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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.   20549

FORM 10-Q

|        |                                                                                       |
|--------|---------------------------------------------------------------------------------------|
|   | Quarterly ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 |

For the quarterly period ended September 30, 2006

OR

|        |                                                                                         |
|--------|-----------------------------------------------------------------------------------------|
|   | Transition Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934 |

For thetransition period from                      to                    

Commission File Number00-32849

CASTLE BRANDSINC.

(Exact name of registrant asspecified in itscharter)

|                                                              |  |  |                                     |
|--------------------------------------------------------------|--|--|-------------------------------------|
| Delaware                                                     |  |  | 41-2103550                          |
| (Stateor other jurisdiction of incorporation ororganization) |  |  | (I.R.S. Employer IdentificationNo.) |
| 570Lexington Avenue, New York, NewYork                       |  |  | 10022                               |
| (Addressof principal executive offices)                      |  |  | (ZipCode)                           |
|                                                              |

Registrant's telephone number,including area code: (646) 356-0200

Indicate by check markwhether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.     Yes         No 

Indicate by check mark whetherthe registrant is a large accelerated filer, accelerated filer or anon-accelerated filer (as defined in Rule  12b-2 of the Act).

|                         |  |  |                   |  |  |                       |
|-------------------------|--|--|-------------------|--|--|-----------------------|
| Large accelerated filer |  |  | Accelerated filer |  |  | Non-accelerated filer |
|                         |

Indicate bycheck mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).     Yes          No

The Company had 12,009,741 shares of $0.01 par valuecommon stock outstanding at November  8,2006.

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TABLEOFCONTENTS

|                                                    |  |  |                                                                                                                                      |  |        |  |  |        |        |  |  |        |
|----------------------------------------------------|--|--|--------------------------------------------------------------------------------------------------------------------------------------|--|--------|--|--|--------|--------|--|--|--------|
| PARTI.    FINANCIALINFORMATION |  |  |                                                                                                                                      |  |   |  |  |        |   |
| Item1.                                             |  |  | CondensedConsolidated FinancialStatements:                                                                                           |  |        |  |  |   |        |  |  |   |
|                                               |  |  | Condensed ConsolidatedBalance Sheets as of September 30, 2006 (unaudited) and March 31,2006                                          |  |        |  |  | 3      |        |  |  |   |
|                                               |  |  | CondensedConsolidated Statements of Operations for the Three-Month and Six-MonthPeriods ended September 30, 2006 and 2005(unaudited) |  |        |  |  | 4      |        |  |  |   |
|                                               |  |  | CondensedConsolidated Statements of Changes in Shareholders' Equity(Deficiency) for the Six-Months ended September 30,2006           |  |        |  |  | 5      |        |  |  |   |
|                                               |  |  | CondensedConsolidated Statements of Cash Flows for the  Six-Month Periodsended September 30, 2006 and 2005(unaudited)                |  |        |  |  | 6      |        |  |  |   |
|                                               |  |  | Notesto Unaudited Condensed Consolidated FinancialStatements                                                                         |  |        |  |  | 7      |        |  |  |   |
| Item2.                                             |  |  | Management's Discussion and Analysis of FinancialCondition and Results ofOperations                                                  |  |        |  |  | 31     |        |  |  |   |
| Item3.                                             |  |  | Quantitative and Qualitative Disclosures About MarketRisk                                                                            |  |        |  |  | 43     |        |  |  |   |
| Item4.                                             |  |  | Controls andProcedures                                                                                                               |  |        |  |  | 44     |        |  |  |   |
| PARTII.    OTHERINFORMATION    |  |  |                                                                                                                                      |  |   |  |  |        |   |
| Item1.                                             |  |  | LegalProceedings                                                                                                                     |  |        |  |  | 46     |        |  |  |   |
| Item1A.                                            |  |  | RiskFactors                                                                                                                          |  |        |  |  | 46     |        |  |  |   |
| Item2.                                             |  |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                                           |  |        |  |  | 46     |        |  |  |   |
| Item3.                                             |  |  | Defaults Upon SeniorSecurities                                                                                                       |  |        |  |  | 47     |        |  |  |   |
| Item4.                                             |  |  | Submission of Matters to a Vote of SecurityHolders                                                                                   |  |        |  |  | 47     |        |  |  |   |
| Item5.                                             |  |  | OtherInformation                                                                                                                     |  |        |  |  | 47     |        |  |  |   |
| Item6.                                             |  |  | Exhibits                                                                                                                             |  |        |  |  | 48     |        |  |  |   |
| SIGNATURE                                          |  |  |                                                                                                                                 |  |        |  |  |   |        |  |  |   |
|                                                    |

----

PARTI. FINANCIAL INFORMATION

Item 1. ConsolidatedFinancial Statements

CASTLE BRANDS INC. ANDSUBSIDIARIESCondensed Consolidated BalanceSheets

|                                                                                                                                                                                             |  |  |                   |   |             |               |  |  |  |   |             |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------------|---|-------------|---------------|--|--|--|---|-------------|---|
|                                                                                                                                                                                        |  |  | September30, 2006 |   |             | March 31,2006 |
|                                                                                                                                                                                        |  |  | (unaudited)       |   |             |          |
| ASSETS                                                                                                                                                                                      |  |  |                   |   |        |               |  |  |  |   |        |   |
| CURRENTASSETS                                                                                                                                                                               |  |  |                   |   |        |               |  |  |  |   |        |   |
| Cash and cashequivalents                                                                                                                                                                    |  |  |                   | $ | 13,509,471  |               |  |  |  | $ | 1,392,016   |   |
| Accountsreceivable –  net of allowance for doubtfulaccounts of $463,351 and$395,207                                                                                         |  |  |                   |   | 6,454,173   |               |  |  |  |   | 3,511,215   |   |
| Duefromaffiliates                                                                                                                                                                           |  |  |                   |   | 1,032,287   |               |  |  |  |   | 953,616     |   |
| Inventories                                                                                                                                                                                 |  |  |                   |   | 8,777,275   |               |  |  |  |   | 6,673,235   |   |
| Prepaidexpenses and other currentassets                                                                                                                                                     |  |  |                   |   | 1,308,656   |               |  |  |  |   | 1,021,369   |   |
| TOTALCURRENTASSETS                                                                                                                                                                          |  |  |                   |   | 31,081,862  |               |  |  |  |   | 13,551,451  |   |
| EQUIPMENT— net                                                                                                                                                                   |  |  |                   |   | 470,193     |               |  |  |  |   | 407,983     |   |
| OTHERASSETS                                                                                                                                                                                 |  |  |                   |   |        |               |  |  |  |   |        |   |
| Intangibleassets –  net of accumulated amortization of$1,788,096 and$1,379,389                                                                                              |  |  |                   |   | 13,631,672  |               |  |  |  |   | 13,936,427  |   |
| Goodwill                                                                                                                                                                                    |  |  |                   |   | 11,649,430  |               |  |  |  |   | 11,649,430  |   |
| Deferredregistrationcosts                                                                                                                                                                   |  |  |                   |   | —     |               |  |  |  |   | 2,823,594   |   |
| Restrictedcash                                                                                                                                                                              |  |  |                   |   | 475,814     |               |  |  |  |   | 362,293     |   |
| Otherassets                                                                                                                                                                                 |  |  |                   |   | 548,741     |               |  |  |  |   | 913,032     |   |
| TOTALASSETS                                                                                                                                                                                 |  |  |                   | $ | 57,857,712  |               |  |  |  | $ | 43,644,210  |   |
| LIABILITIESAND STOCKHOLDERS’ EQUITY(DEFICIENCY)                                                                                                                                       |  |  |                   |   |        |               |  |  |  |   |        |   |
| CURRENTLIABILITIES                                                                                                                                                                          |  |  |                   |   |        |               |  |  |  |   |        |   |
| Currentmaturities of notes payable and capitalleases                                                                                                                                        |  |  |                   | $ | 1,563,941   |               |  |  |  | $ | 3,678,547   |   |
| Accountspayable                                                                                                                                                                             |  |  |                   |   | 3,325,502   |               |  |  |  |   | 3,757,515   |   |
| Accruedexpenses, put warrant payable and derivativeinstrument                                                                                                                               |  |  |                   |   | 2,466,191   |               |  |  |  |   | 2,986,188   |   |
| Dueto stockholders andaffiliates                                                                                                                                                            |  |  |                   |   | 2,058,941   |               |  |  |  |   | 2,121,334   |   |
| Convertiblestockholder notespayable                                                                                                                                                         |  |  |                   |   | —     |               |  |  |  |   | 1,660,148   |   |
| Stockholdernotespayable                                                                                                                                                                     |  |  |                   |   | —     |               |  |  |  |   | 147,113     |   |
| TOTALCURRENTLIABILITIES                                                                                                                                                                     |  |  |                   |   | 9,414,575   |               |  |  |  |   | 14,350,845  |   |
| LONGTERM LIABILITIES                                                                                                                                                                        |  |  |                   |   |        |               |  |  |  |   |        |   |
| Seniornotespayable                                                                                                                                                                          |  |  |                   |   | 4,605,088   |               |  |  |  |   | 4,594,791   |   |
| Notespayable and capital leases, less currentmaturities                                                                                                                                     |  |  |                   |   | 9,007,380   |               |  |  |  |   | 15,350,640  |   |
| Preferredstock and preferred membership units dividendspayable                                                                                                                              |  |  |                   |   | —     |               |  |  |  |   | 1,546,480   |   |
| Deferredtaxliability                                                                                                                                                                        |  |  |                   |   | 2,629,439   |               |  |  |  |   | 2,703,515   |   |
|                                                                                                                                                                                        |  |  |                   |   | 25,656,482  |               |  |  |  |   | 38,546,271  |   |
| REDEEMABLECONVERTIBLE PREFERREDSTOCK                                                                                                                                                        |  |  |                   |   |        |               |  |  |  |   |        |   |
| Redeemableconvertible preferred stock Series A, B, C;4,103,750 shares designated; 4,089,463 shares outstandingat March 31, 2006, liquidation preference of$33,326,484   |  |  |                   |   | —     |               |  |  |  |   | 28,447,683  |   |
| COMMITMENTSAND CONTINGENCIES (Note15)                                                                                                                                                       |  |  |                   |   |        |               |  |  |  |   |        |   |
| MINORITYINTERESTS                                                                                                                                                                           |  |  |                   |   | 1,939,517   |               |  |  |  |   | 2,674,731   |   |
| STOCKHOLDERS’EQUITY(DEFICIENCY)                                                                                                                                                       |  |  |                   |   |        |               |  |  |  |   |        |   |
| Commonstock, $.01 par value, 20,500,000 shares authorized,12,009,741 and 3,106,666 shares issued and outstanding atSeptember  30,  2006 and March 31, 2006,respectively |  |  |                   |   | 120,098     |               |  |  |  |   | 31,067      |   |
| Additionalpaid incapital                                                                                                                                                                    |  |  |                   |   | 82,049,026  |               |  |  |  |   | 17,182,405  |   |
| Accumulateddeficiency                                                                                                                                                                       |  |  |                   |   | (51,687,027 | )             |  |  |  |   | (43,404,887 | ) |
| Accumulatedother comprehensive(loss)/income.                                                                                                                                                |  |  |                   |   | (220,384    | )             |  |  |  |   | 166,940     |   |
| TOTALSTOCKHOLDERS’ EQUITY(DEFICIENCY)                                                                                                                                                 |  |  |                   |   | 30,261,713  |               |  |  |  |   | (26,024,475 | ) |
| TOTALLIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIENCY)                                                                                                                                 |  |  |                   | $ | 57,857,712  |               |  |  |  | $ | 43,644,210  |   |
|                                                                                                                                                                                             |

Seeaccompanying notes to the condensed consolidated financialstatements.

3

----

CASTLE BRANDS INC. ANDSUBSIDIARIESCondensed Consolidated Statements ofOperations(unaudited)

|                                                                                                       |  |  |                                |   |            |                             |  |  |        |   |            |              |  |  |  |   |            |   |  |  |  |   |            |   |
|-------------------------------------------------------------------------------------------------------|--|--|--------------------------------|---|------------|-----------------------------|--|--|--------|---|------------|--------------|--|--|--|---|------------|---|--|--|--|---|------------|---|
|                                                                                                  |  |  | ThreeMonths EndedSeptember 30, |   |            | Six MonthsEndedSeptember30, |
|                                                                                                  |  |  | 2006                           |   |            | 2005                        |  |  | 2006   |   |            | 2005         |
|                                                                                                  |  |  |                           |   |            |                        |  |  |   |   |            | (SeeNote 20) |
| Sales,net                                                                                             |  |  |                                | $ | 6,252,062  |                             |  |  |        | $ | 5,175,144  |              |  |  |  | $ | 11,712,467 |   |  |  |  | $ | 10,091,538 |   |
| Costofsales                                                                                           |  |  |                                |   | 4,231,445  |                             |  |  |        |   | 3,162,084  |              |  |  |  |   | 7,795,504  |   |  |  |  |   | 6,315,276  |   |
| Grossprofit                                                                                           |  |  |                                |   | 2,020,617  |                             |  |  |        |   | 2,013,060  |              |  |  |  |   | 3,916,963  |   |  |  |  |   | 3,776,262  |   |
| Sellingexpense (Note1R)                                                                               |  |  |                                |   | 4,694,074  |                             |  |  |        |   | 3,212,398  |              |  |  |  |   | 8,236,646  |   |  |  |  |   | 6,349,785  |   |
| Generaland administrative expense (Note1R)                                                            |  |  |                                |   | 1,898,702  |                             |  |  |        |   | 1,235,794  |              |  |  |  |   | 4,134,493  |   |  |  |  |   | 2,373,270  |   |
| Depreciationandamortization                                                                           |  |  |                                |   | 245,794    |                             |  |  |        |   | 220,343    |              |  |  |  |   | 480,288    |   |  |  |  |   | 441,828    |   |
| Operatingloss                                                                                         |  |  |                                |   | (4,817,953 | )                           |  |  |        |   | (2,655,475 | )            |  |  |  |   | (8,934,464 | ) |  |  |  |   | (5,388,621 | ) |
| Otherincome                                                                                           |  |  |                                |   | 2,644      |                             |  |  |        |   | 34,132     |              |  |  |  |   | 3,944      |   |  |  |  |   | 34,132     |   |
| Otherexpense                                                                                          |  |  |                                |   | (9,558     | )                           |  |  |        |   | (9,154     | )            |  |  |  |   | (15,866    | ) |  |  |  |   | (18,609    | ) |
| Foreignexchangegain/(loss)                                                                            |  |  |                                |   | 262,377    |                             |  |  |        |   | 15,247     |              |  |  |  |   | 659,789    |   |  |  |  |   | (297,724   | ) |
| Interestexpense,net                                                                                   |  |  |                                |   | (75,931    | )                           |  |  |        |   | (365,274   | )            |  |  |  |   | (498,607   | ) |  |  |  |   | (624,204   | ) |
| Write-offof deferred financing costs in connection with conversion of 6%subordinated convertiblenotes |  |  |                                |   | —    |                             |  |  |        |   | —    |              |  |  |  |   | (295,368   | ) |  |  |  |   | —    |   |
| Current(charge)/credit on derivative financialinstrument                                              |  |  |                                |   | (8,666     | )                           |  |  |        |   | (1,752     | )            |  |  |  |   | (10,858    | ) |  |  |  |   | 15,050     |   |
| Incometaxbenefit                                                                                      |  |  |                                |   | 37,038     |                             |  |  |        |   | 37,038     |              |  |  |  |   | 74,076     |   |  |  |  |   | 74,076     |   |
| Minorityinterests                                                                                     |  |  |                                |   | 391,855    |                             |  |  |        |   | 94,898     |              |  |  |  |   | 735,214    |   |  |  |  |   | 224,057    |   |
| Netloss                                                                                               |  |  |                                |   | (4,218,194 | )                           |  |  |        |   | (2,850,340 | )            |  |  |  |   | (8,282,140 | ) |  |  |  |   | (5,981,843 | ) |
| Preferredstockdividends                                                                               |  |  |                                |   | —    |                             |  |  |        |   | 386,583    |              |  |  |  |   | 48,238     |   |  |  |  |   | 691,762    |   |
| Netloss attributable to commonstockholders                                                            |  |  |                                | $ | (4,218,194 | )                           |  |  |        | $ | (3,236,923 | )            |  |  |  | $ | (8,330,378 | ) |  |  |  | $ | (6,673,605 | ) |
| Netloss attributable to common stockholders per commonshare                                           |  |  |                                |   |       |                             |  |  |        |   |       |              |  |  |  |   |       |   |  |  |  |   |       |   |
| Basic                                                                                                 |  |  |                                | $ | (0.35      | )                           |  |  |        | $ | (1.04      | )            |  |  |  | $ | (0.71      | ) |  |  |  | $ | (2.15      | ) |
| Diluted                                                                                               |  |  |                                | $ | (0.35      | )                           |  |  |        | $ | (1.04      | )            |  |  |  | $ | (0.71      | ) |  |  |  | $ | (2.15      | ) |
| Weightedaverage shares used incomputation                                                             |  |  |                                |   |       |                             |  |  |        |   |       |              |  |  |  |   |       |   |  |  |  |   |       |   |
| Basic                                                                                                 |  |  |                                |   | 12,009,741 |                             |  |  |        |   | 3,106,666  |              |  |  |  |   | 11,716,233 |   |  |  |  |   | 3,106,666  |   |
| Diluted                                                                                               |  |  |                                |   | 12,009,741 |                             |  |  |        |   | 3,106,666  |              |  |  |  |   | 11,716,233 |   |  |  |  |   | 3,106,666  |   |
|                                                                                                       |

Seeaccompanying notes to the condensed consolidated financialstatements.

4

----

CASTLE BRANDS INC. ANDSUBSIDIARIESCondensed Consolidated Statements of Changes inStockholders’ Equity (Deficiency)(Unaudited)

|                                                                              |  |  |                                     |  |            |                          |  |  |                       |   |         |                                            |  |  |                                             |   |            |   |  |  |  |   |             |   |  |  |  |   |          |   |  |  |  |   |             |   |
|------------------------------------------------------------------------------|--|--|-------------------------------------|--|------------|--------------------------|--|--|-----------------------|---|---------|--------------------------------------------|--|--|---------------------------------------------|---|------------|---|--|--|--|---|-------------|---|--|--|--|---|----------|---|--|--|--|---|-------------|---|
|                                                                         |  |  |     CommonStock |  |            | AdditionalPaid inCapital |  |  | AccumulatedDeficiency |   |         | AccumulatedOtherComprehensiveIncome/(Loss) |  |  | TotalStockholders’Equity/(Deficiency) |
|                                                                         |  |  | Shares                              |  |            | Amount                   |
| BALANCE, MARCH 31, 2006                                                 |  |  |                                     |  | 3,106,666  |                          |  |  |                       | $ | 31,067  |                                            |  |  |                                             | $ | 17,182,405 |   |  |  |  | $ | (43,404,887 | ) |  |  |  | $ | 166,940  |   |  |  |  | $ | (26,024,475 | ) |
| Comprehensiveloss                                                            |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   |       |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   |        |   |
| Netloss                                                                      |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   |       |   |  |  |  |   | (8,282,140  | ) |  |  |  |   |     |   |  |  |  |   | (8,282,140  | ) |
| Foreigncurrency translationadjustment                                        |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   |       |   |  |  |  |   |        |   |  |  |  |   | (387,324 | ) |  |  |  |   | (387,324    | ) |
| Totalcomprehensiveloss                                                       |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   |       |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | (8,669,464  | ) |
| Accruedpreferred stockdividends                                              |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   | (48,238    | ) |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | (48,238     | ) |
| Issuanceof common stock in initial public offering, net of issuancecosts     |  |  |                                     |  | 3,500,000  |                          |  |  |                       |   | 35,000  |                                            |  |  |                                             |   | 26,393,889 |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 26,428,889  |   |
| Conversionof redeemable convertible preferred stock, net of fractionalshares |  |  |                                     |  | 4,089,463  |                          |  |  |                       |   | 40,895  |                                            |  |  |                                             |   | 28,406,772 |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 28,447,667  |   |
| Issuanceof common stock in payment of accrueddividends                       |  |  |                                     |  | 193,107    |                          |  |  |                       |   | 1,931   |                                            |  |  |                                             |   | 1,387,834  |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 1,389,765   |   |
| Conversionof 5% euro denominated convertible subordinatednotes               |  |  |                                     |  | 263,362    |                          |  |  |                       |   | 2,634   |                                            |  |  |                                             |   | 1,660,539  |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 1,663,173   |   |
| Conversionof 40% of 6% convertible subordinatednotes                         |  |  |                                     |  | 857,143    |                          |  |  |                       |   | 8,571   |                                            |  |  |                                             |   | 5,991,429  |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 6,000,000   |   |
| Vestingof stock options ascompensation                                       |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   | 19,254     |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 19,254      |   |
| Estimatedfair value ascribed to warrants issued to financialconsultant       |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   | 283,727    |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 283,727     |   |
| Stock-basedcompensation                                                      |  |  |                                     |  |       |                          |  |  |                       |   |    |                                            |  |  |                                             |   | 771,415    |   |  |  |  |   |        |   |  |  |  |   |     |   |  |  |  |   | 771,415     |   |
| BALANCE,SEPTEMBER 30,2006                                                    |  |  |                                     |  | 12,009,741 |                          |  |  |                       | $ | 120,098 |                                            |  |  |                                             | $ | 82,049,026 |   |  |  |  | $ | (51,687,027 | ) |  |  |  | $ | (220,384 | ) |  |  |  | $ | 30,261,713  |   |
|                                                                              |

Seeaccompanying notes to the condensed consolidated financialstatements.

