treatment technology and
revenues related to OC energy drink product sales, respectively.
 
 Note
13 – Related Party Transactions
 
 On
February 11, 2008, Grant King, Chief Executive Officer, made a payment of
$100,000 towards a note from a vendor and recorded it as a loan payable to a
related party. On March 4, 2008, the Company repaid Grant King $30,000 against
the loan. On March 14, 2008, the Company received an additional $32,700 from
Grant King for operating purposes. The loan accrues interest at 11% and is due
upon demand.  The total loan outstanding from Grant King as of
December 31, 2008 is $99,933 and accrued interest of $10,312.
 
 During
the fiscal year ended March 31, 2008, the Company issued a purchase order to
Catalyx Fluid Solutions, Inc. (“Catalyx”), for the purchase of resin, at the
approximate cost of $756,000, needed for the operation of the Company’s
wastewater treatment plant in Wyoming. Catalyx is partially owned by Juzer
Jangbarwala, a Company Director and its Chief Technology Officer. In addition,
from time to time Catalyx has paid for various costs related to the wastewater
treatment plant on behalf of the Company, for which the Company has reimbursed
Catalyx.  As of December 31, 2008, amounts due to Catalyx included in
accounts payable were $280,000.
 
 In July
2007, the Company entered into a lease agreement with Catalyx Engineering, Inc.
(“CEI”), a company that is owned in part by Juzer Jangbarwala, a Company
Director and its Chief Technology Officer, to sub-lease approximately 7,000
square feet to serve as its new corporate office in Anaheim, California. The
term of the lease is 18 months at a base monthly rent of
$7,200.  During the nine months ended December 31, 2008, payments to
CEI for rent were $57,600.
 
 The
Company utilized CEI for engineering services related to the design and
construction of its water treatment plant in Wyoming. The agreement is verbal
and provides engineering services at $75 per hour, which represents a 37.5%
discount off of normal CEI rates. Total expenses incurred by the Company with
CEI during the nine months ended December 31, 2008 were $2,944.  As of
December 31, 2008, amounts due to CEI included in accounts payable were
$23,803.
 
 In
previous periods, the Company utilized Fusion Solutions (“Fusion”) for
manufacturing of product and promotional items for it OC Energy drink products.
Fusion is partially owned by Mariano Fusco, a former owner and former CEO of the
Company’s subsidiary, OC Energy and Albert Guerra, a partial owner of OC
Energy.  As of December 31, 2008, amounts due to Fusion included in
accounts payable were $99,807.
  15
  RG
GLOBAL LIFESTYLES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 During
the three months ended December 31,2008, the Company
utilized Glaser Corporation (“Glaser”) for the rental of office space and
equipment, as well as for accounting and administrative services for it OC
Energy subsidiary. Glaser is owned by Robert Glaser, a partial owner and
President of OC Energy.  For the nine months ended December 31, 2008,
amounts expensed under this arrangement were $12,378.  As of December
31, 2008, amounts due to Glaser included in accounts payable were
$32,201.
 
 Note 14 – Subsequent
Event
 
 Subsequent
to December 31, 2008, the Company received and additional $110,216 of preferred
stock subscriptions.
  16


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 OC Energy Drink product lines and CFS wastewater
      treatment technology, 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;



            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;



            Loss
      of customers or sales weakness;



            Effect
      of environmental regulations in the field of wastewater treatment
      associated with coal bed methane
mining;



            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 or equity
  financings;



            Loss
      of key management or other unanticipated personnel
  changes;



            The
      unavailability of funds for capital expenditures;
  and



            Operational
      inefficiencies in distribution or other
systems.





The
following discussion should be read in conjunction with the historical financial
statements and related notes thereto of R.G. Global Lifestyles, Inc., including
Form 10-KSB as of March 31, 2008.





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





You
should read the following discussion and analysis of our financial condition and
results of operations together with "Selected Financial Data" and our financial
statements and related notes appearing elsewhere in this quarterly
report.  This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. The actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
presented under "Risk Factors" in our prior SEC filings and elsewhere in this
quarterly report.


17





OVERVIEW





CFS
TECHNOLOGY





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





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





CFS is
currently pursuing additional opportunities with other energy companies in the
US and internationally, for the lease or sale, construction, use and/or support
of the CFS Technology.  . The Company is currently in negotiations to
sell its Yates plant and shift from a build own and operate strategy to a
licensor of its technology.  In addition, the Company plans to focus
all of its efforts on earning royalty revenue and finding additional customers
who wish to license its technology.