5

----

CASTLE BRANDS INC. ANDSUBSIDIARIESCondensed Consolidated Statements of CashFlows(unaudited)

|                                                                                                          |  |  |                              |   |             |              |  |  |  |   |            |   |
|----------------------------------------------------------------------------------------------------------|--|--|------------------------------|---|-------------|--------------|--|--|--|---|------------|---|
|                                                                                                     |  |  | SixMonths Ended September30, |
|                                                                                                     |  |  | 2006                         |   |             | 2005         |
|                                                                                                     |  |  |                         |   |             | (SeeNote 20) |
| CASH FLOWS FROM OPERATINGACTIVITIES                                                                      |  |  |                              |   |        |              |  |  |  |   |       |   |
| Netloss                                                                                                  |  |  |                              | $ | (8,282,140  | )            |  |  |  | $ | (5,981,843 | ) |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities                                 |  |  |                              |   |        |              |  |  |  |   |       |   |
| Depreciation andamortization                                                                             |  |  |                              |   | 480,288     |              |  |  |  |   | 441,828    |   |
| Minorityinterest in net loss of consolidatedsubsidiary                                                   |  |  |                              |   | (735,214    | )            |  |  |  |   | (224,057   | ) |
| Losson disposal of fixedassets                                                                           |  |  |                              |   | —     |              |  |  |  |   | 5,195      |   |
| Write-offof deferred financingcosts                                                                      |  |  |                              |   | 167,196     |              |  |  |  |   | 214,509    |   |
| Currentcharge/(credit) on derivative financialinstrument                                                 |  |  |                              |   | 10,858      |              |  |  |  |   | (15,050    | ) |
| Deferredtaxbenefit                                                                                       |  |  |                              |   | (74,076     | )            |  |  |  |   | (74,076    | ) |
| Effectof changes in foreign currencyrate                                                                 |  |  |                              |   | (533,720    | )            |  |  |  |   | (194,159   | ) |
| Stock-basedcompensationexpense                                                                           |  |  |                              |   | 771,415     |              |  |  |  |   | —    |   |
| Non-cashinterestcharge                                                                                   |  |  |                              |   | 283,727     |              |  |  |  |   | —    |   |
| Write-offof deferred financing costs in connection with conversion of 6%subordinated convertiblenotes    |  |  |                              |   | 295,368     |              |  |  |  |   | —    |   |
| Changesin operations, assets andliabilities                                                              |  |  |                              |   |        |              |  |  |  |   |       |   |
| Increase inaccountsreceivable                                                                            |  |  |                              |   | (2,847,054  | )            |  |  |  |   | (886,383   | ) |
| Increasein due from related parties – GXB                                                |  |  |                              |   | (78,199     | )            |  |  |  |   | (551,049   | ) |
| Increaseininventory                                                                                      |  |  |                              |   | (1,957,665  | )            |  |  |  |   | (1,706,196 | ) |
| Increasein prepaid expenses andsupplies                                                                  |  |  |                              |   | (278,636    | )            |  |  |  |   | (446,094   | ) |
| Increasein deferred registrationcosts                                                                    |  |  |                              |   | —     |              |  |  |  |   | (824,856   | ) |
| Increasein otherassets                                                                                   |  |  |                              |   | (15,491     | )            |  |  |  |   | (391,591   | ) |
| (Decrease)/increasein accounts payable, accrued expenses, put warrant payable andderivativeinstrument    |  |  |                              |   | (933,385    | )            |  |  |  |   | 1,744,724  |   |
| Increasein due to relatedparties                                                                         |  |  |                              |   | 254,691     |              |  |  |  |   | 579,245    |   |
| Totaladjustments                                                                                         |  |  |                              |   | (5,189,897  | )            |  |  |  |   | (2,328,010 | ) |
| NETCASH USED IN OPERATINGACTIVITIES                                                                      |  |  |                              |   | (13,472,037 | )            |  |  |  |   | (8,309,853 | ) |
| CASHFLOWS FROM INVESTINGACTIVITIES                                                                       |  |  |                              |   |        |              |  |  |  |   |       |   |
| Acquisition ofproperty andequipment                                                                      |  |  |                              |   | (117,938    | )            |  |  |  |   | (83,349    | ) |
| Acquisitionof intangibleassets                                                                           |  |  |                              |   | (111,931    | )            |  |  |  |   | (67,359    | ) |
| Businessacquisitions –  net of cashacquired                                              |  |  |                              |   | —     |              |  |  |  |   | (13,379    | ) |
| NETCASH USED IN INVESTINGACTIVITIES                                                                      |  |  |                              |   | (229,869    | )            |  |  |  |   | (164,087   | ) |
| CASHFLOWS FROM FINANCINGACTIVITIES                                                                       |  |  |                              |   |        |              |  |  |  |   |       |   |
| Repayment of notespayable                                                                                |  |  |                              |   | (13,541,011 | )            |  |  |  |   | (7,588,923 | ) |
| Proceedsfrom notes payable andwarrants                                                                   |  |  |                              |   | 10,855,070  |              |  |  |  |   | 16,232,554 |   |
| Paymentsof obligations under capitalleases                                                               |  |  |                              |   | (1,729      | )            |  |  |  |   | (2,001     | ) |
| Increase inrestrictedcash                                                                                |  |  |                              |   | (94,938     | )            |  |  |  |   | —    |   |
| Issuance ofredeemable convertible preferredstock                                                         |  |  |                              |   | —     |              |  |  |  |   | 2,900,000  |   |
| Paymentsfor costs of stockissuances                                                                      |  |  |                              |   | —     |              |  |  |  |   | (216,023   | ) |
| Issuanceof commonstock                                                                                   |  |  |                              |   | 31,500,000  |              |  |  |  |   | —    |   |
| Paymentsfor costs of stockissuances                                                                      |  |  |                              |   | (2,898,063  | )            |  |  |  |   | —    |   |
| NETCASH PROVIDED BY FINANCINGACTIVITIES                                                                  |  |  |                              |   | 25,819,329  |              |  |  |  |   | 11,325,607 |   |
| EFFECTSOF FOREIGN CURRENCYTRANSLATION                                                                    |  |  |                              |   | 32          |              |  |  |  |   | (1,094     | ) |
| NETINCREASE/(DECREASE) IN CASH AND CASHEQUIVALENTS                                                       |  |  |                              |   | 12,117,455  |              |  |  |  |   | 2,850,573  |   |
| CASHAND CASH EQUIVALENTS – BEGINNING                                                     |  |  |                              |   | 1,392,016   |              |  |  |  |   | 5,676,398  |   |
| CASHAND CASH EQUIVALENTS – ENDING                                                        |  |  |                              | $ | 13,509,471  |              |  |  |  | $ | 8,526,971  |   |
| SUPPLEMENTALDISCLOSURES                                                                                  |  |  |                              |   |        |              |  |  |  |   |       |   |
| Schedule ofnon-cash investing and financingactivities                                                    |  |  |                              |   |        |              |  |  |  |   |       |   |
| Conversion ofredeemable convertible preferred stock, net of fractional shares, byissuance of commonstock |  |  |                              | $ | (28,447,667 | )            |  |  |  | $ | —    |   |
| Issuanceof common stock in initial publicoffering                                                        |  |  |                              | $ | 28,447,667  |              |  |  |  | $ | —    |   |
| Issuanceof common stock in payment of accrueddividends                                                   |  |  |                              | $ | (1,389,765  | )            |  |  |  | $ | —    |   |
| Issuanceof common stock in initial publicoffering                                                        |  |  |                              | $ | 1,389,765   |              |  |  |  | $ | —    |   |
| Conversionof 5% euro denominated convertible subordinated notes byissuance of commonstock                |  |  |                              | $ | (1,663,173  | )            |  |  |  | $ | —    |   |
| Issuanceof common stock in initial publicoffering                                                        |  |  |                              | $ | 1,663,173   |              |  |  |  | $ | —    |   |
| Conversionof 40% of 6% convertible subordinated notes by issuanceof commonstock                          |  |  |                              | $ | (6,000,000  | )            |  |  |  | $ | —    |   |
| Issuanceof common stock in initial publicoffering                                                        |  |  |                              | $ | 6,000,000   |              |  |  |  | $ | —    |   |
| Interestpaid                                                                                             |  |  |                              | $ | 629,063     |              |  |  |  | $ | 490,351    |   |
| Income taxespaid                                                                                         |  |  |                              | $ | —     |              |  |  |  | $ | —    |   |
|                                                                                                          |

Seeaccompanying notes to the condensed consolidated financialstatements.

6

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CASTLE BRANDS INC.AND SUBSIDIARIESNotes to Condensed Consolidated FinancialStatements(Unaudited)

|  |
|--|
|  |  |
|  |

NOTE  1– ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

Basis of Presentation

The accompanying condensed consolidated financial statementsdo not include all of the information and footnote disclosures normallyincluded in financial statements prepared in accordance with the rulesand regulations of the Securities and Exchange Commission and U.S.generally accepted accounting principles and in the opinion ofmanagement, contain all adjustments (which consist of only normalrecurring adjustments) necessary for a fair presentation of suchfinancial information. Results of operations for interim periods arenot necessarily indicative of those to be achieved for full fiscalyears. The Condensed Consolidated Balance Sheet as of March 31, 2006 isderived from the March 31, 2006 audited financial statements. Thesecondensed consolidated financial statements should be read inconjunction with the Company's audited consolidated financialstatements for the fiscal year ended March 31, 2006 included in theCompany's Annual Report on Form 10-K filed with the Securitiesand Exchange Commission.

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | A.  | Description of business and business combination– Castle Brands Inc. is the successor to Great Spirits Company,LLC, a Delaware limited liability company(‘‘GSC’’). GSC was formed in February 1998. InMay 2003, Great Spirits (Ireland) Limited(‘‘GSI’’), a wholly owned subsidiary of GSC,began operations in Ireland to market GSC's productsinternationally. GSI has been an inactive entity since December 2003and was dissolved as of September 30, 2006. A loss on F/X of $17,659was realized upon the dissolution. In July 2003, GSRWB, Inc. (renamedCastle Brands Inc.) and its wholly owned subsidiary, Great SpiritsCorp. (renamed Castle Brands (USA) Corp.)(‘‘CB-USA’’), were formed under the laws ofDelaware in contemplation of a pending acquisition. On December1, 2003, Castle Brands Inc. acquired The Roaring Water Bay SpiritsGroup Limited and The Roaring Water Bay Spirits Marketing and SalesCompany Limited and their related entities (collectively,‘‘Roaring Water Bay’’). The acquisition hasbeen accounted for under purchase accounting. Simultaneously, GSC wasmerged into CB-USA, and Castle Brands Inc. issued stock to GSC'sshareholders in exchange for their shares of GSC. Subsequent to theacquisition, The Roaring Water Bay Spirits Group Limited was renamedCastle Brands Spirits Group Limited (‘‘CBIreland’’) and The Roaring Water Bay Spirits Marketing andSales Company Limited was renamed Castle Brands Spirits Marketing andSales Company Limited (‘‘CB-UK’’). |

In February  2005, Castle Brands Inc. acquired60% of the shares of Gosling-Castle Partners Inc.(‘‘GCP’’), which holds the worldwidedistribution rights (excluding Bermuda) to Gosling's rum andrelated products.

As used herein, the‘‘Company’’ refers to Castle Brands Inc. and,where appropriate, it also refers collectively to Castle Brands Inc.and its direct and indirect subsidiaries, including its majority ownedGCP subsidiary.

|  |           |                                                                                                                                                                                                                 |
|--|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | B.   | Brands –Vodka  —  Boru vodka, is an ultra-pure, quintupledistilled and specially filtered premium vodka. Boru is produced inIreland and has three flavor extensions (citrus, orange andcrazzberry). |

 Rum  —Gosling's rums, a family of premium rums with a 200-year history,for which the Company is, through its export venture GCP, the exclusivemarketer outside of Bermuda, including the award-winningGosling's Black Seal rum; and Sea Wynde, a premium rum developedand introduced by the Company in 2001.

 IrishWhiskey  —  Knappogue Castle Whiskey, a vintage-datedpremium single-malt Irish whiskey; Knappogue Castle 1951, a purepot-still whiskey that has been aged for 36  years; 

7

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and the Clontarf Irish whiskeys, a family ofpremium Irish whiskeys, available in single malt, reserve and classicpure grain versions.

Liqueurs/Cordials—  Brady's Irish cream, a premium Irish creamliqueur; Celtic Crossing, a premium Irish liqueur; and, pursuant to anexclusive U.S.  marketing arrangement, Pallini Limoncello,Raspicello and Peachello premium Italian liqueurs.

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | C.  | Principles of consolidation –  The consolidated financial statements include theaccounts of Castle Brands Inc., its wholly-owned subsidiaries, CB-USAand its wholly-owned foreign subsidiaries, CB Ireland and CB-UK, andits majority owned Gosling-Castle Partners, Inc. with adjustments forincome or loss allocated based upon percentage of ownership. Theaccounts of the subsidiaries have been included as of the date ofacquisition. All significant intercompany transactions and balanceshave been eliminated. |

|  |          |                                                                                                                                                                                                                                                                                |
|--|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | D.  | Organization andoperations – The Company is principally engaged in themanufacture, marketing and sale of fine spirit brands of vodka, Irishwhiskey, rums and liqueurs (the ‘‘products’’)in the United States, Canada, Europe, and the Caribbean. |

|  |          |                                                                                                                                                                   |
|--|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | E.  | Cash equivalents – The Companyconsiders all highly liquid instruments with a maturity at date ofacquisition of three-months or less to be cash equivalents. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | F.   | Trade accounts receivable –The Company records trade accounts receivable at net realizable value.This value includes an appropriate allowance for estimateduncollectible accounts to reflect anticipated losses on the tradeaccounts receivable balances. The Company calculates this allowancebased on its history of write-offs, level of past due accounts based oncontractual terms of the receivables and its relationships with andeconomic status of the Company's customers. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | G.  | Revenue recognition – Revenue fromproduct sales is recognized when the product is shipped to a customer(generally a distributor or a control state), title and risk of losshas passed to the customer in accordance with the terms of sale (FOBshipping point or FOB destination), and collection is reasonablyassured. Revenue is not recognized on shipments to control states inthe United States until such time as product is sold through to theretail channel. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | H.   | Inventories –Inventories, which comprise distilled spirits, raw materials (bulkspirits, bottles, labels and caps), packaging and finished goods, isvalued at the lower of cost or market, using the weighted average costmethod. The Company assesses the valuation of its inventories andreduces the carrying value of those inventories that are obsolete or inexcess of the Company's forecasted usage to their estimated netrealizable value. The Company estimates the net realizable value ofsuch inventories based on analyses and assumptions including, but notlimited to, historical usage, expected future demand and marketrequirements. Reductions to the carrying value of inventories arerecorded in cost of goods sold. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | I.  | Equipment– Equipment consists of office equipment, computers andsoftware and furniture and fixtures. When assets are retired orotherwise disposed of, the cost and related depreciation is removedfrom the accounts, and any resulting gain or loss is recognized in thestatement of operations. Equipment is depreciated using thestraight-line method over the estimated useful lives of the assetsranging from three to five years. Depreciation expense for the threemonths ended September 30, 2006 and 2005 totaled $41,840 and $29,893,respectively and was $78,286 and $57,748 for the six months endedSeptember 30, 2006 and 2005, respectively. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | J.  | Goodwill and other intangible assets–  Goodwill represents the excess of purchase priceincluding related costs over the value assigned to the net tangible andidentifiable intangible assets of businesses acquired. As of September30, 2006 and March  31, 2006, goodwill and other indefinite livedintangible assets that arose from acquisitions were $11.6million and $11.6  million, respectively. Goodwill and otherintangible assets with indefinite lives are not amortized, but insteadare tested for impairment annually, or more frequently if circumstancesindicate a possible impairment may exist. The Company evaluates therecoverability of |

8

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|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | goodwill and indefinite lived intangibleassets using a two-step impairment test approach at the reporting unitlevel. In the first step the fair value for the reporting unit iscompared to its book value including goodwill. In the case that thefair value of the reporting unit is less than the book value, a secondstep is performed which compares the implied fair value of thereporting unit's goodwill to the book value of the goodwill. Thefair value for the goodwill is determined based on the differencebetween the fair value of the reporting unit and the net fair value ofthe identifiable assets and liabilities of such reporting unit. If thefair value of the goodwill is less than the book value, the differenceis recognized as an impairment. Intangible assets with estimable usefullives are amortized over their respective estimated useful lives to theestimated residual values and reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable. The Company performed its annual impairment assessment onlong-lived assets, including intangible assets and goodwill. TheCompany concluded that no impairment existed at March 31, 2006.Amortization expense for the three months ended September 30, 2006 and2005 totaled $203,954 and $190,450, respectively and was $402,002 and$384,080 for the six months ended September 30, 2006 and 2005,respectively. |

On September 1, 2006, the Companydelivered notice to Comans Wholesale Limited that it was terminatingits distribution agreement. As a result of the delivery of the notice,the distribution agreement will terminate, as provided for by itsterms, as of September 15, 2007. The Company has adjusted the estimateduseful life of the underlying intangible asset to agree to thetermination date. The change in estimated useful life resulted in anadditional $8,000 in amortization expense for the quarter endedSeptember 30, 2006.

|  |          |                                                                                                                                                                                                                                                     |
|--|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | K.  | Deferred registrationcosts –  The costs associated with the Company'sinitial public offering were initially recorded as deferredregistration costs then charged to additional paid in capital at theclose of the offering on April  10, 2006. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | L.  | Shipping and handling –  The Companyreflects as inventory costs freight-in and related external handlingcharges relating to the purchase of raw materials and finished goods.These costs are charged to cost of sales at the time the underlyingproduct is sold. The Company also incurs shipping costs in connectionwith its various marketing activities, including the shipment of pointof sale materials to the Company's regional sales managers andcustomers, and the costs of shipping product in connection with itsvarious marketing programs and promotions. These shipping charges areincluded in selling expense. Shipping charges included in sellingexpense for the three months ended September 30, 2006 and 2005 amountedto $41,968 and $73,020, respectively and were $179,129 and $165,173 forthe six months ended September 30, 2006 and 2005, respectively. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | M.   | Excise taxes and duty –  Excise taxes and duty are computed atstandard rates based on alcohol proof per gallon/liter and are paidafter finished goods are imported into the United States and GreatBritain and then transferred out of ‘‘bond.’’Excise taxes and duty are recorded to inventory as a component of thecost of the underlying finished goods. When the underlying products aresold ‘‘ex warehouse’’ the sales price reflectsthe taxes paid and the inventoried excise taxes and duties are chargedto cost of sales. During the three-month and six-month periods endedSeptember 30, 2006 and 2005, the captions for the Company'srevenues and cost of sales included the amounts of excise tax andduties presented in the table below: |

|             |  |  |                                 |   |           |                               |  |  |      |   |         |      |  |  |  |   |           |  |  |  |  |   |           |  |
|-------------|--|--|---------------------------------|---|-----------|-------------------------------|--|--|------|---|---------|------|--|--|--|---|-----------|--|--|--|--|---|-----------|--|
|        |  |  | Three-monthsended September 30, |   |           | Six-months ended September30, |
|        |  |  | 2006                            |   |           | 2005                          |  |  | 2006 |   |         | 2005 |
| Sales,net   |  |  |                                 | $ | 1,488,077 |                               |  |  |      | $ | 902,576 |      |  |  |  | $ | 2,622,016 |  |  |  |  | $ | 1,894,757 |  |
| CostofSales |  |  |                                 | $ | 1,488,077 |                               |  |  |      | $ | 902,576 |      |  |  |  | $ | 2,622,016 |  |  |  |  | $ | 1,894,757 |  |
|             |

|  |          |                                                                                                                                                                                                                                                                                                                                                                            |
|--|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | N.  | Distributor charges and promotional goods – TheCompany incurs charges from its distributors for a variety oftransactions and services rendered by the distributor, includingproduct depletions, product samples for various promotional purposes,in-store tastings and training where legal, and local advertising wherelegal. Such charges are reflected as selling |

9

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|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | expense as incurred. In addition, for certainof its distributors, the Company has entered into arrangements wherebythe purchase of a particular product or products by a distributor isaccompanied by a percentage of the sale being composed of promotionalgoods or as a predetermined discount percentage of dollars off invoice.In such cases, the cost of the promotional goods is charged to cost ofsales and dollars off invoice are a reduction to revenue. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | O.   | Foreign currency translation–  The functional currency for the Company's foreignoperations is the euro in Ireland, the British pound in the UnitedKingdom, and the Canadian dollar in Canada. The translation from theapplicable foreign currencies to U.S.  dollars is performed forbalance sheet accounts using current exchange rates in effect at thebalance sheet date and for revenue and expense accounts using aweighted average exchange rate during the period. The resultingtranslation adjustments are recorded as a component of othercomprehensive income. Gains or losses resulting from foreign currencytransactions are shown as a separate line item in accompanyingcondensed consolidated statements of operations. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | P.  | Fair value of financial instruments–  SFAS  No.  107, ‘‘DisclosuresAbout Fair Value of Financial Instruments,’’ defines thefair value of a financial instrument as the amount at which theinstrument could be exchanged in a current transaction between willingparties and requires disclosure of the fair value of certain financialinstruments. The Company believes that there is no material differencebetween the fair value and the reported amounts of financialinstruments in the balance sheets due to the short term maturity ofthese instruments, or with respect to the debt, as compared to thecurrent borrowing rates available to the Company. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | Q.  | Income taxes  –  Under the asset andliability method of SFAS  No.  109 ‘‘Accountingfor Income Taxes,’’ deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax basis. A valuation allowance isprovided to the extent a deferred tax asset is not consideredrecoverable. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | R.   | Stock-basedcompensation – Effective April  1, 2006, the Companybegan recording compensation expense associated with stock options andother forms of equity compensation in accordance with Statement ofFinancial Accounting Standards No.  123 (revised 2004),Share-Based Payment (SFAS  123R), as interpreted by SEC StaffAccounting Bulletin  No.  107. Prior to April  1,2006, the Company accounted for stock options according to theprovisions of Accounting Principles Board Opinion No.  25,Accounting for Stock Issued to Employees (APB  25), andrelated interpretations, and therefore no related compensation expensewas recorded for awards granted with no intrinsic value. The Companyadopted the modified prospective transition method provided for underSFAS 123R, and consequently, had not retroactively adjusted resultsfrom prior periods. Under this transition method, compensation costassociated with stock options recognized in the three-month and sixmonth periods ended September 30, 2006 includes: 1)  amortizationrelated to the remaining unvested portion of all stock option awardsgranted prior to April  1, 2006 over the requisite service periodbased on the grant-date fair value estimated in accordance with theoriginal provisions of SFAS  123, Accounting for Stock-BasedCompensation ; and 2) amortization related to all stock optionawards granted on or subsequent to April  1, 2006, based on thegrant-date fair value estimated in accordance with the provisions ofSFAS  123R. A compensation charge is recorded when it is probablethat performance or service conditions will be satisfied. Theprobability of vesting is updated annually and compensation is adjustedvia a cumulative catch-up adjustment or prospectively depending uponthe nature of the change. |

As a result of the adoption ofSFAS  123R, incremental compensation expense for the three-monthand six-month periods ended September 30, 2006 amounted to $276,921 and$771,415, respectively, of which $136,603 and $221,472 is included inselling expense, respectively, and $140,318 and $549,943 in general andadministrative expense, respectively, in 

10

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the accompanying condensed consolidatedstatements of operations. At September 30, 2006 total unrecognizedcompensation cost amounted to approximately $3,339,206, representing921,433 unvested options.

For stock options grantedprior to the adoption of SFAS  123R, if compensation expense forthe Company's stock option plan had been determined based uponestimated fair values at the grant dates in accordance with SFASNo.  123, the Company's pro forma net loss and pro formabasic and diluted net loss per common share would have been asfollows:

|                                                         |  |  |                                               |   |            |                                            |  |  |  |   |            |   |
|---------------------------------------------------------|--|--|-----------------------------------------------|---|------------|--------------------------------------------|--|--|--|---|------------|---|
|                                                    |  |  | Forthe three-months ended September  30, 2005 |   |            | For thesix-months ended September  30,2005 |
| Net loss attributable tocommon stockholders, asreported |  |  |                                               | $ | (3,236,923 | )                                          |  |  |  | $ | (6,673,605 | ) |
| Stock-basedcompensation expensedetermined               |  |  |                                               |   | (60,966    | )                                          |  |  |  |   | (171,419   | ) |
| Proforma net loss attributable to commonstockholders    |  |  |                                               | $ | (3,297,889 | )                                          |  |  |  | $ | (6,845,024 | ) |
| Lossper share: Basic and diluted  – asreported    |  |  |                                               | $ | (1.04      | )                                          |  |  |  | $ | (2.15      | ) |
| Basicand diluted  – proforma                      |  |  |                                               | $ | (1.06      | )                                          |  |  |  | $ | (2.20      | ) |
|                                                         |

|  |          |                                                                                                                                                                          |
|--|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | S.  | Research and development costs  –The costs of research, development and product improvement are chargedto expense as incurred and are included in selling expense. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                               |
|--|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | T.  | Advertising  – Advertisingcosts are expensed when the advertising first appears in its respectivemedium. Advertising expense, which is included in selling expense, forthe three months ended September 30, 2006 and 2005 was $1,462,782 and$935,190, respectively and was $2,528,900 and $2,003,765 for the sixmonths ended September 30, 2006 and 2005, respectively. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                     |
|--|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | U.   | Impairment of long-lived assets–  The Company periodically reviews whether changes haveoccurred that would require revisions to the carrying amounts of itslong-lived assets. When the sum of the undiscounted expected futurecash flows is less than the carrying amount of the asset, an impairmentloss is recognized based on the fair value of the asset. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | V.  | Use of estimates  – Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates. Estimates include theaccounting for items such as evaluating annual impairment tests, fairvalue of put warrants, derivative instruments and other equityissuances, allowance for doubtful accounts, depreciation, amortizationand expense accruals. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | W.  | Recent accountingpronouncements  –  In September  2006, theSecurities and Exchange Commission (SEC)  issued Staff AccountingBulletin 108, ‘‘Considering the Effects on Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements,’’ (‘‘SAB 108’’). SAB108 requires registrants to quantify errors using both the incomestatement method (i.e. iron curtain method) and the rollover method andrequires adjustment if either method indicates a material error. If acorrection in the current year relating to prior year errors ismaterial to the current year, then the prior year financial informationneeds to be corrected. A correction to the prior year results that arenot material to those years, would not require a‘‘restatement process’’ where prior financialswould be amended. SAB 108 is effective for fiscal years ending afterNovember  15, 2006. The Company does not anticipate that SAB 108will have a material effect on its financial position, results ofoperations or cash flows. |

In September 2006, the FASBissued SFAS No. 157, ‘‘Fair ValueMeasurements,’’ to define fair value, establish a frameworkfor measuring fair value in accordance with generally 

11

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accepted accounting principles, and expanddisclosures about fair value measurements. SFAS No. 157 will beeffective for fiscal years beginning after November 15, 2007, thebeginning of the Company's 2008 fiscal year. The Company isassessing the impact the adoption of SFAS No. 157 will have on theCompany's financial position and results of operations.

NOTE  2  – BASIC AND DILUTED NET LOSSPER COMMON SHARE

 Basic net loss per commonshare is computed by dividing net loss by the weighted average numberof common shares outstanding during the period. Diluted net loss percommon share is computed giving effect to all dilutive potential commonshares that were outstanding during the period. Diluted potentialcommon shares consist of incremental shares issuable upon exercise ofstock options and warrants, contingent conversion of debentures andconvertible preferred stock outstanding. In computing diluted net lossper share for the three-month and six-month periods ended September 30,2006 and 2005, no adjustment has been made to the weighted averageoutstanding common shares as the assumed exercise of outstandingoptions and warrants and the assumed conversion of preferred stock andconvertible debentures is anti-dilutive.

 Potential common shares not included in calculatingdiluted net loss per share are as follows:

|                           |  |  |              |  |           |      |  |  |  |  |           |  |
|---------------------------|--|--|--------------|--|-----------|------|--|--|--|--|-----------|--|
|                      |  |  | September30, |
|                      |  |  | 2006         |  |           | 2005 |
| Stockoptions              |  |  |              |  | 1,328,500 |      |  |  |  |  | 915,500   |  |
| Stockwarrants             |  |  |              |  | 598,618   |      |  |  |  |  | 598,618   |  |
| Convertibledebentures     |  |  |              |  | 1,125,000 |      |  |  |  |  | 2,245,505 |  |
| Convertiblepreferredstock |  |  |              |  | —   |      |  |  |  |  | 4,089,465 |  |
| Total                     |  |  |              |  | 3,052,118 |      |  |  |  |  | 7,849,088 |  |
|                           |

NOTE3  – INVENTORIES

|               |  |  |              |   |           |          |  |  |  |   |           |  |
|---------------|--|--|--------------|---|-----------|----------|--|--|--|---|-----------|--|
|          |  |  | September30, |   |           | March31, |
|          |  |  | 2006         |   |           | 2006     |
| Rawmaterials  |  |  |              | $ | 1,622,458 |          |  |  |  | $ | 1,339,697 |  |
| Finishedgoods |  |  |              |   | 7,154,817 |          |  |  |  |   | 5,333,538 |  |
| Total         |  |  |              | $ | 8,777,275 |          |  |  |  | $ | 6,673,235 |  |
|               |

 Asof September 30, and March 31, 2006, 100% of the raw materialsand 16.6% and 23.5%, respectively, of finished goods werelocated outside of the United States.

 Inventoriesare stated at the lower of average cost or market. The Company assessesthe valuation of its inventories and reduces the carrying value ofthose inventories that are obsolete or in excess of the Company'sforecasted usage to their estimated net realizable value. The Companyestimates the net realizable value of such inventories based onanalyses and assumptions including, but not limited to, historicalusage, expected future demand and market requirements. Reductions tothe carrying value of inventories are recorded in cost of goodssold.

NOTE  4  – INVESTMENTS ANDACQUISITIONS

Investment in Gosling-CastlePartners Inc.

In February 2005, the Company enteredinto a stock subscription agreement for 60% of the stock ofGosling Partners Inc., whose name was subsequently changed toGosling-Castle Partners Inc. GCP had no operations prior to the Companyentering into the stock subscription agreement. The originalshareholders of GCP were E. Malcolm Gosling and Gosling's Limitedand after the Company's purchase of 60% of the ownershipinterest, the remaining ownership interests were owned 20% byeach of E. Malcolm Gosling and Gosling's 

12

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Limited. CB-USA had previously entered intoan exclusive distribution agreement with Gosling's Export(Bermuda) Limited (‘‘GXB’’) to distributeGosling's rum in the United States. Gosling Partners Inc. hadoriginally been formed to acquire, and had acquired prior to theCompany's investment in GCP, the following:

|  |              |                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------|
|  | •  | global distribution rights (excludingBermuda) to the Gosling's portfolio of products; |

|  |              |                                                                                  |
|--|--------------|----------------------------------------------------------------------------------|
|  | •  | appointment as the exclusive authorizedglobal exporter for the GXB product line; |

|  |              |                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------|
|  | •  | an exclusive license for the use ofGXB's global trademarks for its brand portfolio; |

The Company agreed to pay GCP $5,000,000 for its 60%interest: $100,000 in cash and issuance of a promissory note of$4,900,000 to GCP for the balance owed. This promissory note is payablein five installments as follows:

$1,025,000 onApril  1, 2005

$1,125,000 on October  1,2005

$1,000,000 on April  1, 2006

$1,000,000 on October  1, 2006; and

$750,000 on April  1, 2007

Effectivewith the payment of the second installment on October  1, 2005,this promissory note began accruing interest on the unpaid principalamount at the rate of 4%  per annum until the note isrepaid in full. As of September 30, and June  30, 2006, $90,000and $68,667, respectively, in interest on this note has been accruedand remains unpaid.

The global distribution agreementcommenced on April  1, 2005 and has a 15  year term. It isrenewable for additional 15  year terms as long as GCP meetscertain case sale targets during the initial term as set forth in theagreement. (See Note  17  —  Gosling-CastlePartners Inc. Export Agreement with Gosling's Export (Bermuda)Limited). The Company ascribed the entire purchase of $5,000,000 to theGosling global distribution agreement described above. In conjunctionwith this transaction the Company recorded a deferred tax liability of$2,222,222 to reflect the difference between the adjusted book valueand tax basis. This deferred tax liability was recorded as an increaseto the value of the distribution agreement and is included inintangible assets.

NOTE  5  – RESTRICTED CASH

In connection with the creditfacilities as described in Note  7, personal guarantees of thetwo former managing directors of CB Ireland and CB-UK in the amount of€158,717 were cancelled and replaced with a deposit ofcash collateral of €375,000, or $475,814 and $362,293 (astranslated at the exchange rate in effect on September 30, and March31, 2006, respectively).

NOTE  6  – OVERDRAFT ACCOUNTS

CB Ireland and CB-UKmaintain overdraft coverage with a financial institution in Ireland ofup to €400,000 ($502,000) and £20,000 ($36,300),respectively. Overdraft balances included in notes payable for theperiods presented totaled $524,447 and $98,327 at September 30 andMarch 31, 2006, respectively.

13

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NOTE  7  – SENIOR NOTES PAYABLE, NOTES  PAYABLE AND CAPITALLEASE

|                                       |  |  |              |   |            |          |  |  |  |   |            |  |
|---------------------------------------|--|--|--------------|---|------------|----------|--|--|--|---|------------|--|
|                                  |  |  | September30, |   |            | March31, |
|                                  |  |  | 2006         |   |            | 2006     |
| Notespayable consist of thefollowing: |  |  |              |   |       |          |  |  |  |   |       |  |
| Revolving creditfacilities (A)        |  |  |              | $ | 869,025    |          |  |  |  | $ | 332,409    |  |
| Revolvingcredit facilities (B)        |  |  |              |   | 66,630     |          |  |  |  |   | 166,283    |  |
| Subordinatednotes (C)                 |  |  |              |   | —    |          |  |  |  |   | 307,938    |  |
| Seniornotes (D)                       |  |  |              |   | 4,605,088  |          |  |  |  |   | 4,594,791  |  |
| Subordinatedconvertible notes (E)     |  |  |              |   | 9,000,000  |          |  |  |  |   | 15,000,000 |  |
| Non-interestbearing notes (F)         |  |  |              |   | 625,000    |          |  |  |  |   | 1,210,162  |  |
| 9%Promissory note (G)                 |  |  |              |   | —    |          |  |  |  |   | 2,000,000  |  |
|                                  |  |  |              |   | 15,165,743 |          |  |  |  |   | 23,611,583 |  |
| Capitalleases                         |  |  |              |   | 10,666     |          |  |  |  |   | 12,395     |  |
| Total                                 |  |  |              | $ | 15,176,409 |          |  |  |  | $ | 23,623,978 |  |
|                                       |

|  |
|--|
|  |  |  |
|  |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (A)  | TheCompany has arranged revolving credit facilities aggregatingapproximately €1,412,303 ($1,791,930) with a lender forworking capital purposes. These facilities are payable on demand,continue until terminated by either party on not less than three-monthsprior written notice, and call for interest at rates ranging from primeplus 3% to 7.85%. The Company also maintains a€190,000 ($241,072) term note with the same lender. Thenote carries an interest rate of 5.2%, is payable on demand andsubject to annual review and renewal by the lender, and calls formonthly payments of principal and interest of €6,377through 2007. |

|  |           |                                                                                                                                                                                                                                                                                     |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (B)  | The Company hasarranged revolving credit facilities aggregating approximately£242,000 ($453,236). The facilities, which are payable on demandand subject to annual review and renewal by the lender, call forinterest at rates ranging from prime plus 2% to prime plus2.25%. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (C)  | In connectionwith the Company's acquisition of CB Ireland, the Company issuedto the former minority shareholders of CB Ireland €255,000($307,937) of subordinated notes, which were set to mature onJuly  11, 2007. The notes accrued interest at the rate of5.7%  per annum with the aggregate interest payable beinglimited to €51,000 ($61,588). All outstanding principaland accrued interest on these notes in the amount of€290,328 ($350,600) were paid in April 2006. |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (D)  | On June  9, September 28 andOctober  13, 2004, the Company issued $3,555,000, $1,005,000 and$100,000, respectively, of senior notes secured by accounts receivableand inventories of CB-USA. As issued, these senior notes bore aninterest rate of 8%, payable semi-annually on November30th and May  31st, and matured on May  31, 2007. EffectiveAugust  15, 2005, the terms of these notes were modified with theconsent of the note holders to mature on May  31, 2009 inexchange for an interest rate adjustment to 9%. In addition,each holder of $1,000 of senior notes received warrants to purchase25  shares of the Company's common stock at $8.00 pershare. At September 30, 2006, there were 116,500 warrants issued andoutstanding in conjunction with issuance of senior notes. Thesewarrants have been valued at $129,195 in the aggregate and have beentreated as a discount to the notes payable. Interest expense pertainingto this discount is recognized, and the notes payable accreted, overthe adjusted term of the notes with a maturity date of May 2009. |

|  |           |                                                                                                                                                                                                                                                                                                                                                  |
|--|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (E)  | On March  1, 2005, theCompany entered into an agreement to issue up to $10,000,000 ofsubordinated convertible notes to a single investor. In June 2005, theCompany issued the remaining $5,000,000 of convertible notes. Thenotes, which mature five years from the date of issuance, bear interestat the rate of 6%  per annum which is payable |

14

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|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | quarterly. The Company has the option for thefirst two years from the date of issuance to pay interest in kind atthe rate of 7.5%  per annum. Through September  30,2006, the Company has accrued and paid all interest in cash at the6% percent rate pursuant to the terms of the note and has themeans and intent to continue to do so. The notes may be converted intocommon stock at $8  per share at any time, and shall be convertedat the option of the holder or automatically after the third year fromthe date of issuance on the 30th  consecutive trading day onwhich the closing price of the common stock is no less than $20per share. 40% of the notes converted automatically into commonstock upon the completion of the Company's initial publicoffering on April 10, 2006, at a price of $7.00  per share. |

In July 2005, the Company entered into an agreement with aninvestor to issue $5,000,000 of subordinated convertible notes. Theclosing was completed in August 2005. The notes, which mature fiveyears from the date of issuance, bear interest at the rate of6%  per annum. The Company has the option for the firsttwo years from the date of issuance to pay interest in kind at the rateof 7.5%  per annum. Through September  30, 2006, theCompany has accrued and paid all interest in cash at the 6%percent rate pursuant to the terms of the note and has the means andintent to continue to do so. The notes may be converted into commonstock at $8  per share at any time, and shall be convertedautomatically after the third year from the date of issuance on the30th  consecutive trading day on which the closing price of thecommon stock is no less than $20  per share. 40% of thenotes converted automatically into common stock upon the completion ofthe Company's initial public offering on April 10, 2006, at aprice of $7.00  per share.

In July 2005, theoriginal $10,000,000 of convertible notes was amended to be equivalentin terms to those of the new $5,000,000 investor. The automaticconversion of 40% of the combined $15,000,000 of convertiblenotes at the $7.00 conversion price upon the closing of the initialpublic offering resulted in the issuance of 107,143 more shares thanwould have been issued at the $8.00 conversion price.

|  |           |                                                                                                                                                                                                                                                                                                                                                                                |
|--|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (F)  | On February  14, 2005, theCompany, through its interest in GCP, entered into an agreement withGosling's Export (Bermuda) Limited(‘‘GXB’’) to acquire the global distributionrights (excluding Bermuda) to GXB's portfolio of products inexchange for $2,500,000 in non-interest bearing notes due in four equalsemi-annual installments (See Note  4). |

|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (G)  | On February  17, 2006, theCompany entered into a $5  million credit agreement with aninvestment trust which is a stockholder and controlled by one of theCompany's directors. On February  17, 2006, the Companyborrowed $2.0  million under this credit agreement and issued apromissory note bearing interest at the rate of 9%  perannum, payable at maturity. In addition, the Company paid a $100,000facility fee upon receipt of these funds. The Company repaid alloutstanding principal and accrued interest under this note in theamount of $2,026,000 in April 2006. |

The Companyfinanced the purchase of certain office equipment totaling $17,821included in equipment. The leases call for monthly payments of $337 inprincipal and interest at the rate of 5%  per annum, to bepaid through July 2009. As of September 30, and March 31, 2006, theCompany owed $10,666 and $12,395 respectively, under this lease. As ofSeptember 30, 2006, future minimum lease payments equal $11,128including interest.

15

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Principal payments due over thenext five years for the above listed notes payable and capital leaseare due as follows (as translated at the exchange rate in effect onSeptember 30,2006):

|                    |  |  |                                   |   |            |  |
|--------------------|--|--|-----------------------------------|---|------------|--|
|               |  |  | Forthe Period ending September30, |
| 2007               |  |  |                                   | $ | 1,563,941  |  |
| 2008               |  |  |                                   |   | 4,084      |  |
| 2009               |  |  |                                   |   | 3,296      |  |
| 2010               |  |  |                                   |   | 7,605,088  |  |
| 2011               |  |  |                                   |   | 6,000,000  |  |
| Total              |  |  |                                   |   | 15,176,409 |  |
| Lesscurrentportion |  |  |                                   |   | 1,563,941  |  |
| Noncurrentportion  |  |  |                                   | $ | 13,612,468 |  |
|                    |

NOTE8  – ROARING WATER BAY NOTESPAYABLE

In connection with the Company'sacquisition of Roaring Water Bay in December 2003 (see Note1.A), €444,389 ($576,372) of subordinated notes wereissued by CB Ireland in substitution of subordinated notes of the sameamount originally issued on April  1, 2001 by CB Ireland. Theoriginal notes had a maturity date of April  1, 2006 and werenon- interest bearing. The replacement notes were non-interest bearingand the terms called for annual principal payments of€177,743, €133,323 and €133,323on December  1, 2004, 2005 and 2006, respectively. Interest of6% was imputed on these notes at the date of acquisition of$56,653. The note discount was accreted monthly by a charge to interestexpense. For the three-months ended September 30, 2006 and 2005, theCompany recorded interest expense on these notes of $0 and $4,678,respectively. For the six months ended September 30, 2006 and 2005, theCompany recorded interest expense on these notes of $11,500 and $9,510respectively.

The remaining principal amounts due onthese notes in the aggregate amount of $159,961 (as translated at theexchange rate in effect on April 20, 2006)  were repaid by theCompany in April 2006.

In connection with theacquisition of Roaring Water Bay (see Note  1.A) in December2003, the former principal shareholders received€1,374,750 of convertible subordinated notes in partialconsideration for their shares in CB Ireland and CB-UK. These noteswere convertible into common shares of the Company at the currentconversion price of €5.22, which was subject to adjustmentfrom time to time as set forth in the note agreement. These convertiblenotes were to mature on December  1, 2006 and had an interestrate of 5% payable quarterly on March  31st, June30th, September  30th and December  31st. As ofMarch  31, 2006, the Company was indebted in the amount of$1,660,148 on the notes (as translated at the exchange rate in effecton March  31, 2006). These notes converted into 263,362shares of common stock upon the closing of the initial public offeringand $20,726 of accrued interest was paid in April 2006.

NOTE  9  – COMMON STOCK

At March  31, 2006, the Company had 3,106,666 commonshares outstanding.

 On April  5, 2006, theSecurities and Exchange Commission declared effective theCompany's registration statement on Form  S-1 (FileNo.  333-128676) with respect to the Company's initialpublic offering. The initial public offering commenced on April6, 2006 and terminated after all of the registered securities, exceptfor the securities issuable pursuant to the over-allotment option, hadbeen sold. The underwriters in the offering were Oppenheimer& Co. Inc., ThinkEquity Partners LLC and Ladenburg Thalmann& Co. Inc. On April  10, 2006, 3,500,000  shares ofcommon stock were sold on the Company's behalf at an initialpublic 

16

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offering price of $9.00  per share.The Company registered the shares of its common stock in the initialpublic offering under the Securities Act of 1933, as amended. TheCompany's registered shares are currently being traded on theAmerican Stock Exchange under the ticker symbol ROX.

 Net proceeds to the company after payment of issuancecosts not already paid as of April  10, 2006 were $26,533,652,determined as follows:

|                                          |  |  |  |   |            |  |
|------------------------------------------|--|--|--|---|------------|--|
| Aggregateoffering proceeds to theCompany |  |  |  | $ | 31,500,000 |  |
| Underwritingdiscounts and commissions    |  |  |  |   | 2,205,000  |  |
| Otherfees andexpenses                    |  |  |  |   | 2,761,348  |  |
| Totalexpenses                            |  |  |  |   | 4,966,348  |  |
| Netproceeds to thecompany                |  |  |  | $ | 26,533,652 |  |
|                                          |

TheCompany has received all final invoices and adjustments incurred inconnection with its initial public offering and has paid all balancesin full.