OC ENERGY
DRINKS





The
Company operates OC Energy Drink, Inc. as a majority owned subsidiary. OC Energy
Drink has a line of "OC ENERGY" caffeinated energy drinks and energy shots
fashioned for the Orange County lifestyle. Presently there are two Energy Drinks
and two Energy Shots. The Energy Drinks consist of a 10-oz energy drink
("KIK-IT") and a 10-oz diet energy drink ("KIK-IT Diet"), The Energy Shots
consist of a 2-oz high-powered energy shot ("Insane") and a 2-oz high-powered
sugar free, zero calorie, energy shot ("Energy Shot+"). The energy line is low
in natural sugar and high in vitamins and minerals, and come in custom-designed
bottles.





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




18




MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2008 AND
2007.





The
following table summarizes the results of continuing operations and balance
sheet amounts of the Company for the periods and dates shown:





Three Months Ended December 31INCOME
      STATEMENT DATA
                            
                            2008
                            
                            
                            2007Revenue
                            
                            $
                            111,139
                            
                            
                            $
                            144,598Gross
      loss
                            
                            $
                            (132,274
                            )
                            
                            $
                            (215,096
                            )Loss
      from operations
                            
                            $
                            (1,091,149
                            )
                            
                            $
                            (1,638,184
                            )Net
      income/(loss)
                            
                            $
                            (1,138,185
                            )
                            
                            $
                            1,532,265Net
      income/(loss) per weighted average common share
                            
                            $
                            (0.02
                            )
                            
                            $
                            .05





For the quarter ended December 31
                      
                      
                      Increase/(Decrease)REVENUES
                      
                      2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      %Revenues
                      
                      $
                      111,139
                      
                      
                      $
                      144,598
                      
                      
                      $
                      (33,459
                      )
                      
                      
                      (23
                      )%





During
the quarter ended December 31, 2008, revenue associated with the Company's water
treatment revenue accounted for 90% of its total revenues. During the quarter
ended December 31, 2007, the 41% and 59% of the Company’s revenues was sales of
its water treatment royalties and energy drink sales
respectively.  The decrease in energy drink sales as compared to the
same period in 2007 was resulted from the Company concentrating all of its
efforts on the Yates plant and to negotiating the sale of the plant, while
continuing to make adjustments to the operation of the plant. The decrease in
energy drink revenues was due to a lack of sales at OC Energy resulting from its
inability to market the product or obtain any contracts to place its products
with retailers.


For the quarter ended December 31
                      
                      
                      Increase/(Decrease)GROSS LOSS
                      
                      2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      %Gross
      loss
                      
                      $
                      (132,274
                      )
                      
                      $
                      (215,096
                      )
                      
                      $
                      (82,822
                      )
                      
                      
                      (38
                      )
      %





During
the quarter ended December 31, 2008, gross (loss) associated with the Company's
water treatment technology was $(118,385) and the gross (loss) from OC Energy
Drink products was ($13,889).  The resulting loss during the quarter
ended December 31, 2008, the Company was due primarily to its inability to
operate the plant at full capacity because of the excessive amounts of waste
water produced by the plant in the outflow pond.  Included in its cost
of sales were labor costs and depreciation expense of approximately
$218,516.  The gross loss from its OC Energy Drink products was due to
the Company selling some of its inventory at cost before it would need to be
destroyed as most of it was past its shelf life.




For the quarter ended December 31
                        
                        
                        Increase/(Decrease)TOTALOPERATINGEXPENSES
                        
                        2008
                        
                        
                        2007
                        
                        
                        $
                        
                        
                        %Total
      Operating Expenses
                        
                        $
                        958,875
                        
                        
                        $
                        1,423,088
                        
                        
                        $
                        (464,213
                        )
                        
                        
                        (33
                        )
      %





Total
operating expenses include management and administrative personnel costs
(including non-cash stock-based compensation), corporate office costs,
accounting fees, legal expense, information systems expense, and product
marketing and sales expense.  The decrease in total operating expenses
in the quarter ended December 31, 2008 as compared to the quarter ended December
31, 2007 was primarily the result of a decrease in stock-based
compensation.





For the quarter ended December 31
                      
                      
                      Increase/(Decrease)OTHER INCOME (EXPENSE)
                      
                      2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      %Other
      Income (Expense)
                      
                      $
                      (47,036
                      )
                      
                      $
                      3,145,131
                      
                      
                      $
                      (3,192,167
                      )
                      
                      
                      (101
                      )
      %


19





The
decrease in other income during the quarter ended December 31, 2008 as compared
to the quarter ended December 31, 2007 resulted primarily from reduced interest
expense for notes converted to stock in 2007, a reduction in the change in the
fair value of common stock issued in connection with convertible notes in 2007,
a reduction in the change in fair value of derivative liabilities in 2007 and
proceeds of an insurance policy on the founders life that was collected after
his death .