 In addition, certain transactionsoccurred at the time of the initial public offering and were settledfrom the net proceeds of such offering:

|  |              |                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The conversion of all of theCompany's outstanding Series  A convertible preferred stockinto 535,715  shares of common stock; |

|  |              |                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The conversion of all of theCompany's outstanding Series  B convertible preferred stockinto 200,000  shares of common stock; |

|  |              |                                                                                                                                |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The conversion of all of theCompany's outstanding Series  C convertible preferred stockinto 3,353,748  shares of common stock; |

|  |              |                                                                                                                                 |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------|
|  | •  | 193,107  shares of commonstock were issued in payment of all of the dividends accrued onpreferred stock through April  9, 2006; |

|  |              |                                                                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | All of the€1,374,750 ($1,660,148) principal amount of theCompany's 5% euro denominated convertible subordinatednotes was converted into 263,362  shares of common stock; |

|  |              |                                                                                                                                                   |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | $6.0  million (40%)of the $15.0  million principal amount of the Company's6%  convertible notes was converted into 857,143shares of common stock; |

|  |              |                                                                                                                                                                 |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Unamortized deferred financingcosts incurred in connection with the $6.0  million of6%  convertible notes referred to above were recognized asinterest expense; |

|  |              |                                                            |
|--|--------------|------------------------------------------------------------|
|  | •  | €255,000 ($307,937)of subordinated notes were repaid; |

|  |              |                                                                                                                                                                                                                                                            |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The balance of non-interestbearing shareholder notes payable, including $13,888 of aggregateimputed interest on the original notes, from net offering proceeds($159,963), adjusted for change in foreign exchange rate at paymentdate ($1,038) was repaid; |

|  |              |                                                                                                                                                              |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | $2,005,000 of borrowings underthe February 2006 credit facility (including $5,000 of interest accruedfrom April  1, 2006 through April  10, 2006) wasrepaid; |

|  |              |                                           |
|--|--------------|-------------------------------------------|
|  | •  | $91,222 of accruedinterest was paid;  and |

|  |              |                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------|
|  | •  | $204,952 of all accrueddividends on the preferred membership units of the predecessor company,Great Spirits, LLC was paid. |

At September 30, 2006, theCompany had 12,009,741 common shares outstanding.

17

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NOTE  10  – REDEEMABLE CONVERTIBLE PREFERRED STOCK

TheCompany had convertible preferred stock outstanding, asfollows:

|                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |              |   |            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--------------|---|------------|---|
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | March31,2006 |
| Description                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |         |
| ConvertiblePreferred Stock, Series  A, $1  par value, 550,000shares authorized, 535,715  shares issued and outstanding; cashdividends at 5%, or accrued dividends at 7% atCompany's option, paid semi-annually; 20% redemption peryear commencing with sixth anniversary of issuance, automaticconversion to common stock at conversion price of $7  per shareupon initial public offering of $10  million ormore                 |  |  |              | $ | 3,750,005  |   |
| Convertible Preferred Stock,Series  B, $1  par value, 200,000  shares authorized,issued and outstanding; cash dividends at 5%, or accrueddividends at 7% at Company's option, paid semi-annually,20% redemption per year commencing with sixth anniversary ofissuance, automatic conversion to common stock at conversion price of$6  per share upon initial public offering of $10  millionor more                               |  |  |              |   | 1,200,000  |   |
| Convertible PreferredStock, Series  C, $1  par value, 3,353,750  sharesauthorized, 3,353,750 issued and outstanding at March  31, 2006;cash dividends at 4%, or accrued dividends at 6% atCompany's option, paid semi-annually; 20% redemption peryear commencing with sixth anniversary of issuance, automaticconversion to common stock at conversion price of $8  per shareupon initial public offering of $10  million ormore |  |  |              |   | 26,830,000 |   |
| (SeeNote  13 for consideration given to warrant beneficial conversionfeatures)                                                                                                                                                                                                                                                                                                                                                    |  |  |              |   |       |   |
| Subtotal                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |              |   | 31,780,005 |   |
| Offeringcosts and value ascribed towarrants                                                                                                                                                                                                                                                                                                                                                                                       |  |  |              |   | (3,332,322 | ) |
| Net                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |              | $ | 28,447,683 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |

Effectivewith the Company's initial public offering on April 6, 2006, allof the Company's outstanding Series  A convertiblepreferred stock converted into 535,715  shares of common stock;all of the Company's outstanding Series  B convertiblepreferred stock converted into 200,000  shares of common stock;and all of the Company's outstanding Series  C convertiblepreferred stock converted into 3,353,748  shares of commonstock.

NOTE  11  – FOREIGNCURRENCY FORWARD CONTRACTS

The Company enters intoforward contracts to attempt to limit its exposure to foreign currencyfluctuations. The Company recognizes in the balance sheet derivativecontracts at fair value, and reflects any net gains and lossescurrently in earnings. At March  31, 2006, the Company heldoutstanding forward exchange positions for the purchase of euros,expiring through July 2006, in the amount of $723,700 with a weightedaverage conversion rate of €1  = $1.2062 as comparedto the spot rate at March  31, 2006 of €1 = $1.2076.At September 30, 2006, the Company had no outstanding forward exchangepositions for the purchase of euros. Gain or loss on foreigntransactions, which was de  minimus, is included in other incomeand expense.

NOTE  12  – PROVISIONFOR INCOME TAXES

The Company's income taxbenefit for the three-month and six-month periods ended September 30,2006 and 2005 consists of federal and state and local taxesattributable to 

18

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Gosling-Castle Partners Inc.(‘‘GCP’’) which does not file a consolidatedincome tax return with the Company. In connection with the investmentin GCP, the Company recorded a deferred tax liability on the ascribedvalue of the acquired intangible assets of $2,222,222, increasing thevalue of the asset. The deferred tax liability is being reversed and adeferred tax benefit is being recognized over the amortization periodof the intangible asset (15 years). For the three-months endedSeptember 30, 2006 and 2005, the Company recognized $37,038 and $37,038of deferred tax benefits, respectively, and $74,076 and $74,076 for thesix months ended September 30, 2006 and 2005, respectively.

On December 1, 2003, the Company recorded a deferred taxliability of $629,444 as the amount ascribed to the difference betweenthe book and tax basis of the tangible and intangible assets acquiredas additional goodwill.

NOTE  13  – STOCK OPTIONS AND WARRANTS

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | A.  | StockOptions  –  In July 2003, the Companyimplemented the 2003 Stock Incentive Plan (‘‘thePlan’’) which provides for awards of incentive andnon-qualified stock options, restricted stock and stock appreciationrights for its officers, employees, consultants and directors in orderto attract and retain such individuals who contribute to theCompany's success by their ability, ingenuity and industryknowledge, and to enable such individuals to participate in thelong-term success and growth of the Company by giving them an equityinterest in the Company. There are 2,000,000 common shares reserved andavailable for distribution under the Plan. In January 2004, the Boardof Directors approved the Plan and the grant of 553,000 options to itsfull-time U.S. and international employees at an exercise price of$6.00  per share. These options vest over a four or five yearperiod and expire ten years after the grant date. |

Inconnection with the Company's acquisition of CB Ireland andCB-UK, the Company granted to an individual the option to purchase upto 10,000  shares of common stock at an exercise price of$6.00  per share at any time through November  30,2013.

Stock-based compensation expense recognized in theStatement of for the three-month and six-month periods ended September30, 2006 amounted to $276,921 and $771,415, respectively. There were nooptions exercised under all share-based payment arrangements for thesix-months ended September 30, 2006.

A summary of theoptions outstanding under the stock option plan is asfollows:

|                                                                |  |  |                              |  |           |                              |  |  |        |   |         |                              |  |  |  |  |         |  |  |  |  |   |         |  |
|----------------------------------------------------------------|--|--|------------------------------|--|-----------|------------------------------|--|--|--------|---|---------|------------------------------|--|--|--|--|---------|--|--|--|--|---|---------|--|
|                                                           |  |  | Six-monthsended September30, |
|                                                           |  |  | 2006                         |  |           | 2005                         |
|                                                           |  |  | Shares                       |  |           | WeightedAverageExercisePrice |  |  | Shares |   |         | WeightedAverageExercisePrice |
| Outstandingat beginning ofperiod                               |  |  |                              |  | 888,500   |                              |  |  |        | $ | 6.82    |                              |  |  |  |  | 745,500 |  |  |  |  | $ | 6.47    |  |
| Granted                                                        |  |  |                              |  | 440,000   |                              |  |  |        |   | 7.91    |                              |  |  |  |  | 170,000 |  |  |  |  |   | 8.00    |  |
| Forfeited                                                      |  |  |                              |  | —   |                              |  |  |        |   | — |                              |  |  |  |  | — |  |  |  |  |   | — |  |
| Exercised                                                      |  |  |                              |  | —   |                              |  |  |        |   | — |                              |  |  |  |  | — |  |  |  |  |   | — |  |
| Outstandingat end ofperiod                                     |  |  |                              |  | 1,328,500 |                              |  |  |        |   | 7.18    |                              |  |  |  |  | 915,500 |  |  |  |  |   | 6.76    |  |
| Optionsexercisable at periodend                                |  |  |                              |  | 409,267   |                              |  |  |        | $ | 6.63    |                              |  |  |  |  | 188,533 |  |  |  |  | $ | 6.34    |  |
| Weightedaverage fair value of options granted during theperiod |  |  |                              |  |      |                              |  |  |        | $ | 3.63    |                              |  |  |  |  |    |  |  |  |  | $ | 3.05    |  |
|                                                                |

19

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The following table representsinformation relating to stock options outstanding at September 30,2006:

|           |  |  |                                |   |                          |                                        |  |  |                    |  |        |                               |  |  |  |  |         |  |  |  |  |   |         |  |  |  |  |   |           |  |  |  |  |   |           |  |
|-----------|--|--|--------------------------------|---|--------------------------|----------------------------------------|--|--|--------------------|--|--------|-------------------------------|--|--|--|--|---------|--|--|--|--|---|---------|--|--|--|--|---|-----------|--|--|--|--|---|-----------|--|
|      |  |  |                           |   |                          | OptionsOutstanding                     |  |  | OptionsExercisable |  |        | AggregateIntrinsicValue       |
| Shares    |  |  | WeightedAverage Exercise Price |   |                          | Weighted AverageRemaining Life inYears |  |  | Shares             |  |        | WeightedAverage ExercisePrice |
|      |  |  |                                |   |                     |                                        |  |  |                    |  |   |                               |  |  |  |  |    |  |  |  |  |   |    |  |  |  |  |   |      |  |  |  |  |   |      |  |
| 522,000   |  |  |                                | $ | 6.00                     |                                        |  |  |                    |  | 7.47   |                               |  |  |  |  | 257,667 |  |  |  |  | $ | 6.00    |  |  |  |  | $ | 1,153,860 |  |
| 200,000   |  |  |                                |   | 7.23                     |                                        |  |  |                    |  | 9.70   |                               |  |  |  |  | 50,000  |  |  |  |  |   | 7.23    |  |  |  |  |   | 1,054,000 |  |
| 100,000   |  |  |                                |   | 7.73                     |                                        |  |  |                    |  | 9.95   |                               |  |  |  |  | — |  |  |  |  |   | 8.00    |  |  |  |  |   | 570,000   |  |
| 366,500   |  |  |                                |   | 8.00                     |                                        |  |  |                    |  | 8.47   |                               |  |  |  |  | 101,600 |  |  |  |  |   | 8.00    |  |  |  |  |   | 1,117,425 |  |
| 140,000   |  |  |                                |   |      |                                        |  |  |                    |  | 9.00   |                               |  |  |  |  | 9.50    |  |  |  |  |   | — |  |  |  |  |   | 9.00      |  |  |  |  |   | 922,600   |  |
| 1,328,500 |  |  |                                |   |      |                                        |  |  |                    |  |   |                               |  |  |  |  |    |  |  |  |  |   | 409,267 |  |  |  |  |   |      |  |  |  |  | $ | 4,817,885 |  |
|           |

Asof September 30, 2006, the total stock options outstanding were1,328,500. The weighted average exercise price of these options was$7.18. The weighted average remaining life of the options outstandingand exercisable was 8.36 and 7.15, respectively. Total stock optionsexercisable as of September 30, 2006 were 409,267. The weighted averageexercise price of these options was $6.63.

The fairvalue of options at date of grant was estimated using the Black-Scholesoption-pricing model utilizing the followingassumptions:

|                                |  |  |              |  |           |          |  |  |  |  |           |   |
|--------------------------------|--|--|--------------|--|-----------|----------|--|--|--|--|-----------|---|
|                           |  |  | September30, |  |           | March31, |
|                           |  |  | 2006         |  |           | 2006     |
| Risk-freeinterestrates         |  |  |              |  | 4.93-5.19 | %        |  |  |  |  | 4.37-4.43 | % |
| Expectedoptions life inyears   |  |  |              |  | 7.00      |          |  |  |  |  | 7.00      |   |
| Expected stock pricevolatility |  |  |              |  | 75        | %        |  |  |  |  | 25        | % |
| Expecteddividendyield          |  |  |              |  | 0         | %        |  |  |  |  | 0         | % |
|                                |

Thefollowing summarizes the activity of the Company's stock optionsthat have not vested for the three-months and six-months endedSeptember 30,2006:

|                               |  |  |        |  |          |                               |  |  |  |   |         |  |
|-------------------------------|--|--|--------|--|----------|-------------------------------|--|--|--|---|---------|--|
|                          |  |  | Shares |  |          | WeightedAverageExercise Price |
| Nonvested at April 1,2006     |  |  |        |  | 586,733  |                               |  |  |  | $ | 7.02    |  |
| Granted                       |  |  |        |  | 340,000  |                               |  |  |  |   | 7.96    |  |
| Canceledorexpired             |  |  |        |  | —  |                               |  |  |  |   | — |  |
| Vested                        |  |  |        |  | (103,500 | )                             |  |  |  |   | 7.32    |  |
| Nonvestedat June 30,2006      |  |  |        |  | 823,233  |                               |  |  |  |   | 7.39    |  |
| Granted                       |  |  |        |  | 100,000  |                               |  |  |  |   | 7.73    |  |
| Canceledorexpired             |  |  |        |  | —  |                               |  |  |  |   | — |  |
| Vested                        |  |  |        |  | (4,000   | )                             |  |  |  |   | 8.00    |  |
| Nonvestedat September 30,2006 |  |  |        |  | 919,233  |                               |  |  |  | $ | 7.37    |  |
|                               |

Asof September 30, 2006, there was $3,339,206 of total unrecognizedcompensation cost related to nonvested share-based compensationarrangements granted under existing stock option plans. This cost isexpected to be recognized over a weighted-average period of 8.75 years.The total fair value of shares vested during the three-months and sixmonths ended September 30, 2006 was $32,330 and $437,981,respectively.

The Company did not recognize any taxbenefit for the six months ended September 30, 2006 due to the fullvaluation allowance on its deferred tax assets.

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|  |           |                                                                                 |
|--|-----------|---------------------------------------------------------------------------------|
|  | B.   | StockWarrants  –  The Company has entered intovarious warrant agreements. |

Common Stock WarrantIssued to the Financing Agent

On August  29,2002, in connection with the revolving credit facility, the Companygranted to the lender, Keltic Financial Partners, LP(‘‘Keltic’’), a warrant to acquire20,000  shares of the Company's common stock at an exerciseprice of $30. On December  1, 2003, the Company enacted a 5-for-1split of its common stock. To reflect the effect of this stock split,the warrant was adjusted to grant Keltic the right to acquire100,000  shares of common stock at an exercise price of $6. Thewarrant is subject to anti-dilution provisions, upon the occurrence ofcertain events such as stock splits and stock dividends, vestsimmediately and is exercisable through September  1, 2014. TheCompany is not obligated to register the warrant or the underlyingshares, except to the extent that, if the Company elected to file aregistration statement, Keltic could have the shares underlying itswarrant included in that registration statement and the Company wouldassume all registration costs and other expenses in connection withsuch registration.

The warrant is exercisable at anytime. The holder may convert the warrant, in whole or in part, into thenumber of shares of common stock determined by multiplying the numberof shares under this warrant to be converted by the amount by which(a)  the fair market value of one share immediately prior to suchexercise exceeds (b)  the exercise price in effect immediatelyprior to such exercise divided by the fair market value of one share ineffect immediately prior to such exercise. If the shares are notregularly traded in a public market, the Board of Directors inreasonable good faith judgment shall determine the fair market value asfollows: the fair value of the warrant is computed at an amount equalto the Enterprise Value divided by the number of outstanding shares ofcommon stock. If the shares are traded regularly in a public market,the fair market value of a share of common stock shall be the closingsales price of the shares reported for the business day immediatelybefore the holder delivers its conversion notice.

Fromthe date of issuance through September  27, 2005, the warrantcontained a put option right that could be exercised by the holder atany time commencing as of September 2006 and ending on the warrantexpiration date. Pursuant to that put option right, Keltic had theright to require the Company to purchase the warrant, in whole or inpart, for an amount equal to the number of shares as to which Kelticwas exercising the put option multiplied by the amount by which(a)  the fair market value of one share exceeded (b)  theexercise price in effect immediately prior to such exercise of the putoption right. The Company would then be obligated to pay the put amountin immediately available funds on the date set; provided however, thatif the put amount was greater than $300,000, the Company would pay atleast $300,000 on such date and have the option to pay the remainder ofthe put amount in four equal installments due at the end of each fiscalquarter thereafter, bearing interest at the greater of (a)  theprime rate as published by The Wall Street Journal, or in the eventthat The Wall Street Journal was not available, such rate published inanother publication as determined by the holder plus two hundred fifty(250)  basis points per annum, or (b)  seven percent(7%) per annum, or (c)  LIBOR plus five hundred(500)  basis points per annum.

The $282,295 fairvalue assigned to the warrant was recorded as a financing costreduction in the value assigned to the loan's credit facility(debt discount amount). Such amount was recognized over the three-yearlife of the credit facility as additional interest expense. The creditfacility was closed in June 2004 and the unaccreted balance recognizedas additional interest expense at that time.

The Companyaccounted for the warrant and the put option rights as a compoundfinancial instrument in the consolidated financial statements at fairvalue following the guidelines of EITF  00-19, paragraphs44 and 45, and paragraphs  11 and 24 of SFAS  150. Changesin the fair value of the compound instrument are recognized in earningsfor each reporting period. The Company recorded a credit of $18,752 asof September  30, 2005 to reflect the change in fair value of thecompound instrument as a result of the amendment discussed below.

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 On September  27,2005, the warrant was amended to eliminate the cash put feature andreplace it with certain penalties (up to $200,000) if the sharesunderlying the warrant have not been registered by June  1, 2007and June  1, 2008. The Company agreed that if on eitherJune  1, 2007 or June  1, 2008 (a)  there are sharesof common stock received or issuable upon the exercise of the warrantthat have not been registered, and (b)  it has not filed aregistration statement with respect to which Keltic had the opportunityto register the unregistered shares, the Company would pay Keltic$100,000 within ten (10)  days of such dates.

 The Company accounted for the warrant and theregistration rights penalty as a derivative following the guidance ofEITF  00-19. The Company has concluded that the amendment to thewarrant agreement obligating the Company to issue registered shares bythe stated dates was dependent both on the Commission'sacceptance of the Company's registration and on theunderwriters' ability to successfully market the shares. Pursuantto paragraph  14 of EITF  00-19, these factors were beyondthe control of the Company and, for this reason, the Company hasaccounted for the instrument as if it would be required to be net-cashsettled.

 The Company applied EITF  05-04,View A, concluding that the registration rights are inseparable fromthe underlying warrant and should be accounted for together as a unit(the delivery of unregistered shares, plus the cash penalty, inexchange for the exercise price) and recorded as a liability at fairvalue at each reporting date with changes in fair value reported inearnings.

 The Company has reflected the fairvalue of the combined instrument at September 30, and March  31,2006 included in the balance sheet caption accrued expenses, putwarrants payable and derivative instrument of approximately $318,000and $307,000, respectively.

Common Stock WarrantsIssued to Placement Agents

 In connectionwith the issuance of the Series  C preferred stock, the Companygranted to the placement agent warrants to acquire approximately192,118  shares of the Company's common stock with anexercise price of $8.00. The warrants are subject to anti-dilutionprovisions, such as stock splits and stock dividends, vest immediatelyand expire at various dates from December 2008 through August 2010. TheCompany is not obligated to register the warrants or the underlyingshares, except to the extent that if the Company elects to file aregistration statement, the holders can request to have the underlyingshares registered. The Company will assume all registration costs andother expenses in connection with such registration.

 The proceeds upon issuance of the Series  Cpreferred stock based upon relative fair values were allocated asfollows:

|                                  |  |  |  |   |            |  |
|----------------------------------|--|--|--|---|------------|--|
| Valueallocated to preferredstock |  |  |  | $ | 26,368,971 |  |
| Value allocated towarrants       |  |  |  |   | 461,029    |  |
| Gross proceeds ofpreferredstock  |  |  |  | $ | 26,830,000 |  |
|                                  |

Thebeneficial conversion feature allocated to the warrants was calculatedusing the Black-Scholes method as the difference between the beneficialconversion price and the fair value of the Company's commonstock, multiplied by the number of shares into which the SeriesC preferred stock was convertible, in accordance with the EmergingIssues Task Force (‘‘EITF’’) Issue No.00-27. The beneficial conversion feature allocated to the warrants wasrecorded immediately as a deemed dividend and reflected in the net lossattributable to common stockholders and an increase in additionalpaid-in-capital.

The warrants have conversion rights andcan be converted at any time. The holder may convert in whole or inpart, into a number of common shares equal to the number of sharesunder this warrant to be converted, multiplied by the amount by which(a)  the fair market value of one share exceeds (b)  theexercise price in effect immediately prior to such exercise of theconversion price divided by the fair market value of one share ineffect immediately 

22

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prior to such exercise of the conversionprice. If the shares are not regularly traded in a public market, theBoard of Directors in reasonable good faith judgment shall determinethe fair market value as follows: the fair value of the warrant iscomputed at an amount equal to the Enterprise Value divided by thenumber of outstanding shares of common stock. If the shares are tradedregularly in a public market, the fair market value of a share ofcommon stock shall be the closing sales price of the shares reportedfor the business day immediately before the holder delivers itsconversion notice.

Common Stock Warrants Issued toSenior Note  Holders

In connection with theissuance of the senior notes in June, September and October 2004, theCompany entered into a warrant agreement to grant the right to purchase116,500  shares of the Company's common stock at anexercise price of $8.00  per share at any time through May31, 2009. These warrants were recorded at fair value and accounted foras a discount of the face value of the senior notes and a credit toadditional paid-in capital of $129,195. This discount will berecognized over the adjusted term of the senior notes with a charge tointerest expense and a credit to senior notes payable. For three-monthsended September 30, 2006 and 2005, the Company recorded $5,148 and$7,020, respectively, of senior note accretion as additional interestexpense, and $10,296 and $17,784 for the six months ended September 30,2006 and 2005, respectively.

Common Stock WarrantsIssued to Financial Advisor

In July 2005, theCompany granted to a financial advisor warrants to purchase up to100,000  shares of common stock at $8.00  per share. Thewarrants are subject to anti-dilution provisions, such as stock splitsand stock dividends, and vested upon the completion of the initialpublic offering in April 2006. The Company fair valued the warrant at$283,727 and recorded a charge upon vesting. The charge is included ininterest expense on the accompanying condensed consolidated statementsof operations.