RESULTS
OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED DECEMBER  31, 2008 AND
2007.





The
following table summarizes the results of continuing operations and balance
sheet amounts of the Company for the periods and dates shown:





NineMonthsEndedDecember31INCOME STATEMENT DATA
                      
                      2008
                      
                      
                      2007Revenue
                      
                      $
                      238,027
                      
                      
                      $
                      969.449Gross
      loss
                      
                      $
                      (471,753
                      )
                      
                      $
                      (142,500
                      )Loss
      from operations
                      
                      $
                      (3,704,451
                      )
                      
                      $
                      (4,245,635
                      )Net
      (loss)/income
                      
                      $
                      (3,899,070
                      )
                      
                      $
                      1,366,374Net
      loss per weighted average common share
                      
                      $
                      (0.09
                      )
                      
                      $
                      0.05





AsofDecember31BALANCE SHEET DATA
                  
                  2008
                  
                  
                  2007Total
      assets
                  
                  $
                  7,090,275
                  
                  
                  $
                  7,758,187Total
      liabilities
                  
                  $
                  3,591,126
                  
                  
                  $
                  2,958,937Stockholders'
      equity
                  
                  $
                  3,499,149
                  
                  
                  $
                  4,799,250





FortheninemonthsendedDecember31
                            
                            
                            Increase/(Decrease)REVENUES
                            
                            2008
                            
                            
                            2007
                            
                            
                            $
                            
                            
                            %Revenues
                            
                            $
                            238,027
                            
                            
                            $
                            969,449
                            
                            
                            $
                            (731,442
                            )
                            
                            
                            (75
                            )%





During
the nine months ended December 31, 2008, royalty revenue associated with the
Company's water treatment technology accounted for 80% of its total
revenues.  These revenues related solely to the treatment and
purification of approximately 1,012,000 barrels of waste water at the Yates
plant.  The Company recorded $47,477 in sales of OC Energy Drink
products during the nine months presented.  During the nine months
ended December 31, 2007, the Company’s primary source of revenues was sales of
its water treatment technology, which accounting for $737,576 of total
revenue.  The decrease in water treatment sales was due to one of the
Company’s current customers (Black Diamond Energy) request that the construction
of its plant be delayed until it could obtain additional funding.  In
addition, the Company shut down the Yates plant after its first initial
operation to make adjustments and modifications deemed necessary to reduce
unexpected amounts of residual waste produced in the outflow pond during the
filtration of the waste water. The decrease in energy drink revenues was due to
a lack of sales at OC Energy resulting from its inability to market the product
or obtain any contracts to place its products with retailers.


For the nine months ended December 31
                      
                      
                      Increase/(Decrease)GROSS LOSS
                      
                      2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      %Gross loss
                      
                      $
                      (471,753
                      )
                      
                      $
                      (142,500
                      )
                      
                      $
                      (329,253
                      )
                      
                      
                      (231
                      )
      %


20





During
the nine months ended December 31, 2008, gross (loss) associated with the
Company's water treatment technology was $(461,245) and the gross loss from OC
Energy Drink products was $(10,508).  During the nine ended December
31, 2008, the Company was unable to operate the plant at full
capacity.  Included in its cost of sales were labor costs and
depreciation expense of approximately $651,795.  The gross loss from
its OC Energy Drink products was due to the Company selling some of its
inventory at cost before it would need to be destroyed due to it being past its
shelf life. The gross profit from the Company’s results for the nine months
ended December 31, 2007 was primarily the result from deferred revenue recorded
on the Black Diamond project and profitable sales of its OC Energy Drink
products.


FortheninemonthsendedDecember31
                    
                    
                    Increase/(Decrease)TOTAL OPERATING EXPENSES
                    
                    2008
                    
                    
                    2007
                    
                    
                    $
                    
                    
                    %Total
      Operating Expenses
                    
                    $
                    3,232,698
                    
                    
                    $
                    4,103,135
                    
                    
                    $
                    (870,437
                    )
                    
                    
                    (21
                    )%





Total
operating expenses include management and administrative personnel costs
(including non-cash stock-based compensation), corporate office costs,
accounting fees, legal expense, information systems expense, and product
marketing and sales expense.  The decrease in total operating expenses
in the nine months ended December 31, 2008 as compared to the nine months ended
December 31, 2007 was primarily the result of a decrease in stock-based
compensation.