Common Stock Warrants Issued inGosling's Acquisition

In connection with theacquisition of the Company's interest in GCP it agreed to issuewarrants to purchase 90,000  shares of common stock at$8.00  per share to three members of the Gosling family and anemployee. The Company recorded warrants at fair value as an increase tothe purchase price.

The following is a summary of thecompany's outstanding warrants:

|                                        |  |  |          |  |         |                                           |  |  |  |   |         |  |
|----------------------------------------|--|--|----------|--|---------|-------------------------------------------|--|--|--|---|---------|--|
|                                   |  |  | Warrants |  |         | WeightedAverage Exercise Price PerWarrant |
| Warrants outstanding, March  31,2006   |  |  |          |  | 598,618 |                                           |  |  |  | $ | 7.67    |  |
| Granted                                |  |  |          |  | — |                                           |  |  |  |   | — |  |
| Exercised                              |  |  |          |  | — |                                           |  |  |  |   | — |  |
| Forfeited                              |  |  |          |  | — |                                           |  |  |  |   | — |  |
| Warrantsoutstanding, September 30,2006 |  |  |          |  | 598,618 |                                           |  |  |  | $ | 7.67    |  |
| Warrantsexercisable, September 30,2006 |  |  |          |  | 598,618 |                                           |  |  |  | $ | 7.67    |  |
|                                        |

NOTE14  – RELATED PARTY TRANSACTIONS

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | A.  | The Company is operating under an agreement withMHW, Ltd. (‘‘MHW’’) whereby MHW acts as theCompany's agent in the distribution of its products across theUnited States. MHW's president also serves as a director of theCompany and has a de  minimis indirect ownership interest in theCompany. In addition, MHW has a 10% ownership interest in theCeltic Crossing brand, one of the Company's products, in theUnited States and its territories, Canada, Mexico, and theCaribbean. |

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Pursuant to the MHW distributionagreement, MHW receives sales orders from the Company's domesticwholesalers at prices agreed upon with the Company. MHW simultaneouslypurchases Company inventory necessary to fill those orders and shipsthat inventory to the various wholesalers. MHW then invoices, collects,and deposits remittances from those wholesalers into an MHW bankaccount designated for the Company. The funds are remitted to theCompany on a bi-weekly basis. Although MHW is responsible for thebilling function, the collected funds are the property of the Companyand MHW is not liable to the Company for any unpaid balances due fromwholesalers.

In addition to the distribution servicesprovided for the Company, MHW also provides administrative and supportservices on behalf of the Company. For the three months ended September30, 2006 and 2005, aggregate charges recorded for all services providedwere approximately $64,651 and $63,412, respectively and were $124,358and $115,466 for the six months ended September 30, 2006 and 2005,respectively. These charges have been included in general andadministrative expenses on the accompanying condensed consolidatedstatements of operations.

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | B.  | The Company hastransactions with Knappogue Corp., a shareholder in the Company.Knappogue Corp. is controlled by the Company's CEO and hisfamily. The transactions primarily involved rental fees for use ofKnappogue Corp.'s interest in the Knappogue Castle for variouscorporate purposes including Company meetings and to entertaincustomers. For the three months ended September 30, 2006 and 2005, theCompany recognized $5,000 and $0, respectively, and recognized $5,000and $7,540 for the six months ended September 30, 2006 and 2005,respectively. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | C.  | In April 2004, the Companycontracted with BPW, Ltd., for business development services includingproviding introductions for the Company to agency brands that wouldenhance the Company's portfolio of products and assisting theCompany in successfully negotiating agency agreements with targetedbrands. BPW, Ltd. is controlled by a director of the Company. Thecontract provides for a monthly retainer to BPW, Ltd. of $3,500, abonus payable to BPW Ltd. in equal quarterly installments upon thefinalization of an agency brand agreement based upon estimated annualcase sales by the Company during the first year of operations at therate of $1  per 9-liter case of volume, less any retainerpreviously paid, and a commission based upon actual future sales of theagency brand while under the Company's management. This contractis cancelable by either party, at their convenience, upon 30days written notice. For the three months ended September 30, 2006 and2005, the Company recognized $13,220 and $23,000, respectively and$22,546 and $33,500 for the six months ended September 30, 2006 and2005, respectively, under this contract. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | D.  | Forthe three months ended September 30, 2006 and 2005, and for the sixmonths ended September 30, 2006 and 2005, the Company purchased goodsfrom Terra Manufacturing Limited (‘‘Terra’’)and Carbery Milk Products Limited (‘‘Carbery’’)of approximately $692,078, and $608,020, respectively, and $1,101,885and $1,136,945 respectively. The Company had assumed the underlyingsupplier agreements with Terra and Carbery from CB-Ireland.Terra's affiliate, Tanis Investments, and Carbery are bothshareholders in the Company. As of September 30, 2006 and 2005, theCompany was indebted to these two affiliates in the amount ofapproximately $446,685 and $728,470 respectively, which is included indue to stockholders and affiliates on the accompanying condensedconsolidated balance sheet. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | E.  | For thethree-months ended September 30, 2006 and 2005, the Company maderoyalty payments of approximately $9,563 and $9, 604, respectively, andfor the six months ended September 30, 2006 and 2005 it made paymentsof $18,976 and $18,654, respectively, for use of a patent, to an entitythat is owned by two stockholders in the Company. These charges havebeen included in other expense on the accompanying consolidatedstatements of operations. The royalty agreement also includes the rightto acquire the patent for the Trinity Bottle for €90,000($114,192) for the duration of the licensing period, which expires onDecember  1, 2008. |

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|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | F.  | In February and August2005, the Company executed agreements with the two Co-ManagingDirectors of CB Ireland whereby, effective March  11, 2005 andDecember  1, 2005, respectively, each individual resigned hisposition in CB Ireland in exchange for a consultancy agreementconsisting of fifteen monthly payments totaling €196,875,plus Value Added Tax (‘‘VAT’’). The balancedue, net of payments made, was $124,351 and $113,462 atSeptember  30, 2006 and 2005, respectively. In addition, underthe terms of these agreements, the stock options of these individualswere deemed to have accrued two years' vesting at the end of theconsultancy period, the exercise period for their stock options wasextended to December  1, 2008, and the Company agreed to pay offthe outstanding balance of their 5%  ConvertibleSubordinated Notes, each dated December  1, 2003, and each in theamount of €465,550 and their Subordinated Note, each datedDecember  1, 2003, and each in the amount of€133,323 at the earlier of one month following thecompletion of the Company's initial public offering or in fourquarterly installments beginning January  1, 2006. The Companypaid the outstanding balance on each of these subordinated notes in theamount of $159,961 on April  19, 2006. The Company alsoreimbursed these individuals the legal fees incurred in connection withtheir consultancy agreements in the amounts of €8,000 and€5,000, respectively, plus VAT. For the three-months andsix-months ended September 30, 2006 and 2005, the Company made paymentsof $50,208 and $48,058, respectively and $132,574 and $108,117,respectively, pursuant to these agreements. In September 2005, theCompany consented to the sale of the 5%  Convertible Notesheld by the two Co-Managing Directors of CB Ireland and shares ofcommon stock held by one of the Co-Managing Directors to thirdparties. |

NOTE  15  – COMMITMENTSAND CONTINGENCIES

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | A.  | The Company hasentered into a supply agreement with Irish Distillers Limited(‘‘Irish Distillers’’), which provides for theproduction of Irish whiskeys for the Company through 2014, subject toautomatic five year extensions thereafter. Under this agreement, theCompany is obligated to notify Irish Distillers annually of the amountof liters of pure alcohol it requires for the current year andcontracts to purchase that amount. For the calendar year endedDecember  31, 2006, the Company has contracted to purchaseapproximately €654,746 in bulk Irish whiskey. The Companyis not liable to Irish Distillers for any product not yet received.During the term of this supply agreement Irish Distillers has the rightto limit additional purchases above the commitment amount. |

|  |          |                                                                                                                                                                                                                                                                |
|--|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | B.  | The Company has entered into a distributionagreement with Gaelic Heritage Corporation, Ltd.(‘‘Gaelic’’), an international supplier, to bethe sole-producer of Celtic Crossing, one of the Company'sproducts, for an indefinite period. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | C.  | In August2004, Castle Brands entered into an agency agreement with I.L.A.R.S.p.A., the producer of Pallini Limoncello and its flavor extensions,to be the sole and exclusive importer of Pallini Limoncello and itsflavor extensions throughout the United States and its territories andpossessions. This agreement is subject to automatic renewal for as muchas five years per renewal period upon Castle Brands achievement ofcontractual case sale targets. The agreement expires on December31, 2009. |

|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | Under this agreement, Castle Brands ispermitted to import Pallini Limoncello and its flavor extensions at aset price, updated annually, and is obligated to set aside a portion ofthe gross margin toward a marketing fund for Pallini. The agreementalso encompasses the hiring of a Pallini Brand Manager at Castle Brandswith Pallini reimbursing the costs of this position up to a stipulatedannual amount. These reimbursements are included in the accompanyingconsolidated financial statements as a reduction in selling expense andan increase in due from affiliates. |

25

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|  |           |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | D.   | In September 2004,CB-USA entered into an exclusive distribution agreement withGosling's Export (Bermuda) Limited(‘‘GXB’’) to be the sole and exclusive importerof Gosling's rum brands within the United States. Under thisagreement, CB-USA will receive a net sales commission on each casesold. In February 2005, GXB sold its interest in the distributionagreement to Gosling-Castle Partners Inc. (See Note  17). |

|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | CB-USA will receive a stipulated commission percase, subject to adjustment, provided certain case sales are achieved,for all sales in calendar years under the distribution agreement. Thesales commission is net of agreed reimbursements, including taxes andpayment to the marketing affiliate, GCP. This distribution agreement isfor fifteen years, subject to extension. These reimbursements areincluded in the accompanying consolidated financial statements as areduction in selling expense and an increase in due fromaffiliates. |

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | E.  | In June 2004, the Company executedsubleases for office space in Dublin, Ireland and midtown Manhattan.The Dublin office lease commenced on June  1, 2004 and extendsthrough February  28, 2009. Rent is payable quarterly in advance.The New York City lease commenced on August  15, 2004 and extendsthrough March  30, 2008. The Houston, Texas lease commenced onFebruary  24, 2000 and extends through March  31, 2007. TheCompany has also entered into non-cancelable operating leases forcertain office equipment. |

|  |        |                                              |
|--|--------|----------------------------------------------|
|  |   | Future minimum leasepayments are as follows: |

|                                 |  |  |        |   |         |  |
|---------------------------------|--|--|--------|---|---------|--|
| Forthe yearsending September30, |  |  | Amount |
| 2007                            |  |  |        | $ | 300,864 |  |
| 2008                            |  |  |        |   | 139,866 |  |
| 2009                            |  |  |        |   | 4,962   |  |
| 2010                            |  |  |        |   | 1,012   |  |
| Total                           |  |  |        | $ | 446,704 |  |
|                                 |

Inaddition to the above annual rental payments, the Company is obligatedto pay its pro-rata share of utility and maintenance expenses on theleased premises. Rent expense under operating leases amounted toapproximately $105,026 and $99,221 for the three-months ended September30, 2006 and 2005, respectively, and $197,983 and $184,150 for the sixmonths ended and September 30, 2006 and 2005, respectively, and isincluded in general and administrative expense on the accompanyingcondensed consolidated statements of operations.

|  |          |                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | F.  | Pursuant to the distribution agreement signed inMarch 1998 between the Company and Gaelic, which was amended andrestated in April 2001, the Company, which currently owns 60% ofthe Celtic Crossing brand in the United States, has the option topurchase 70% of the brand outside the United States from Gaelicat a specified price adjusted by interim, annual changes in the IrishConsumer Price Index. |

|  |        |                                                                                                                                                                                                                                                        |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | In the event of the saleof the brand rights by either the Company or Gaelic, the non-sellingparty shall have the right of first refusal to purchase the interest atthe same price as the proposed sale and the right to sell alongside theother party. |

|  |        |                                                                                                                                                                                                                           |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | Pursuant to the agreement, theCompany is required to pay royalties to Gaelic for each case purchased,such royalties are included within cost of sales in the accompanyingcondensed consolidated statements of operations. |

|  |          |                                                                                                                                                                                                                                                                                                                    |
|--|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | G.  | Pursuant to a composite inter-company guarantee inthe amount of €860,000 ($1,091,168) completed in February2005 between the Company, Castle Brands Spirits Company Limited andCastle Brands Spirits (GB) Limited, the Company has guaranteed theloans from Ulster Bank to the Company's Europeansubsidiaries. |

|  |          |                                                                                                                                                                    |
|--|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | H.  | The Company is subject to strictfederal and state government regulations associated with the marketing,import, warehouse, transport, and distributions of spirits. |

26

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NOTE  16  – CONCENTRATION OF CREDIT RISK

The Companymaintains its cash balances at various large financial institutionsthat, at times, may exceed federally and internationally insuredlimits. As of September  30, and March 31, 2006, the Companyexceeded the insured limit by approximately $13,590,000 and $1,300,000,respectively. Management believes the Company is not exposed to anysignificant credit risk because the institutions are internationalmoney center banking institutions with strong financial positions.

|                       |                                                                                     |
|-----------------------|-------------------------------------------------------------------------------------|
| NOTE 17 –  | GOSLING-CASTLE PARTNERS INC.EXPORT AGREEMENT WITH GOSLING'S EXPORT (BERMUDA)LIMITED |

In February 2005, Gosling-Castle PartnersInc. secured the GXB global distribution rights under an ExportAgreement (the ‘‘Agreement’’) with GXB. Thisagreement calls for GCP to pay $2,500,000 to GXB for the assignment ofits global distribution rights in four equal installments atApril  1, 2005, October  1, 2005, April  1, 2006 andOctober  1, 2006. The discounted note has been fully accreted atSeptember 30, 2006. For the three-months ended September 30, 2006 and2005, the Company recognized interest expense of $19,919 and $19,919,respectively. For the six-months ended September 30, 2006 and 2005, theCompany recognized interest expense of $39,838 and $39,838,respectively, on this note.

In addition, under the termsof the Export Agreement, GXB has agreed to sell all brands in itsportfolio to GCP at its manufacturer's cost plus a specifiedproducer's profit. For the years of the agreement, theproducer's profit is a stipulated amount per case, adjusted forcertain documented cost increases.

The Export Agreementgives GCP the right of first refusal to purchase, in the event GXBdecides to sell any or all of its trademarks or other intellectualproperty, at the same price being offered by a bona fide third partyofferor. In the event GCP waives its right of first refusal, theCompany has an identical right of first refusal. Furthermore, in theevent GXB should decide to sell any or all of its portfolio of productseither directly or indirectly through the sale of stock of GXB or itsparent company to a third party, the agreement contains a formula forGCP to share in the proceeds of the sale of the brand with such sharein the sale proceeds up to a stipulated percentage depending upon thenumber of nine liter equivalent cases of product sold by GCP in thetwelve months preceding the sale.

The Export Agreementcommenced on April  1, 2005 and has a 15  year term. It isrenewable for additional 15  year terms as long as GCP meetscertain case sale targets as set forth in the Agreement.

NOTE  18  – GEOGRAPHICINFORMATION

The Company operates in onebusiness  —  premium branded spirits. TheCompany's product categories are vodka, rum, liqueurs/cordials,and whiskey. The Company reports its operations in two geographicareas: International and United States.

The consolidatedfinancial statements include revenues and assets generated in or heldin foreign countries. The following table sets forth the percentage ofconsolidated revenue from continuing operations and consolidated assetsfrom foreign countries.

27

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|                                                |  |  |                                         |  |             |                                      |  |  |      |  |        |      |  |  |  |  |            |  |  |  |  |  |        |   |  |  |  |  |             |  |  |  |  |  |        |   |  |  |  |  |             |  |  |  |  |  |        |   |
|------------------------------------------------|--|--|-----------------------------------------|--|-------------|--------------------------------------|--|--|------|--|--------|------|--|--|--|--|------------|--|--|--|--|--|--------|---|--|--|--|--|-------------|--|--|--|--|--|--------|---|--|--|--|--|-------------|--|--|--|--|--|--------|---|
|                                           |  |  | Forthe three-months ended September 30, |  |             | For the six-monthsended September30, |
|                                           |  |  | 2006                                    |  |             | 2005                                 |  |  | 2006 |  |        | 2005 |
| ConsolidatedRevenue:                           |  |  |                                         |  |        |                                      |  |  |      |  |   |      |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| International                                  |  |  |                                         |  | $1,969,140  |                                      |  |  |      |  | 31.5   | %    |  |  |  |  | $1,682,313 |  |  |  |  |  | 32.5   | % |  |  |  |  | $3,852,184  |  |  |  |  |  | 32.9   | % |  |  |  |  | $3,468,009  |  |  |  |  |  | 34.4   | % |
| UnitedStates                                   |  |  |                                         |  | 4,282,922   |                                      |  |  |      |  | 68.5   | %    |  |  |  |  | 3,492,831  |  |  |  |  |  | 67.5   | % |  |  |  |  | 7,860,283   |  |  |  |  |  | 67.1   | % |  |  |  |  | 6,623,529   |  |  |  |  |  | 65.6   | % |
| TotalConsolidatedRevenue                       |  |  |                                         |  | $6,252,062  |                                      |  |  |      |  | 100    | %    |  |  |  |  | $5,175,144 |  |  |  |  |  | 100    | % |  |  |  |  | $11,712,467 |  |  |  |  |  | 100    | % |  |  |  |  | $10,091,538 |  |  |  |  |  | 100    | % |
| ConsolidatedDepreciation andAmortization       |  |  |                                         |  |        |                                      |  |  |      |  |   |      |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| International                                  |  |  |                                         |  | $19,353     |                                      |  |  |      |  | 7.9    | %    |  |  |  |  | $19,327    |  |  |  |  |  | 8.8    | % |  |  |  |  | $38,295     |  |  |  |  |  | 8.0    | % |  |  |  |  | $39,536     |  |  |  |  |  | 8.9    | % |
| UnitedStates                                   |  |  |                                         |  | 226,441     |                                      |  |  |      |  | 92.1   | %    |  |  |  |  | 201,016    |  |  |  |  |  | 91.2   | % |  |  |  |  | 441,993     |  |  |  |  |  | 92.0   | % |  |  |  |  | 402,292     |  |  |  |  |  | 91.1   | % |
| TotalConsolidated Depreciation andAmortization |  |  |                                         |  | $245,794    |                                      |  |  |      |  | 100    | %    |  |  |  |  | $220,343   |  |  |  |  |  | 100    | % |  |  |  |  | $480,288    |  |  |  |  |  | 100    | % |  |  |  |  | $441,828    |  |  |  |  |  | 100    | % |
| IncomeTaxBenefit                               |  |  |                                         |  |        |                                      |  |  |      |  |   |      |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| UnitedStates                                   |  |  |                                         |  | $37,038     |                                      |  |  |      |  | 100    | %    |  |  |  |  | $37,038    |  |  |  |  |  | 100    | % |  |  |  |  | $74,076     |  |  |  |  |  | 100    | % |  |  |  |  | $74,076     |  |  |  |  |  | 100    | % |
| RevenuesbyCategory:                            |  |  |                                         |  |        |                                      |  |  |      |  |   |      |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| Vodka                                          |  |  |                                         |  | $2,024,189  |                                      |  |  |      |  | 32.4   | %    |  |  |  |  | $1,564,501 |  |  |  |  |  | 30.2   | % |  |  |  |  | $3,862,152  |  |  |  |  |  | 33.0   | % |  |  |  |  | $3,319,926  |  |  |  |  |  | 32.9   | % |
| Rum                                            |  |  |                                         |  | 2,138,809   |                                      |  |  |      |  | 34.2   | %    |  |  |  |  | 1,693,166  |  |  |  |  |  | 32.7   | % |  |  |  |  | 3,944,885   |  |  |  |  |  | 33.7   | % |  |  |  |  | 3,437,765   |  |  |  |  |  | 34.1   | % |
| Liqueurs/Cordials                              |  |  |                                         |  | 1,329,587   |                                      |  |  |      |  | 21.3   | %    |  |  |  |  | 1,158,685  |  |  |  |  |  | 22.4   | % |  |  |  |  | 2,379,712   |  |  |  |  |  | 20.3   | % |  |  |  |  | 1,894,433   |  |  |  |  |  | 18.8   | % |
| Whiskey                                        |  |  |                                         |  | 692,590     |                                      |  |  |      |  | 11.1   | %    |  |  |  |  | 742,240    |  |  |  |  |  | 14.4   | % |  |  |  |  | 1,420,673   |  |  |  |  |  | 12.1   | % |  |  |  |  | 1,422,862   |  |  |  |  |  | 14.1   | % |
| Other*                                         |  |  |                                         |  | 66,887      |                                      |  |  |      |  | 1.0    | %    |  |  |  |  | 16,552     |  |  |  |  |  | 0.3    | % |  |  |  |  | 105,045     |  |  |  |  |  | 0.9    | % |  |  |  |  | 16,552      |  |  |  |  |  | 0.1    | % |
| TotalConsolidatedRevenue                       |  |  |                                         |  | $6,252,062  |                                      |  |  |      |  | 100    | %    |  |  |  |  | $5,175,144 |  |  |  |  |  | 100.0  | % |  |  |  |  | $11,712,467 |  |  |  |  |  | 100    | % |  |  |  |  | $10,091,538 |  |  |  |  |  | 100.0  | % |
| ConsolidatedAssets:                            |  |  |                                         |  |        |                                      |  |  |      |  |   |      |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| International                                  |  |  |                                         |  | $6,027,458  |                                      |  |  |      |  | 10.4   | %    |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| UnitedStates                                   |  |  |                                         |  | 51,830,254  |                                      |  |  |      |  | 89.6   | %    |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
| TotalConsolidatedAssets                        |  |  |                                         |  | $57,857,712 |                                      |  |  |      |  | 100.0  | %    |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |  |  |  |  |        |  |  |  |  |  |   |   |
|                                                |

|  |
|--|
|  |  |
|  |

|  |                                  |
|--|----------------------------------|
|  | *Includes related food products. |

NOTE 19 –SUBSEQUENT EVENTS

On October 12, 2006, theCompany acquired all of the outstanding capital stock of McLain &Kyne, Ltd. (‘‘McLain & Kyne’’), pursuant toa Stock Purchase Agreement among Chester F. Zoeller III, Brittany LynnZoeller Carlson, Beth Allison Zoeller Willis (collectively, the‘‘Sellers’’) and the Company (the‘‘Agreement’’). McLain & Kyne is aLouisville, Kentucky based developer and marketer of three premiumsmall batch bourbons: Jefferson's, Jefferson's Reserve andSam Houston. As consideration for the acquisition, the Company has paid$1,294,800 in cash to the Sellers and will issue to the Sellers 100,000shares of its common stock. The Company will also pay an earn-out tothe Sellers based on the financial performance of the acquiredbusiness. The aggregate amount of such earn-out payments, which shallnot exceed $4,000,000, will be determined by a calculation based on thegross margin (as defined in the Agreement) recognized by the Companyfrom the sales of McLain & Kyne's bourbons through March 31,2011.

The Agreement also provides for, among otherthings, representations, warranties, indemnities and‘‘piggyback’’ registration rights to theSellers.

On November 10, 2006, CB-USA issued to 11individuals an aggregate of $5,340,000 of additional senior notessecured by accounts receivable and inventories of CB-USA. These notesmature on May  31, 2009 and bear interest at 9% payablesemi-annually. In addition, each holder of senior notes receivedwarrants to purchase 40  shares of the Company's

28

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common stock at $8.00 per share for each$1,000 of additional senior notes purchased by such holder. There were213,600 warrants issued in conjunction with the issuance of theadditional senior notes. These warrants have been valued at $814,814and will be treated as a discount to the notes payable. Interestexpense pertaining to this discount will be recognized, and the notespayable accreted, over the term of the notes with a maturity of May2009.

|                       |                                                                                                                                                                      |
|-----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| NOTE 20 –  | ACCOUNTING FORDERIVATIVE INSTRUMENT, THE INCREASING RATE DIVIDEND ON THE SERIES CPREFERRED STOCK AND AMORTIZATION OF DEFINITE LIVED INTANGIBLE ASSET— REVISION |

The Company has revised theaccompanying financial statements to reflect as a liability the fairvalue of a derivative instrument (put warrant issued December 1, 2003)(see Note 13). Such recomputation of the fair value of the derivativeinstrument resulted in a change for the six-months ended September 30,2005. The fair value of the derivative instrument at December 1, 2003was $282,295. The Company has recorded the changes in fair value of thederivative financial instrument at each reporting period presented inthe Statement of Operations.

The Company has revised theaccompanying financial statements to reflect the fair value of Series CPreferred Stock from the date of issuance. As issued, the Series CPreferred Stock did not accrue dividends until December 1, 2005.Increasing rate preferred stock is initially recorded at fair value andthe discount amortized over the period preceding the commencement ofthe perpetual dividend by recording a deemed dividend and increasingthe carrying amount of the preferred stock by a corresponding amount.The fair value of the Series C Preferred Stock deemed dividend atDecember 1, 2003 was $1,259,262. The amortization on the Series CPreferred Stock resulted in a change for the six-months ended September30, 2005.

The Company has revised the accompanyingfinancial statements to reflect the amortization of certain intangibleswhich have been reclassified from indefinite lived assets to intangibleassets with an estimated life of five years and ten years,respectively. The amortization of the intangibles resulted in a changefor the six-months ended September 30, 2005.

Thefollowing table summarizes the recomputation of fair value on thederivative instrument, the increasing rate dividend on Series CPreferred Stock at December 1, 2003 and the amortization of thereclassified definite lived intangibleassets.

|                                                      |  |  |                      |   |   |           |  |  |            |   |           |  |  |  |  |   |           |  |
|------------------------------------------------------|--|--|----------------------|---|---|-----------|--|--|------------|---|-----------|--|--|--|--|---|-----------|--|
|                                                 |  |  | Aspreviouslyreported |   |   | Asrevised |  |  | Adjustment |
| Value of derivativeinstrument                        |  |  |                      | $ | 0 |           |  |  |            | $ | 282,295   |  |  |  |  | $ | 282,295   |  |
| Fairvalue of Series C Preferred Stock deemeddividend |  |  |                      | $ | 0 |           |  |  |            | $ | 1,259,262 |  |  |  |  | $ | 1,259,262 |  |
| Amortizationof definite livedintangibles             |  |  |                      | $ | 0 |           |  |  |            | $ | 247,633   |  |  |  |  | $ | 247,633   |  |
|                                                      |

29

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Net loss, preferred stock andpreferred membership unit dividends and net loss attributable to commonstockholders for all periods presented were amended as follows as aresult of the aboverevisions:

|                                                    |  |  |         |   |            |                                                    |  |  |                                          |   |         |                                                                        |  |  |  |   |            |   |  |  |  |   |       |   |
|----------------------------------------------------|--|--|---------|---|------------|----------------------------------------------------|--|--|------------------------------------------|---|---------|------------------------------------------------------------------------|--|--|--|---|------------|---|--|--|--|---|-------|---|
|                                               |  |  | Netloss |   |            | Preferredstockandpreferredmembershipunit dividends |  |  | Netlossattributableto commonstockholders |   |         | Net losspercommonshareattributabletocommonstockholdersbasic anddiluted |
| Aspreviously reported September  30,2005           |  |  |         | $ | (5,918,693 | )                                                  |  |  |                                          | $ | 202,579 |                                                                        |  |  |  | $ | (6,121,272 | ) |  |  |  | $ | (1.97 | ) |
| Currentcredit/(charge) on derivativeinstrument     |  |  |         |   | 15,050     |                                                    |  |  |                                          |   |    |                                                                        |  |  |  |   | 15,050     |   |  |  |  |   | 0.01  |   |
| Increasingrate dividend on Series C PreferredStock |  |  |         |   |       |                                                    |  |  |                                          |   | 489,183 |                                                                        |  |  |  |   | (489,183   | ) |  |  |  |   | (0.16 | ) |
| Amortizationof definite livedintangibles           |  |  |         |   | (78,200    | )                                                  |  |  |                                          |   |    |                                                                        |  |  |  |   | (78,200    | ) |  |  |  |   | (0.03 | ) |
| Asrevised, September 30,2005                       |  |  |         | $ | (5,981,843 | )                                                  |  |  |                                          | $ | 691,762 |                                                                        |  |  |  | $ | (6,673,605 | ) |  |  |  | $ | (2.15 | ) |
|                                                    |

30

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Item2.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations

This Quarterly Report onForm 10-Q includes statements of our expectations, intentions plans andbeliefs that constitute ‘‘forward-lookingstatements’’ within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Actof 1934 and are intended to come within the safe harbor protectionprovided by those sections. These statements, which involve risks anduncertainties, relate to the discussion of our business strategies andour expectations concerning future operations, margins, profitability,liquidity and capital resources and to analyses and other informationthat are based on forecasts of future results and estimates of amountsnot yet determinable. We have used words such as‘‘may,’’‘‘will,’’‘‘should,’’‘‘expects,’’‘‘intends,’’‘‘plans,’’‘‘anticipates,’’‘‘believes,’’‘‘thinks,’’‘‘estimates,’’‘‘seeks,’’‘‘expects,’’‘‘predicts,’’‘‘could,’’‘‘projects,’’‘‘potential’’ and other similar terms andphrases, including references to assumptions, in this report toidentify forward-looking statements. These forward-looking statementsare made based on expectations and beliefs concerning future eventsaffecting us and are subject to uncertainties, risks and factorsrelating to our operations and business environments, all of which aredifficult to predict and many of which are beyond our control, thatcould cause our actual results to differ materially from those mattersexpressed or implied by these forward-looking statements. These risksand other factors include, without limitation, our history of lossesand expectation of further losses; the effect of poor operating resultson our company; the effect of growth on our infrastructure, resources,and existing sales; our ability to expand our operations in both newand existing markets and our ability to develop or acquire new brands;the impact of supply shortages and alcohol and packaging costs ingeneral; our ability to raise capital; our ability to fully utilize andretain new executives; negative publicity surrounding our products orthe consumption of beverage alcohol products in general; our ability toacquire and/or maintain brand recognition and acceptance; trends inconsumer tastes; our ability to protect trademarks and otherproprietary information; the impact of litigation; the impact offederal, state, local or foreign government regulations; the effect ofcompetition in our industry; and economic and political conditionsgenerally; and the other factors listed under the caption‘‘Risk Factors’’ in our Annual Report onForm 10-K for the year ended March  31,  2006 and elsewherein this report.

We assume no obligation to publicly update orrevise these forward-looking statements for any reason, or to updatethe reasons actual results could differ materially from thoseanticipated in, or implied by, these forward-looking statements, evenif new information becomes available in the future.

The followinginformation should be read in conjunction with‘‘Management's Discussion and Analysis of FinancialCondition and Results of Operations’’ and the consolidatedfinancial statements and related notes included in our Annual Report onForm 10-K for the year ended March 31, 2006, as well as in conjunctionwith the condensed consolidated financial statements and related notesappearing elsewhere in this Form 10-Q.

Overview

Wedevelop and market premium branded spirits in several growing marketcategories, including vodka, rum, Irish whiskey, liqueurs/cordials, andbeginning in October  2006, bourbon. We distribute these spiritsin all 50 U.S. states and the District of Columbia, in six keyinternational markets: Ireland, Great Britain, Germany, France, Italyand Canada, and in a number of other countries in continental Europe.Our brands include, among others, Boru vodka, Gosling’s rums,Knappogue Castle Whiskey and the Pallini liqueurs.

Our currentgrowth strategy focuses on: (a) aggressive brand development toencourage case sale and revenue growth of our existing portfolio ofbrands through significant investment in sales and marketingactivities, including advertising, promotion and direct sales personnelexpense; and (b) the selective addition of complementary premium brandsthrough a combination of strategic initiatives, including acquisitions,joint ventures and long-term exclusive distributionarrangements.

For the three-months ended September30,  2006, our total net sales increased $1.1  million, to$6.3  million, representing a 20.8% increase when comparedagainst $5.2  million in the comparable prior year period. Thisincrease was driven by organic growth of our existing brands, led byBoru vodka and Gosling’s rums.

31

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In the same period, selling expenseincreased $1.5  million, to $4.7  million, representing a46.1% increase when compared against $3.2  million in thecomparable prior year period, due primarily to volume driven increasesin distributor incentives, sales support expense, selling relatedshipping costs and sales commissions as well as billboard and printmedia advertising expenses pertaining to a recent Gosling’s rumadvertising campaign.

General and administrative expenseincreased $0.7  million, or 53.6%, to $1.9  millionfor the three-months ended September  30,  2006 versus$1.2  million in the comparable prior year period primarily dueto increased financial printing charges incurred in connection with ourchange in status to a public company, as well as to increases incompensation expense, our D&O liability insurance expense andtravel and entertainment expenses. Depreciation and amortizationremained approximately the same as the same period in2005.

Case Sales

The following table sets forthcertain information regarding our case sales for the three and sixmonth periods ended September  30,  2006 and 2005. The datain the following table is based on nine-liter equivalent cases, whichis a standard spirits industrymetric.

|                   |  |  |                                 |  |        |                               |  |  |      |  |        |      |  |  |  |  |         |   |  |  |  |  |         |   |
|-------------------|--|--|---------------------------------|--|--------|-------------------------------|--|--|------|--|--------|------|--|--|--|--|---------|---|--|--|--|--|---------|---|
|              |  |  | Three-monthsEnded September 30, |  |        | Six-months Ended September30, |
| CaseSales         |  |  | 2006                            |  |        | 2005                          |  |  | 2006 |  |        | 2005 |
| Cases             |  |  |                                 |  |   |                               |  |  |      |  |   |      |  |  |  |  |    |   |  |  |  |  |    |   |
| UnitedStates      |  |  |                                 |  | 48,107 |                               |  |  |      |  | 41,294 |      |  |  |  |  | 90,637  |   |  |  |  |  | 73,972  |   |
| International     |  |  |                                 |  | 32,011 |                               |  |  |      |  | 29,645 |      |  |  |  |  | 59,976  |   |  |  |  |  | 57,913  |   |
| Total             |  |  |                                 |  | 80,118 |                               |  |  |      |  | 70,939 |      |  |  |  |  | 150,613 |   |  |  |  |  | 131,885 |   |
| Vodka             |  |  |                                 |  | 39,172 |                               |  |  |      |  | 31,486 |      |  |  |  |  | 73,036  |   |  |  |  |  | 63,273  |   |
| Rum               |  |  |                                 |  | 23,122 |                               |  |  |      |  | 18,991 |      |  |  |  |  | 42,985  |   |  |  |  |  | 37,123  |   |
| Liqueurs/cordials |  |  |                                 |  | 13,207 |                               |  |  |      |  | 15,687 |      |  |  |  |  | 25,112  |   |  |  |  |  | 22,791  |   |
| Whiskey           |  |  |                                 |  | 4,617  |                               |  |  |      |  | 4,775  |      |  |  |  |  | 9,480   |   |  |  |  |  | 8,698   |   |
| Total             |  |  |                                 |  | 80,118 |                               |  |  |      |  | 70,939 |      |  |  |  |  | 150,613 |   |  |  |  |  | 131,885 |   |
| PercentageofCases |  |  |                                 |  |   |                               |  |  |      |  |   |      |  |  |  |  |    |   |  |  |  |  |    |   |
| UnitedStates      |  |  |                                 |  | 60.1   | %                             |  |  |      |  | 58.2   | %    |  |  |  |  | 60.2    | % |  |  |  |  | 56.1    | % |
| International     |  |  |                                 |  | 39.9   | %                             |  |  |      |  | 41.8   | %    |  |  |  |  | 39.8    | % |  |  |  |  | 43.9    | % |
| Total             |  |  |                                 |  | 100.0  | %                             |  |  |      |  | 100.0  | %    |  |  |  |  | 100.0   | % |  |  |  |  | 100.0   | % |
| Vodka             |  |  |                                 |  | 48.9   | %                             |  |  |      |  | 44.4   | %    |  |  |  |  | 48.5    | % |  |  |  |  | 48.0    | % |
| Rum               |  |  |                                 |  | 28.9   | %                             |  |  |      |  | 26.8   | %    |  |  |  |  | 28.5    | % |  |  |  |  | 28.1    | % |
| Liqueurs/cordials |  |  |                                 |  | 16.4   | %                             |  |  |      |  | 22.1   | %    |  |  |  |  | 16.7    | % |  |  |  |  | 17.3    | % |
| Whiskey           |  |  |                                 |  | 5.8    | %                             |  |  |      |  | 6.7    | %    |  |  |  |  | 6.3     | % |  |  |  |  | 6.6     | % |
| Total             |  |  |                                 |  | 100.0  | %                             |  |  |      |  | 100.0  | %    |  |  |  |  | 100.0   | % |  |  |  |  | 100.0   | % |
|                   |

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Results of Operations

Thefollowing table sets forth, for the periods indicated, the percentageof net sales of certain items in our financialstatements:

|                                                                                                       |  |  |                                 |  |        |                               |  |  |      |  |        |      |  |  |  |  |        |    |  |  |  |  |        |    |
|-------------------------------------------------------------------------------------------------------|--|--|---------------------------------|--|--------|-------------------------------|--|--|------|--|--------|------|--|--|--|--|--------|----|--|--|--|--|--------|----|
|                                                                                                  |  |  | Three-monthsEnded September 30, |  |        | Six-months Ended September30, |
|                                                                                                  |  |  | 2006                            |  |        | 2005                          |  |  | 2006 |  |        | 2005 |
| Sales,net                                                                                             |  |  |                                 |  | 100.0  | %                             |  |  |      |  | 100.0  | %    |  |  |  |  | 100.0  | %  |  |  |  |  | 100.0  | %  |
| Costofsales                                                                                           |  |  |                                 |  | 67.7   |                               |  |  |      |  | 61.1   |      |  |  |  |  | 66.6   |    |  |  |  |  | 62.6   |    |
| Grossprofit                                                                                           |  |  |                                 |  | 32.3   |                               |  |  |      |  | 38.9   |      |  |  |  |  | 33.4   |    |  |  |  |  | 37.4   |    |
| Sellingexpense                                                                                        |  |  |                                 |  | 75.1   |                               |  |  |      |  | 62.1   |      |  |  |  |  | 70.3   |    |  |  |  |  | 62.9   |    |
| Generaland administrativeexpense                                                                      |  |  |                                 |  | 30.4   |                               |  |  |      |  | 23.9   |      |  |  |  |  | 35.3   |    |  |  |  |  | 23.5   |    |
| Depreciationandamortization                                                                           |  |  |                                 |  | 3.9    |                               |  |  |      |  | 4.3    |      |  |  |  |  | 4.1    |    |  |  |  |  | 4.4    |    |
| Lossfrom continuingoperations                                                                         |  |  |                                 |  | (77.1  | )                             |  |  |      |  | (51.4  | )    |  |  |  |  | (76.3  | )  |  |  |  |  | (53.4  | )  |
| Otherincome                                                                                           |  |  |                                 |  | 0.0    |                               |  |  |      |  | 0.7    |      |  |  |  |  | 0.0    |    |  |  |  |  | 0.3    |    |
| Otherexpense                                                                                          |  |  |                                 |  | (0.2   | )                             |  |  |      |  | (0.2   | )    |  |  |  |  | (0.1   | )  |  |  |  |  | (0.2   | )  |
| Foreignexchangegain/(loss)                                                                            |  |  |                                 |  | 4.2    |                               |  |  |      |  | 0.3    |      |  |  |  |  | 5.6    |    |  |  |  |  | (3.0   | )  |
| Interestexpense,net                                                                                   |  |  |                                 |  | (1.2   | )                             |  |  |      |  | (7.1   | )    |  |  |  |  | (4.3   | )  |  |  |  |  | (6.2   | )  |
| Write-offof deferred financing costs in connection with conversion of 6%subordinated convertiblenotes |  |  |                                 |  |   |                               |  |  |      |  |   |      |  |  |  |  | (2.5   | )  |  |  |  |  |   |    |
| Currentcredit/(charge) on derivative financialinstrument                                              |  |  |                                 |  | (0.1   | )                             |  |  |      |  | 0.0    |      |  |  |  |  | (0.1   | )  |  |  |  |  | 0.1    |    |
| Incometaxbenefit                                                                                      |  |  |                                 |  | 0.6    |                               |  |  |      |  | 0.7    |      |  |  |  |  | 0.6    |    |  |  |  |  | 0.7    |    |
| Minorityinterests                                                                                     |  |  |                                 |  | 6.3    |                               |  |  |      |  | 1.8    |      |  |  |  |  | 6.3    |    |  |  |  |  | 2.2    |    |
| Netloss                                                                                               |  |  |                                 |  | (67.5  | )                             |  |  |      |  | (55.2  | )    |  |  |  |  | (70.8  | )  |  |  |  |  | (59.5  | )  |
| Less:                                                                                                 |  |  |                                 |  |   |                               |  |  |      |  |   |      |  |  |  |  |   |    |  |  |  |  |   |    |
| Preferredstockdividends                                                                               |  |  |                                 |  | 0.0    |                               |  |  |      |  | 7.5    |      |  |  |  |  | 0.4    |    |  |  |  |  | 6.9    |    |
| Netloss attributable to commonstockholders                                                            |  |  |                                 |  | (67.5  | )%                            |  |  |      |  | (62.7  | )%   |  |  |  |  | (71.2  | )% |  |  |  |  | (66.4  | )% |
|                                                                                                       |

ThreeMonths Ended September  30,  2006 Compared to Three MonthsEnded September  30,  2005

Netsales.    Net sales increased $1.1  million, or20.8%, to $6.3  million in the fiscal quarter endedSeptember  30,  2006 versus $5.2  million in thecomparable 2005 period. This increase reflected an increase in casesales of our existing brands. This increase also reflected that theaverage sales price per case increased $5.09, or 7.0%, dueprimarily to the favorable sales mix in the current quarter whichincluded a greater proportion of Pallini and Celtic Crossing liqueursand Gosling’s rums, than in the comparable prior year period.There was no material change in the selling prices of our existingproducts between the three-months ended September  30,2006 and the comparable prior period in 2005. Our case sales, measuredin nine-liter case equivalents, increased 9,179 cases, or 12.9%,to 80,118 cases versus 70,939 cases in the comparable prior period,driven by growth in our products in three of our primary categories asfollows:

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | 7,686 additional cases ofvodka; |

|  |              |                                                              |
|--|--------------|--------------------------------------------------------------|
|  | •  | 4,131 additional cases of rum,primarily Gosling’s; and |

|  |              |                                                       |
|--|--------------|-------------------------------------------------------|
|  | •  | 2,576additional cases of liqueurs, primarily Pallini; |

This wasoffset by a 5,056 case decline in sales of our Irish creams and a 158case decline in sales of our Irish whiskey.

Our overall U.S. casesales as a percentage of total case sales increased to 60.1%during the three-months ended September  30,  2006 from58.2% in the comparable prior year period. This increase of6,813 cases, representing 74.2% of the total quarterly increasein case sales globally, reflects the relative growth opportunitieswithin the United States for our premium spirits portfolio,particularly Gosling’s rums, Pallini liqueurs, and Boruvodka.

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The table below presents the increase inour case sales by product category for the three-months endedSeptember  30,  2006 compared to the comparable 2005period.

|                   |  |  |                                  |  |        |                               |  |  |         |  |       |      |  |  |  |  |       |    |  |  |  |  |      |    |
|-------------------|--|--|----------------------------------|--|--------|-------------------------------|--|--|---------|--|-------|------|--|--|--|--|-------|----|--|--|--|--|------|----|
|              |  |  | Increase(decrease) in case sales |  |        | Percentage Increase(decrease) |
|              |  |  | Overall                          |  |        | U.S.                          |  |  | Overall |  |       | U.S. |
| Vodka             |  |  |                                  |  | 7,686  |                               |  |  |         |  | 2,809 |      |  |  |  |  | 24.4  | %  |  |  |  |  | 22.4 | %  |
| Rum               |  |  |                                  |  | 4,131  |                               |  |  |         |  | 3,768 |      |  |  |  |  | 21.7  | %  |  |  |  |  | 24.4 | %  |
| Liqueurs/cordials |  |  |                                  |  | (2,480 | )                             |  |  |         |  | (198  | )    |  |  |  |  | (15.8 | %) |  |  |  |  | (1.5 | %) |
| IrishWhiskey      |  |  |                                  |  | (158   | )                             |  |  |         |  | 434   |      |  |  |  |  | (3.3  | %) |  |  |  |  | 59.3 | %  |
| Total             |  |  |                                  |  | 9,179  |                               |  |  |         |  | 6,813 |      |  |  |  |  | 12.9  | %  |  |  |  |  | 16.5 | %  |
|                   |

Grossprofit.    Gross profit was flat at $2.0  million duringthe three-months ended September  30,  2006, matching thegross profit of the comparable 2005 period. While net sales increasedas compared to the prior year period, gross profit remained flat due toan increase in our cost of sales. Cost of sales increased in thecurrent period due to increases in the costs of raw materials andproduct packaging, as well as a higher cost sales mix and certainhigher margin ‘‘one-off’’ sales thatoccurred in 2005. In addition, price sensitivity and competition inmany of our markets have prevented us from passing increased costs ofsales to our customers at this time. As a result of these factors, thecurrent period saw a drop in gross margin percentage to 32.3%from 38.9% in the comparable prior year period.