FortheninemonthsendedDecember31
                        
                        
                        Increase/(Decrease)OTHERINCOME(EXPENSE)
                        
                        2008
                        
                        
                        2007
                        
                        
                        $
                        
                        
                        %Other
      Income (Expense)
                        
                        $
                        (194,619
                        )
                        
                        $
                        5,612,009
                        
                        
                        $
                        (5,806,628
                        )
                        
                        
                        (103
                        )
      %





The
decrease in other income during the nine months ended December 31, 2008 as
compared to the nine months ended December 31, 2007 resulted primarily from
reduced interest expense for notes converted to stock in 2007, a reduction in
the change in the fair value of common stock issued in connection with
convertible notes in 2007and a reduction in the change in fair value of
derivative liabilities in 2007.





LIQUIDITY
AND CAPITAL RESOURCES





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





The
Company’s principal sources of liquidity consist of cash and cash equivalents,
cash generated from product sales and construction contracts, and the issuance
of equity and/or debt securities. In addition to funding operations, the
Company’s principal short-term and long-term liquidity needs have been, and are
expected to be, the debt service requirements of its notes payable, capital
expenditures and general corporate expense expenses.  As of December
31, 2008, the Company had cash and cash equivalents of $72,983, accounts payable
of $1,359,067, accrued liabilities of $1,061,329 and notes payable outstanding
of $1,002,840.


21


The
Company believes that cash expected to be generated from the issuance of debt
and equity securities will be sufficient to fund its operations and other
financing requirements through March 31, 2009. The Company is currently in
negotiations to sell its Yates plant and shift from a build to own strategy to a
licensee of its technology.  In addition, the Company is currently
reviewing the infeasibility of its energy drink company and has been focusing
almost all of its efforts on earning royalty revenue and finding additional
customers who wish to license its technology.  In order to continue
its operations until the plant is sold or other licensees are found, the Company
may seek to obtain additional debt or equity financing.  It may also
need to obtain additional debt or equity financing if it experiences downturns
or cyclical fluctuations in its business that are more severe or longer than
anticipated, or if the Company fails to achieve anticipated revenue, experiences
significant increases in the costs associated with products sales, or if it
engages in additional strategic transactions.  The Company cannot
provide assurance that such financing will be available to it on favorable
terms, or at all.  If, after utilizing the existing sources of capital
available to the Company, further capital needs are identified and the Company
is not successful in obtaining the financing, it may be forced to curtail its
existing or planned future operations.  There can be no assurance that
the revenue from the sale of the plant will be sufficient for the Company to
achieve profitability in its operations.





For the
nine month period ended December 31, 2008, the Company funded operations
primarily through sales of its common and preferred stock to investors in the
amount of $904,733 and from a tax refund received of $143,775.





OPERATING
ACTIVITIES





Operating
cash flows used during the nine months ended December 31, 2008, amounted to
$886,302.  The primary use of operating cash was to pay consultants
and salaries and wages.  This was the result of a net loss of
$3,899,070 offset by non-cash and non-operating items (depreciation,
amortization of intangible assets, stock-based compensation and interest expense
from the amortization of debt discounts) totaling $1,975,197 and net changes in
current assets and liabilities of $1,037,571.





INVESTING
ACTIVITIES





There
were no cash flows used for investing during the nine months ended December 31,
2008





FINANCING
ACTIVITIES





Financing
cash flows during the nine months ended December 31, 2008, amounted to $946,966
and consisted of, sales of its preferred stock to investors of $505,733, sales
of commons stock totaling $399,000, a $45,000 loan from a third party interested
in purchasing the Yates plant and a payment on a shareholder note
of  $2,767.





CRITICAL
ACCOUNTING POLICIES





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





The
methods, estimates, and judgment we use in applying our most critical accounting
policies have significant impact on the results we report in our financial
statements. The SEC has defined "critical accounting policies" as those
accounting policies that are most important to the portrayal of our financial
condition and results, and require us to make our most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based upon this definition, our most critical estimates
are described below under the heading "Revenue Recognition." We also have other
key accounting estimates and policies, but we believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional
information see Note 1, "Summary of Organization and Significant Accounting
Policies" in the notes to our audited financial statements appearing in our
annual report on Form 10-KSB. Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently available,
and actual results may differ significantly from these
estimates.