Selling expense.    Selling expense increased46.1% to $4.7  million during the three-months endedSeptember  30,  2006 versus $3.2  million in thecomparable prior year period. The change in selling expense wasprimarily attributable to increases in distributor incentives and salessupport costs of $0.4  million. In addition, the Gosling rumadvertising campaign incurred charges of $1.0  million in thequarter ended September  30,  2006 versus $0.4million in the comparable prior year period. Compensation expenseincreased by $0.3  million due, in part, to the impact of thehiring of our Managing Director – Americas and Senior VicePresident of Global Strategic Planning as well as to the hiring ofseveral additional full time employees during the current fiscal yearwho replaced part-time employees or interns. This increase alsoreflects stock-based compensation expense of $0.1  million due toour adoption of SFAS 123(R), Share-Based Payment. As a percentage ofnet sales, selling expense increased to 75.1% compared to62.1% for the comparable prior year period.

General andAdministrative Expense.    General and administrative expenseincreased 53.6% to $1.9  million during the three-monthsended September  30,  2006 versus $1.2  million inthe comparable period in 2005. Major components of this increaseincluded an increase of $0.1  million in professional fees whichwere primarily attributable to our change in status to that of a publiccompany and an increase of $0.2  million in compensation expensedue to the full current period impact of salaries and benefits forseveral executive and administrative employees hired in the past 12months versus the comparable period in 2005. This increase alsoreflects a $0.2  million charge for stock-based compensationexpense resulting from our adoption of SFAS 123(R) effectiveApril  1,  2006 and an increase of $0.2  millionincurred for public company directors and officers’ liabilityinsurance. As a percentage of net sales, general and administrativeexpense increased to 30.4% for the three-months endedSeptember  30,  2006 compared to 23.9% for thecomparable period in 2005.

Depreciation andAmortization.    Depreciation and amortization during thequarter ended September  30,  2006 was approximately thesame as the comparable prior year quarter at $0.2  million and isprimarily attributable to amortization of the Gosling worldwide (exceptBermuda) distribution agreement which went into effect duringFebruary  2005.

Other Income/(Expense),Net.    Other income/(expense), net, increased to $0.6million during the three-months ended September 30, 2006 versus ($0.2)million in the comparable 2005 period. The major components of thiscategory include the following:

34

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|  |              |                                                                                                                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Foreign exchangegain during the three-months ended September  30,  2006 was$0.3  million versus a nominal gain in the comparable prior yearperiod. The current period gain is attributable to the effects of thestrengthening of the euro against the dollar on our intercompany loansto our foreign subsidiaries; |

|  |              |                                                                                                                                                                                                                        |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Interestincome during the three-months ended September  30,  2006was $0.2  million versus zero in the comparable period in 2005.The source of this income is investment of the proceeds of our initialpublic offering; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Interest expenseduring the three-months ended September  30,  2006 remainedflat from the comparable period in 2005 at $0.3  million andpertained to our senior notes, the $9.0  million of 6%convertible subordinated notes outstanding following our initial publicoffering and financing costs on our accounts receivable discountingarrangement with a bank in Ireland;and |

|  |              |                                                                                                                                                                                                                                                                        |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Minority interest during thethree-months ended September  30,  2006 amounted to acredit of $0.4  million versus a credit of $0.1  million inthe comparable 2005 period as a result of a larger loss recorded by our60%-owned subsidiary, Gosling-Castle Partners, Inc. |

NetLoss Attributable to Common Stockholders.    The net lossattributable to common stockholders for the three-months endedSeptember  30,  2006 increased 30.3% to $4.2million versus $3.2  million in the comparable 2005 period. Thesenet losses included $0 and $0.4  million of preferred stockdividends accrued during the three-months ended September30,  2006 and 2005, respectively. The primary factors impactingour net loss for the three-months ended September  30,2006 were the increase in selling and general and administrativeexpenses, including our first-time recognition of stock basedcompensation expense in the current period.

Six Months EndedSeptember  30,  2006 Compared to Six Months EndedSeptember  30,  2005

Net sales.    Netsales increased $1.6  million, or 16.1%, to $11.7million in the six months ended September  30,  2006 versus$10.1  million in the comparable 2005 period. This increasereflected an increase in case sales of our existing brands. Averagesales price per case increased $1.25, or 1.6%, due primarily tothe favorable sales mix in the current period which included a greaterproportion of Pallini and Celtic Crossing liqueurs and Gosling’srums sold than in the comparable 2005 period. There was no materialchange in the selling prices of our existing products between thesix-months ended September  30,  2006 and the comparableprior period in 2005. Our case sales, measured in nine-liter caseequivalents, increased 18,728 cases, or 14.2%, to 150,613 casesversus 131,885 cases in the comparable prior period, with the increasecomprised of:

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | 9,763 additional cases ofvodka; |

|  |              |                                                          |
|--|--------------|----------------------------------------------------------|
|  | •  | 5,862 additional cases of rum,primarily Gosling’s; |

|  |              |                                                                  |
|--|--------------|------------------------------------------------------------------|
|  | •  | 2,321additional cases of creams and liqueurs, primarily Pallini; |

|  |              |                                       |
|--|--------------|---------------------------------------|
|  | •  | 782 additional cases of Irish whiskey |

Our U.S. case sales as a percentage of total case sales increased to60.2% during the six-months ended September  30,2006 from 56.1% in the comparable prior year period. Thisincrease of 16,665 cases, representing 89.0% of the totalsix-month increase in case sales globally, reflects the relative growthopportunities within the United States for our premium spiritsportfolio, particularly Gosling’s rums, Pallini liqueurs, andBoru vodka.

35

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The table below presents the increase inour case sales by product category for the six months endedSeptember  30,  2006 compared to the comparable 2005period.

|                   |  |  |                                  |  |        |                               |  |  |         |  |        |      |  |  |  |  |      |   |  |  |  |  |      |   |
|-------------------|--|--|----------------------------------|--|--------|-------------------------------|--|--|---------|--|--------|------|--|--|--|--|------|---|--|--|--|--|------|---|
|              |  |  | Increase(decrease) in case sales |  |        | Percentage Increase(decrease) |
|              |  |  | Overall                          |  |        | U.S.                          |  |  | Overall |  |        | U.S. |
| Vodka             |  |  |                                  |  | 9,763  |                               |  |  |         |  | 6,719  |      |  |  |  |  | 15.5 | % |  |  |  |  | 29.2 | % |
| Rum               |  |  |                                  |  | 5,862  |                               |  |  |         |  | 4,477  |      |  |  |  |  | 15.8 | % |  |  |  |  | 14.7 | % |
| Liqueurs/cordials |  |  |                                  |  | 2,321  |                               |  |  |         |  | 4,791  |      |  |  |  |  | 10.2 | % |  |  |  |  | 25.4 | % |
| IrishWhiskey      |  |  |                                  |  | 782    |                               |  |  |         |  | 678    |      |  |  |  |  | 9.0  | % |  |  |  |  | 40.5 | % |
| Total             |  |  |                                  |  | 18,728 |                               |  |  |         |  | 16,665 |      |  |  |  |  | 14.2 | % |  |  |  |  | 22.5 | % |
|                   |

Grossprofit.    Gross profit increased 3.7% to $3.9million during the six-months ended September  30,  2006versus $3.8  million in the comparable 2005 period. Cost of salesincreased in the current period due to increases in the costs of rawmaterials and product packaging, as well as a higher cost sales mix. Inaddition, price sensitivity and competition in many of our markets haveprevented us from passing on increased costs of sales to our customersat this time. As a result of these factors, the current period saw adrop in gross margin percentage to 33.4% from 37.4% inthe comparable prior year period.

Sellingexpense.    Selling expense increased 29.7% to$8.2  million during the six-months ended September30,  2006 versus $6.3  million in the comparable 2005period. The change in selling expense was primarily attributable toincreases in distributor incentives and sales support costs of$0.5  million and to an aggregate increase of $0.1  millionin selling related shipping costs and sales commissions. In addition,the Gosling rum advertising campaign incurred charges of $1.0million in the six-months ended September  30,  2006 versus$0.4  million in the comparable prior year period. In addition,sales consulting expense increased approximately $0.1  million inthe six-months ended September  30,  2006 and was employedto further enhance our strategic brand marketing platforms and toexecute the new Boru bottle design in time for a re-launch of the brandin fiscal 2007.Compensation expense increased by $0.5  milliondue, in part, to impact of the hiring of our Senior Vice President andManaging Director, International Operations and our Managing Director– Americas and Senior Vice President of Global StrategicPlanning, as well as to the hiring of several additional full timeemployees during the current fiscal year who replaced part-timeemployees or interns. This increase also reflects stock-basedcompensation expense of $0.2  million due to our adoption of SFAS123(R), Share-Based Payment. These increases were offset, in part, by areduction of $0.1  million in travel and entertainment expensesduring the six months ended September  30,  2006. As apercentage of net sales, selling expense increased to 70.3%compared to 62.9% for the comparable prior yearperiod.

General and Administrative Expense.    Generaland administrative expense increased 74.2% to $4.1million during the six months ended September  30,  2006versus $2.3  million in the comparable period in 2005. Majorcomponents of this increase included an increase of $0.2  millionin professional fees which were primarily attributable to our change instatus to that of a public company, an increase of $0.8  millionin compensation expense due to the full current period impact ofsalaries and benefits for several executive and administrativeemployees hired in the past 12 months versus the comparable period in2005. This increase also reflects a $0.5  million charge forstock-based compensation expense resulting from our adoption of SFAS123(R) effective April  1,  2006 and an increase of$0.3  million incurred for public company directors andofficers’ liability insurance. As a percentage of net sales,general and administrative expense increased to 35.3% for thesix months ended September  30,  2006 compared to23.5% for the comparable prior yearperiod.

Depreciation and Amortization.    Depreciationand amortization increased 9% to $0.5  million during thesix-months ended September  30,  2006 versus $0.4million in the comparable prior year period and is primarilyattributable to amortization of the Gosling worldwide (except Bermuda)distribution agreement which went into effect during February2005.

Other Income (Expense), Net.    Otherincome/(expense), net, increased to $0.7  million during thesix-months ended September 30, 2006 versus ($0.6) million in thecomparable period in 2005. The major components of this categoryinclude the following:

36

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|  |              |                                                                                                                                                                                                                                                                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Foreign exchangegain / (loss) during the six-months ended September  30,2006 was a gain of $0.7  million versus a loss of ($0.3) millionin the comparable period in 2005. The current period gain isattributable to the effect of a strengthening of the euro against thedollar on our intercompany loans to our foreignsubsidiaries; |

|  |              |                                                                                                                                                                                                                     |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Interest income during thesix-months ended September  30,  2006 was $0.4million versus zero in the comparable period in 2005. The source ofthis income is investment of the proceeds of our initial publicoffering; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Interest expense during thesix-months ended September  30,  2006 was $0.8million versus $0.6  million in the comparable period in 2005 andpertained to our senior notes, the $9.0  million of 6%convertible subordinated notes outstanding following our initial publicoffering and financing costs on our accounts receivable discountingarrangement with a bank inIreland; |

|  |              |                                                                                                                                                            |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Write-off of deferred financingcosts of $0.3  million in connection with the conversion tocommon stock of 40% of our 6% convertible subordinatednotes; and |

|  |              |                                                                                                                                                                                                                                                                      |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Minority interest during thesix-months ended September  30,  2006 amounted to a creditof $0.7  million versus a credit of $0.2  million in thecomparable 2005 period as a result of a larger loss recorded by our60%-owned subsidiary, Gosling-Castle Partners, Inc. |

NetLoss Attributable to Common Stockholders.    The net lossattributable to common stockholders for the six-months endedSeptember  30,  2006 increased 24.8% to $8.3million versus $6.7  million in the comparable 2005 period. Thesenet losses included $0.1  million and $0.7  million ofpreferred stock dividends accrued during the six-months endedSeptember  30,  2006 and 2005, respectively. The primaryfactors impacting our net loss for the six-months endedSeptember  30,  2006 were the increase in selling andgeneral and administrative expenses, the expensing of deferredfinancing charges associated with the automatic conversion to commonstock of 40% of our 6% convertible notes at the time ofour initial public offering, our first-time recognition of stock basedcompensation expense in the six-month period ending September30,  2006, our foreign exchange gain versus a loss in thecomparable prior year period and the effects of an increase in lossesby our 60%-owned subsidiary, Gosling-Castle PartnersInc.

EBITDA.    EBITDA decreased 12.8% tonegative $6.2  million for the six-months ended September30,  2006 versus negative $5.5  million the comparableprior year period. EBITDA represents net income before deductinginterest expense (including expensing of deferred financing costs),income taxes, depreciation and amortization and the impact of thenon-cash charge for stock-based compensation reported under SFAS123(R). We use EBITDA as the primary internal management measure forevaluating performance on a period over period analysis, when comparingactual results to budgeted performance and when allocating additionalresources. This non-GAAP financial measure is presented in order toassist industry analysts and investors in assessing our liquidity, ourability to incur and service debt, make capital expenditures and meetworking capital requirements. EBITDA should not be considered as analternative to operating income as an indicator of our performance, asan alternative to cash flows from operating activities as a measure ofliquidity, or as an alternative to any other measure determined inaccordance with GAAP. Unlike net income, EBITDA does not includedepreciation or interest expense and therefore does not reflect currentor future capital expenditures or the cost of capital. We compensatefor these limitations by using EBITDA as only one of severalcomparative tools, together with GAAP measurements, to assist in theevaluation of operating performance. Such GAAP measurements includeoperating income (loss), net income (loss), cash flows from operationsand cash flow data. We have significant uses of cash flows, includinginterest payments, debt principal repayments, and other non-recurringcharges, which are not reflected in EBITDA. Because EBITDA asdetermined by us excludes some, but not all, items that affect netincome, it may not be comparable to EBITDA or similarly titled measuresused by other companies.

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The following table sets forth ourreconciliation of EBITDA to net loss (the most directly comparablefinancialmeasure):

|                                                                      |  |  |                               |   |        |      |  |  |  |   |         |   |
|----------------------------------------------------------------------|--|--|-------------------------------|---|--------|------|--|--|--|---|---------|---|
|                                                                 |  |  | Six-monthsEndedSeptember  30, |
| (Dollars inthousands)                                                |  |  | 2006                          |   |        | 2005 |
| Netloss                                                              |  |  |                               | $ | (8,282 | )    |  |  |  | $ | (5,982  | ) |
| Add(subtract):                                                       |  |  |                               |   |   |      |  |  |  |   |    |   |
| Income taxbenefit                                                    |  |  |                               |   | (74    | )    |  |  |  |   | (74     | ) |
| Interestexpense, net, including expensing of deferred financingcosts |  |  |                               |   | 794    |      |  |  |  |   | — |   |
| Depreciationandamortization                                          |  |  |                               |   | 480    |      |  |  |  |   | 442     |   |
| Stockbasedcompensation                                               |  |  |                               |   | 771    |      |  |  |  |   | — |   |
| EBITDA                                                               |  |  |                               | $ | (6,311 | )    |  |  |  | $ | (4,990  | ) |
|                                                                      |

Liquidityand Capital Resources

Since our inception, we have incurredsignificant operating and net losses and, in addition, have notgenerated positive cash flows from operations. As of September30,  2006, we had stockholders’ equity of $30.3million and working capital of $21.7  million. At March31,  2006 (prior to our initial public offering in April2006), we had a stockholders’ deficit of $26.0  millionand a working capital deficit of $0.8  million. AtSeptember  30,  2006, we had cash and cash equivalents ofapproximately $13.5  million. At March  31,  2006, wehad cash and cash equivalents of approximately $1.4  million. Theincrease in stockholders’ equity, working capital and cash andcash equivalents is due to our initial public offering which raisedgross proceeds of $31,500,000 upon the sale of 3,500,000 common sharesat the offering price of $9.00 per share. Total estimated offeringcosts were $4,966,348. Upon the closing of our initial public offering,we received net proceeds from the offering of approximately$26.5  million. We have received all final invoices andadjustments incurred in connection with our initial public offering andhave paid all balances in full. The proceeds have been and willcontinue to be used for working capital and general corporate purposes,including for sales and marketing activities, meeting capitalcommitments to our 60%-owned subsidiary, Gosling-Castle PartnersInc., the hiring of additional employees and repayment of debt andrelated interest.

In addition, at September  30,2006, we had approximately $0.5  million of cash restricted fromwithdrawal and held by a bank in Ireland as collateral for a line ofcredit.

The following trends are reasonably likely to result in amaterial decrease in our liquidity over the near-to-midterm:

|  |              |                                                                                                            |
|--|--------------|------------------------------------------------------------------------------------------------------------|
|  | •  | an increase in working capitalrequirements to finance higher levels of inventories and accountsreceivable; |

|  |              |                                                                        |
|--|--------------|------------------------------------------------------------------------|
|  | •  | addition of administrativeand sales personnel as our business expands; |

|  |              |                                                                                            |
|--|--------------|--------------------------------------------------------------------------------------------|
|  | •  | increases in advertising, public relationsand sales promotions for existing and newbrands; |

|  |              |                                          |
|--|--------------|------------------------------------------|
|  | •  | acquisition of additionalspirits brands; |

|  |              |                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------|
|  | •  | an increase in legal,accounting and other expenses due to our new status as a publiccompany; |

|  |              |                                                                                                                                                                      |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | a reduction in gross margindue to increases in our cost of sales which are not fully passed on toour customers in the form of higher selling prices for ourproducts; |

|  |              |                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------|
|  | •  | financing the operations ofour 60%-owned Gosling-Castle Partners strategic export venture;and |

|  |              |                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------|
|  | •  | expansion into new markets andwithin existing markets in the United States andinternationally. |

We expect that we will require increasingamounts of working capital to finance our inventory levels in theUnited States. Except for Gosling’s rums and the bourbonproducts (acquired in 

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October  2006), which are bottled inthe United States, all of our products are imported from Europe. In thecase of our wholly-owned brands, there is a three-to-four monthproduction and shipping lead time between the time of order placementand the time the product is available for sale. This lead time hasrequired us to ensure that we maintain sufficient inventories toproperly service our customers.

We expect to experience alengthening of the revenue collection cycle due to the need to extendpayment terms as an incentive to encourage customers to makecontainer-sized purchases of our products in which title passes to thecustomer at the shipping point in Ireland. A lengthening of the revenuecollection cycle will require a significant amount of workingcapital.

Cash Flows.

The following tablesummarizes our primary sources and uses of cash during the periodspresented (inthousands):

|                                         |  |  |                              |   |         |      |  |  |  |   |        |   |
|-----------------------------------------|--|--|------------------------------|---|---------|------|--|--|--|---|--------|---|
|                                    |  |  | Six-monthsEnded September30, |
|                                    |  |  | 2006                         |   |         | 2005 |
| Netcash provided by (used in):          |  |  |                              |   |    |      |  |  |  |   |   |   |
| Operatingactivities                     |  |  |                              | $ | (13,472 | )    |  |  |  | $ | (8,310 | ) |
| Investingactivities                     |  |  |                              |   | (230    | )    |  |  |  |   | (164   | ) |
| Financingactivities                     |  |  |                              |   | 25,819  |      |  |  |  |   | 11,326 |   |
| Effectsof foreign currencytranslation   |  |  |                              |   | — |      |  |  |  |   | ($1    | ) |
| Netincrease in cash and cashequivalents |  |  |                              | $ | 12,117  |      |  |  |  | $ | 2,851  |   |
|                                         |

OperatingActivities.    A substantial portion of our available cash hasbeen used to fund our operating activities. In general, these cashfunding requirements are based on operating losses, driven chiefly byour sizable investment in selling and marketing. With increases in ouroverall sales volumes, we have also utilized cash to fund ourreceivables and inventories. In general, these increases are onlypartially offset by increases in our accounts payable to our suppliersand accrued expenses. Our business has incurred significant lossessince inception.

On average, the production cycle for our ownedbrands can take as long as four months from the time we obtain thedistilled spirits and other materials needed to bottle and package ourproducts to the time we receive products available for sale, which isimpacted by the international nature of our business. With respect toGosling’s rums and Pallini liqueurs, we do not produce thefinished product and, instead, receive the finished product directlyfrom the owners of such brands. From the time we have productsavailable for sale, an additional three-to-four months may be requiredbefore we sell our inventory and collect payment from ourcustomers.

In the six-months ended September  30,2006, net cash used in operating activities was $13.5  million,consisting primarily of losses from our operations of $8.3million, an increase in accounts receivable of $2.8  million,increases in inventories and prepaid expenses of $2.0  millionand $0.3  million, respectively, an increase in due to relatedparties, net, of $0.2  million, $0.5  million resultingfrom the effect of changes in foreign currency rates, and minorityinterest in the net loss of our 60%-owned subsidiaryGosling-Castle Partners Inc., of $0.7  million. These uses ofcash were offset, in part, by non-cash charges for depreciation andamortization and share-based compensation expense of $0.5million and $0.8  million, respectively.

InvestingActivities.    Net cash used in investing activities during thesix-months ended September  30,  2006 was $0.2million for the acquisition of property and equipment and intangibleassets.

Financing Activities.    Net cash provided byfinancing activities during the six-months ended September30,  2006 was $25.8  million and consisted of $31.5million from common stock issued in our initial public offering less$2.8  million in payments for the cost of stock issuance and thenet repayment of notes payable in the amount of $2.7million.

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As of November  10,  2006,our wholly owned subsidiary Castle Brands (USA) Corp. completed anoffering to 11 persons of an aggregate of $5,340,000 of additionalsenior notes secured by accounts receivable and inventories of CastleBrands (USA), pursuant to the First Amended and Restated Indenture ofCastle Brands (USA), dated as of June  1,  2004, andamended and restated as of August  15,  2005. The issuancewas made pursuant to Regulation D and Regulation S under the SecuritiesAct of 1933, as amended. The additional senior notes have substantiallyidentical terms to the aggregate principal amount of $4,660,000 ofsenior notes previously issued under the indenture in 2004 and 2005except that the additional senior notes were issued at a two percentdiscount to the stated principal amount. The additional senior notesbear interest at a rate of 9%, payable semi-annually onNovember 30th and May 31st, and mature on May 31,2009. The additional senior notes will be treated as a single classwith the previously issued senior notes.