22


IMPAIRMENT
OF LONG-LIVED AND INTANGIBLE ASSETS





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





REVENUE
RECOGNITION





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





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





STOCK-BASED
COMPENSATION





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





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





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


23





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





RECENT
ACCOUNTING PRONOUNCEMENTS




In April
2008, the FASB issued FASB Staff Position 142-3,Determination of the Useful Lives
of Intangible Assets (“FSP 142-3”), which amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB No. 142,Goodwill and Other
Intangible Assets . The intent of FSP 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141(R) and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for fiscal years beginning after
December 15, 2008 and for interim periods within those fiscal years. The
Company does not expect the adoption of FSP 142-3 to have a material effect on
its results of operations, financial position and cash
flows.


In
September 2007, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 provides accounting guidance on the definition of fair value and
establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2008. We plan to
adopt the provisions of SFAS 157 on April 1, 2009 and are currently assessing
the impact of the adoption of SFAS 157 on our results of operations and
financial condition.





In
February 2008, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued for fiscal
year beginning after November 15, 2008. We are currently assessing the impact of
adopting SFAS 159 on our results of operations and financial
condition.





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





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements", which is an amendment of Accounting Research
Bulletin ("ARB") No. 51. This statement clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. This statement
changes the way the consolidated income statement is presented, thus requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both parent and the noncontrolling interest. This statement is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Based on current conditions, the
Company does not expect the adoption of SFAS 160 to have a significant impact on
its results of operations or financial position.





OFF-BALANCE
SHEET ARRANGEMENTS





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


24





Item 3.  Quantitative and
Qualitative Disclosures About Market Risk– Not Applicable





Item
4. Controls and Procedures





During
its year end procedures, the Company noted several weaknesses in its internal
controls.  No steps have been taken to address these control
weaknesses.





As
required by SEC Rule 13a-15 or Rule 15d-15, our Chief Executive and Principal
Accounting Officers carried out an evaluation under the supervision and with the
participation of our management, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report.  In the course of the previous fiscal quarter
ended September 30, 2008, our chief executive officer and principal
accounting  officer concluded that our disclosure controls and
procedures were not effective 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 Principal Accounting officer, as appropriate, to allow
timely decisions regarding required disclosure.





Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives and our Chief Executive Officer
and Principal Accounting Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level. 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. Because
of 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 internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.





Internal
Control Over Financial Reporting





Pursuant
to Rule 13a-15(d) or Rule 15d-15(d) of the Exchange Act, our management, with
participation with the Company’s Chief Executive and Principal Accounting
Officers, is responsible for evaluating any change in the company's internal
control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f)
under the Exchange Act), that occurred during each of the issuer's fiscal
quarters that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.





Based on
the foregoing evaluation, the Company has concluded that there was no change in
our internal control over financial reporting that occurred during the fiscal
quarter ended December 31, 2008, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II — OTHER INFORMATION





Item
1. Legal Proceedings





On June
11, 2008, the Company and Grant King was served a lawsuit from one of its note
holders claiming that the Company defaulted on repayment on a note payable in
the amount of $350,000 plus interest at 8%.  The complaint asks for
payment of these amounts plus damages.  On August 12, 2008 the parties
agreed to stipulated order whereby Grant King was dismissed from the lawsuit and
the Company was granted a 90 day extension to respond to the complaint (until
November 10, 2008) and in exchange the Company paid $49,530 which represents the
interest due on the note through July 18, 2008.  On January 30, 2009,
the Company paid $8,016 of additional interest on the note, the Company has
until February 19, 2009 to satisfy this obligation.  No amounts for
damages have been accrued in the accompanying consolidated financial statement
other than the note payable and accrued interest (see Note 11).


25





On July
11, 2008, the Company received notice that one of the Company’s vendors filed a
lien against the Company’s water treatment plant for past due amounts due to the
vendor. On September 4, 2008, the vendor filed a formal lawsuit and the
litigation is now in its discovery phase. As of December 31, 2008, the vendor is
due $136,691, which is included in accounts payable.





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





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





During
the quarter ended December 31, 2008, the Company raised investor money through a
private sale of Series A preferred stock. The Company raised $505,733 from sales
of Series A preferred stock and incurred an obligation to issue 3,371,554 of
such preferred stock. These securities were sold to the investors in reliance on
Section 4(2) under the Securities Act of 1933, as
amended.


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.





The
following Exhibits are filed or incorporated by reference as part of this
Quarterly Report on Form 10-Q:





Exhibit
                Number
              
              Description of Document31.1
              
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act31.2
              
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act32.1
              
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act32.2
              
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley
  Act




26




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
                        
                        DateGrant
      King
                        
                        Chief
      Executive Officer
                        
                        February
      17, 2009Richard
      Lambright
                        
                        Principal
      Accounting Officer
                        
                        February
      17,
2009


27