As with the previouslyissued senior notes, we have guaranteed payment on the additionalsenior notes. We have also agreed to pay a one time fee equal to1% of the aggregate principal amount of the additional seniornotes, for an aggregate payment of $53,400, in the event that the notesremain outstanding at December  31,  2007.

The seniornotes are subject to customary restrictive covenants. In addition, theconsent of holders of a requisite majority of the aggregate principalamount of these notes is required for Castle Brands (USA) to take anyof the following actions: merge or consolidate or sell all orsubstantially all of its assets other than with an entity formed in theUnited States or to a person or entity that assumes all of ourobligations under the senior notes, engage in a transaction with anaffiliate unless the transaction is on fair and reasonable terms, orchange our jurisdiction of incorporation without giving 60 days priornotice.

We intend to use the proceeds from the sale of theadditional senior notes to fund operating expenses and for generalcorporate purposes.

In addition, the additional senior notes wereaccompanied by warrants to purchase 40 shares of our commonstock at $8.00 a share for every $1,000 principal amount of such notes,for an aggregate of 213,600 shares. The issuance was madepursuant to Regulation D and Regulation S under the Securities Act of1933, as amended.

We believe that we will be able to fund ouroperations from the proceeds of our initial public offering, ourprojected cash flow from operations, and current cash and cashequivalents for the next twelve months. Beyond that, additionalfinancing may be needed to fund working capital and other requirements.Changes in our operating plans, acquisitions or other additions ofbrands, lower than anticipated sales, increased expenses, or otherevents, including those described in our Annual Report on Form 10-K forthe year ended March  31,  2006, under the caption‘‘Risk Factors,’’ may require us to seekadditional debt or equity financing on an accelerated basis. Financingmay not be available on acceptable terms, or at all, and our failure toraise capital when needed could impact negatively our growth plans,financial condition and results of operations. Additional equityfinancing may be dilutive to the holders of our common stock, and debtfinancing, if available, may involve significant cash paymentobligations or financial covenants and ratios that restrict our abilityto operate our business.

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Contractualobligations

The following table sets forth our contractualcommitments as of September  30,  2006 for each of thefollowing twelve month periods:

|                                                                         |  |  |                                                                 |   |         |      |  |  |      |   |         |      |  |  |      |   |         |            |  |  |       |   |         |  |  |  |  |   |         |  |  |  |  |   |         |  |  |  |  |   |        |  |
|-------------------------------------------------------------------------|--|--|-----------------------------------------------------------------|---|---------|------|--|--|------|---|---------|------|--|--|------|---|---------|------------|--|--|-------|---|---------|--|--|--|--|---|---------|--|--|--|--|---|---------|--|--|--|--|---|--------|--|
|                                                                    |  |  | Paymentsdue during the twelve month periods ending September30, |
|                                                                    |  |  | 2007                                                            |   |         | 2008 |  |  | 2009 |   |         | 2010 |  |  | 2011 |   |         | Thereafter |  |  | Total |
|                                                                    |  |  | (inthousands)                                                   |
| Long-term notes payable,including current portion and estimatedinterest |  |  |                                                                 |   |    |      |  |  |      |   |    |      |  |  |      |   |    |            |  |  |       |   |    |  |  |  |  |   |    |  |  |  |  |   |    |  |  |  |  |   |   |  |
| UlsterBankfacilities                                                    |  |  |                                                                 | $ | 936     |      |  |  |      | $ | — |      |  |  |      | $ | — |            |  |  |       | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | 936    |  |
| Gosling’sexportagreement                                          |  |  |                                                                 |   | 625     |      |  |  |      |   | — |      |  |  |      |   | — |            |  |  |       |   | — |  |  |  |  |   | — |  |  |  |  |   | — |  |  |  |  |   | 625    |  |
| 9% seniornotes                                                     |  |  |                                                                 |   | — |      |  |  |      |   | — |      |  |  |      |   | — |            |  |  |       |   | 4,660   |  |  |  |  |   |    |  |  |  |  |   |    |  |  |  |  |   | 4,660  |  |
| 6% convertiblesubordinatednotes                                    |  |  |                                                                 |   | — |      |  |  |      |   | — |      |  |  |      |   | — |            |  |  |       |   | 3,000   |  |  |  |  |   | 6,000   |  |  |  |  |   | — |  |  |  |  |   | 9,000  |  |
| Capitalleases                                                           |  |  |                                                                 |   | 4       |      |  |  |      |   | 4       |      |  |  |      |   | 3       |            |  |  |       |   |    |  |  |  |  |   |    |  |  |  |  |   |    |  |  |  |  |   | 11     |  |
| Operatingleases                                                         |  |  |                                                                 |   | 297     |      |  |  |      |   | 136     |      |  |  |      |   | 2       |            |  |  |       |   | 1       |  |  |  |  |   |    |  |  |  |  |   | — |  |  |  |  |   | 436    |  |
| Estimatedinterest                                                       |  |  |                                                                 |   | 965     |      |  |  |      |   | 965     |      |  |  |      |   | 611     |            |  |  |       |   | 360     |  |  |  |  |   | 15      |  |  |  |  |   |    |  |  |  |  |   | 2,916  |  |
| Total                                                                   |  |  |                                                                 | $ | 2,827   |      |  |  |      | $ | 1,105   |      |  |  |      | $ | 616     |            |  |  |       | $ | 8,021   |  |  |  |  | $ | 6,015   |  |  |  |  | $ | — |  |  |  |  | $ | 18,584 |  |
|                                                                         |

CriticalAccounting Policies and Estimates

The preparation ofconsolidated financial statements in conformity with U.S. generallyaccepted accounting principles requires us to make a number ofestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements. Such estimates and assumptionsaffect the reported amounts of sales and expenses during the reportingperiod. On an ongoing basis, we evaluate these estimates andassumptions based upon historical experience and various other factorsand circumstances. We believe our estimates and assumptions arereasonable under the circumstances; however, actual results may differfrom these estimates under different future conditions.

Webelieve that the estimates and assumptions discussed below are mostimportant to the portrayal of our financial condition and results ofoperations in that they require our most difficult, subjective orcomplex judgments and form the basis for the accounting policies deemedto be most critical to our operations.

RevenueRecognition

We recognize revenue from product sales when theproduct is shipped to a customer (generally upon shipment to adistributor or to a control state entity), title and risk of loss haspassed to the customer in accordance with the terms of sale (FOBshipping point or FOB destination) and collection is reasonablyassured. We do not offer a right of return but will accept returns ifwe shipped the wrong product or wrong quantity.

AccountsReceivable

We record trade accounts receivable at net realizablevalue. This value includes an appropriate allowance for estimateduncollectible accounts to reflect any loss anticipated on the tradeaccounts receivable balances and charged to the provision for doubtfulaccounts. We calculate this allowance based on our history ofwrite-offs, level of past due accounts based on contractual terms ofthe receivables and our relationships with, and economic status of, ourcustomers.

Inventory

Our inventory, which consists ofdistilled spirits, packaging and finished goods, is valued at the lowerof cost or market, using the weighted average cost method. We assessthe valuation of our inventories and reduce the carrying value of thoseinventories that are obsolete or in excess of our 

41

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forecasted usage to their estimatedrealizable value. We estimate the net realizable value of suchinventories based on analyses and assumptions including, but notlimited to, historical usage, future demand and market requirements.Reduction to the carrying value of inventories is recorded in cost ofgoods sold.

Goodwill and Other Intangible Assets

Goodwillrepresents the excess of purchase price and related costs over thevalue assigned to the net tangible and identifiable intangible assetsof businesses acquired. As of September  30,  2006, andMarch  31,  2006, goodwill and other intangible assets thatarose from cumulative acquisitions were $25.3  million and$25.5  million, respectively. Goodwill and other intangibleassets with indefinite lives are not amortized, but instead are testedfor impairment annually, or, more frequently if circumstances indicatea possible impairment may exist.

We evaluate the recoverabilityof goodwill and indefinite lived intangible assets using a two-stepimpairment test approach at the reporting unit level. In the first stepthe fair value for the reporting unit is compared to its book valueincluding goodwill. In the case that the fair value of the reportingunit is less than the book value, a second step is performed whichcompares the implied fair value of the reporting unit’s goodwillto the book value of the goodwill. The fair value for the goodwill isdetermined based on the difference between the fair values of thereporting units and the net fair values of the identifiable assets andliabilities of such reporting units. If the fair value of the goodwillis less than the book value, the difference is recognized as animpairment.

SFAS No. 142 also requires that intangible assetswith estimable useful lives be amortized over their respectiveestimated useful lives to the estimated residual values and reviewedfor impairment in accordance with SFAS No. 144,‘‘Accounting for the Impairment or Disposal of Long-LivedAssets.’’

Stock-Based Compensation

Prior toApril  1,  2006, we accounted for our employee stock optionplan under the intrinsic value method in accordance with the provisionsof Accounting Principles Board (‘‘APB’’)Opinion No. 25, ‘‘Accounting for Stock Issued toEmployees’’ (‘‘APB No. 25’’)and related interpretations. Under APB No. 25, generally nocompensation expense was recorded when the terms of the award are fixedand the exercise price of the employee stock option equals or exceedsthe fair value of the underlying stock on the date of the grant. Nostock based compensation expense has been recognized throughMarch  31,  2006. Additionally, in periods prior toApril  1,  2006, we followed the disclosure-onlyrequirements of SFAS No. 123, ‘‘Accounting forStock-Based Compensation’’ (‘‘SFAS123’’) which allowed entities to continue to apply theprovisions of APB No. 25 for transactions with employees and providepro forma net income and pro forma earnings per share disclosures foremployee stock grants made as if the fair value based method ofaccounting in SFAS 123 had been applied to thesetransactions.

Effective April  1,  2006, the Companyadopted SFAS No. 123(R), ‘‘Share-BasedPayment’’ (‘‘SFAS 123(R)’’)and related interpretations which superseded APB No. 25. SFAS 123(R)requires that all stock-based compensation be recognized as an expensein the financial statements and that such cost be measured at the fairvalue of the award. This statement was adopted using the modifiedprospective method, which requires us to recognize compensation expenseon a prospective basis following adoption. Therefore, prior periodfinancial statements have not been restated. Under this method, inaddition to reflecting compensation expense for new share-based awards,expense is also recognized to reflect the remaining service period ofawards that had been included in pro-forma disclosures in priorperiods.

As a result of adopting SFAS 123(R) on April1,  2006, our net loss for the three-months endedSeptember  30,  2006 is $276,921 higher than if we hadcontinued to account for share-based compensation under APB No. 25.Basic and diluted net loss per share for the three-months endedSeptember  30,  2006 were increased by $0.02 per share as aresult of adopting SFAS 123(R). For further information on the effectof our adoption of SFAS 123(R), see Note 1.R. to the condensedconsolidated financial statements.

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Fair Value ofInvestment.    SFAS No. 107, ‘‘Disclosures AboutFair Value of Financial Instruments,’’ defines the fairvalue of a financial instrument as the amount at which the instrumentcould be exchanged in a current transaction between willing parties andrequires disclosure of the fair value of certain financial instruments.We believe that there is no material difference between the fair valueand the reported amounts of financial instruments in the balance sheetsdue to the short-term maturity of these instruments, or with respect tothe debt, as compared to the current borrowing rates available tous.

Currency Translation.    The functional currenciesfor our foreign operations are the euro in Ireland, the British poundin the United Kingdom and the Canadian dollar in Canada. With respectto our consolidated financial statements, the translation from theapplicable foreign currencies to U.S. dollars is performed for balancesheet accounts using exchange rates in effect at the balance sheet dateand for revenue and expense accounts using a weighted average exchangerate during the period. The resulting translation adjustments arerecorded as a component of other comprehensive income. Gains or lossesresulting from foreign currency transactions are included in otherincome/expenses. See Item 3. Quantitative and QualitativeDisclosures about Market Risk for a description of risks associatedwith currency translation.

Where in this quarterly report werefer to amounts in euros, British pounds or Canadian dollars, we havefor your convenience also in certain cases provided a translation ofthose amounts to U.S. dollars in parenthesis. Where the numbers referto a specific balance sheet date account or financial statement period,account, we have used the exchange rate that was used to perform thetranslations in connection with the applicable financial statement. Inall other instances, unless otherwise indicated, the translations havebeen made using the exchange rates as of September  30,2006, each as calculated from the Interbank exchange rates as reportedby Oanda.com. On September  30,  2006, the exchange rate ofthe euro, the British pound and the Canadian dollar in exchange forU.S. dollars were €1.00 = U.S. $1.2688 (equivalent to U.S.$1.00 = € 0.7882) for euros, £1.00 = U.S. $1.8726(equivalent to U.S. $1.00 = £0.5340) for British Pounds, and CAN$1.00=U.S. $0.8979 (equivalent to U.S. $1.00 = CAN $1.1137),respectively.

These translations should not be construed asrepresentations that the euro, British pound and Canadian dollaramounts actually represent U.S. dollar amounts or could be convertedinto U.S. dollars at the rates indicated.

Recent AccountingPronouncements

In September  2006, the Securities andExchange Commission (SEC) issued Staff Accounting Bulletin 108,‘‘Considering the Effects on Prior Year Misstatementswhen Quantifying Misstatements in Current Year FinancialStatements,’’ (‘‘SAB 108’’).SAB 108 requires registrants to quantify errors using both the incomestatement method (i.e. iron curtain method) and the rollover method andrequires adjustment if either method indicates a material error. If acorrection in the current year relating to prior year errors ismaterial to the current year, then the prior year financial informationneeds to be corrected. A correction to the prior year results that arenot material to those years, would not require a‘‘restatement process’’ where priorfinancials would be amended. SAB 108 is effective for fiscal yearsending after November  15,  2006. The Company does notanticipate that SAB 108 will have a material effect on its financialposition, results of operations or cash flows.

InSeptember  2006, the FASB issued SFAS No. 157,‘‘Fair Value Measurements,’’ to define fairvalue, establish a framework for measuring fair value in accordancewith generally accepted accounting principles, and expand disclosuresabout fair value measurements. SFAS No. 157 will be effective forfiscal years beginning after November  15,  2007, thebeginning of the Company’s 2008 fiscal year. The Company isassessing the impact the adoption of SFAS No. 157 will have on theCompany’s financial position and results ofoperations.

Item 3.    Quantitative and QualitativeDisclosures about Market Risk

As of September  30,2006, we did not participate in any derivative financial instruments,or other financial or commodity instruments for which fair valuedisclosure would be required under SFAS No. 

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107, ‘‘Disclosure About FairValue of Financial Investments.’’ We hold no investmentsecurities that would require disclosure of market risk.

ForeignCurrency Risk

International revenues from our non-U.S.operations accounted for approximately 31.5% and 32.5% oftotal revenues during the three month periods ended September30,  2006 and 2005, respectively. International revenues from ournon-U.S. operations also accounted for approximately 32.9% and34.4% of total revenues during the six month periods endedSeptember  30,  2006 and 2005, respectively. Internationalrevenues are generated from our foreign subsidiaries and aredenominated in the local currency of each country. These subsidiariesincur most of their expenses in their local currency, and accordinglyuse the local currency as their functional currency.

Ourinternational operations are subject to risks, including but notlimited to differing economic conditions, changes in political climate,differing tax structures, other regulations and restrictions, andforeign exchange rate volatility when compared to the United States.Accordingly, our future results could be materially adversely impactedby changes in these or other factors.

Foreign exchange ratefluctuations may adversely affect our consolidated financial positionas well as our consolidated results of operations. Foreign exchangerate fluctuations may adversely impact our financial position as theassets and liabilities of our foreign operations are translated intoU.S. dollars in preparing our consolidated balance sheet. Our exposureto foreign exchange rate fluctuations arises in part from balances inour intercompany accounts included on our subsidiary balance sheets.These intercompany accounts are denominated in the functional currencyof the foreign subsidiaries. Additionally, foreign exchange ratefluctuations may significantly impact our consolidated results fromoperations as exchange rate fluctuations on transactions denominated incurrencies other than the functional currencies of Castle Brands Inc.and its subsidiaries result in gains and losses that are reflected inour consolidated statement of income. The effect of foreign exchangerate fluctuations on our consolidated financial position for the sixmonths ended September  30,  2006, was a net translationadjustment of approximately $0.2  million. This net translationadjustment is recognized within stockholders’ equity throughaccumulated other comprehensive loss. We do not hedge against foreigncurrency risk.

From time to time we do participate in certainforeign exchange currency future contracts programs to limit our riskand the potential impact of currency fluctuations on our product costs.When placing a product order, we attempt to lock in its cost by buyingforward contracts on euros coinciding with the projected payment datesfor such purchases. Individual forward contracts rarely extend for morethan six months or exceed €300,000 ($362,300). AtSeptember  30,  2006, there were no forward contractsoutstanding.

Interest Rate Risk

Our exposure to marketrate risk for changes in interest rates relates primarily to ourshort-term investment portfolio and issuance of debt. We do not usederivative financial instruments in our investment portfolio. We have aprescribed methodology whereby we invest excess cash in debtinstruments of government agencies and high quality corporate issuers.The portfolio is managed by professional fund managers and our interestrate risk is minimal.

Item 4.    Controls andProcedures

Evaluation of disclosure controls andprocedures

We maintain disclosure controls and procedures (asdefined in Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended (the ‘‘Exchange Act’’))that are designed to ensure that information that would be required tobe disclosed in Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SecuritiesExchange Commission’s rules and forms, and that such informationis accumulated and communicated to our management, including the ChiefExecutive Officer, President and Chief Operating Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingdisclosure.

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As of September  30,  2006,we carried out an evaluation, under the supervision and with theparticipation of our management, including the Chief Executive Officer,President and Chief Operating Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of our disclosurecontrols and procedures. Based on the foregoing, our Chief ExecutiveOfficer, President and Chief Operating Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this quarterlyreport.

Section 404 compliance project

Beginning with ourfiscal year ending March  31,  2009, Section 404 of theSarbanes-Oxley Act of 2002 will require us to includemanagement’s report on our internal control over financialreporting in our Annual Report on Form 10-K. The internal controlreport must contain (1) a statement of management’sresponsibility for establishing and maintaining adequate internalcontrol over our financial reporting, (2) a statement identifying theframework used by management to conduct the required evaluation of theeffectiveness of our internal control over financial reporting, (3)management’s assessment of the effectiveness of our internalcontrol over financial reporting as of the end of our most recentfiscal year, including a statement as to whether or not our internalcontrol over financial reporting is effective, and (4) a statement thatour registered independent public accounting firm has issued anattestation report on management’s assessment of our internalcontrol over financial reporting.

In order to achieve compliancewith Section 404 within the prescribed period, management has commenceda Section 404 compliance project under which management will engageoutside consultants and adopt a detailed project work plan to assessthe adequacy of our internal control over financial reporting,remediate any control deficiencies that may be identified, validatethrough testing that controls are functioning as documented andimplement a continuous reporting and improvement process for internalcontrol over financial reporting. During the six months endedSeptember  30,  2006, there have been no changes in ourinternal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internalcontrol over financial reporting.

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PART II.    OTHERINFORMATION

Item 1.    Legal Proceedings

We believethat neither we nor any of our subsidiaries is currently subject tolitigation which, in the opinion of our management, is likely to have amaterial adverse effect on us. We may, however, become involved inlitigation from time to time relating to claims arising in the ordinarycourse of our business. These claims, even if not meritorious, couldresult in the expenditure of significant financial and managerialresources.

Item 1A.    Risk Factors

Notapplicable.

Item 2.    Unregistered Sales of Equity Securitiesand Use of Proceeds

Unregistered Sales of EquitySecurities

The Company did not sell any equity securitiesduring the fiscal quarter ending September  30,  2006 whichwere not registered under the Securities Act of 1933, asamended.

Use of proceeds from registeredsecurities

On April 6, 2006, we commenced our initialpublic offering of our common stock, $0.01 par value, pursuantto our Registration Statement on Form S-1 (FileNo. 333-128676), that was declared effective on April 5,2006. We registered 3,500,000 shares of common stock, all ofwhich were sold in the offering at a per share price of $9.00 for anaggregate offering price of $31.5 million. The underwriters inthe offering were Oppenheimer & Co. Inc., ThinkEquityPartners LLC and Ladenburg Thalmann & Co. Inc.

The netproceeds received by us in the offering were $26,533,652, determined asfollows:

|                                          |  |  |  |   |            |  |
|------------------------------------------|--|--|--|---|------------|--|
| Aggregateoffering proceeds to theCompany |  |  |  | $ | 31,500,000 |  |
| Underwritingdiscounts and commissions    |  |  |  |   | 2,205,000  |  |
| Findersfee                               |  |  |  |   | —    |  |
| Other fees andexpenses                   |  |  |  |   | 2,761,348  |  |
| Totalexpenses                            |  |  |  |   | 4,966,348  |  |
| Netproceeds to theCompany                |  |  |  | $ | 26,533,652 |  |
|                                          |

TheCompany has received all final invoices and adjustments incurred inconnection with its initial public offering and has paid all balancesin full.

No payments were made directly or indirectly to(i) any of our directors, officers or their associates,(ii) any person(s) owning 10% or more of any class of ourequity securities or (iii) any of our affiliates, except asfollows:

|  |              |                                                                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | repayment of $2,026,000 to anaffiliate of one of our directors to repay all outstanding principaland interest under our February  2006 creditfacility; |

|  |              |                                                                                                                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | payment of $105,246 fordividends accrued on preferred membership units of our predecessorcompany, Great Spirits Company, LLC to certain of our directors andexecutive officers; and |

|  |              |                                                                                                                                                                                    |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | paymentof $354,130 in underwriting discount and commissions to LadenburgThalmann & Co. One of our directors is a principalstockholder and director of Ladenburg Thalmann. |

We used$2,543,395 to repay indebtedness and the remaining net proceeds fromthe offering have been, and are expected to continue to be used by usto provide additional capital to support the growth of our business andfor general corporate purposes.

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Dividend policy

We donot intend to pay any cash dividends with respect to our common stockin the foreseeable future. We currently intend to retain any earningsfor use in the operation of our business and to fund future growth. Inaddition, our ability to pay dividends is subject to the consent of theholders of our 6% convertible notes and we expect thatany future credit facility will contain terms prohibiting or limitingthe amount of dividends that may be declared or paid on our commonstock. Any future determination to pay cash dividends will be at thediscretion of our board of directors and will depend upon our financialcondition, operating results, capital requirements and such otherfactors as the board of directors deems relevant.

Item3.    Defaults Upon Senior Securities

Notapplicable.

Item 4.    Submission of Matters to a Vote ofSecurity Holders

(a)    We held our Annual Meeting ofStockholders on September  20,2006.

(b)    Proxies for the meeting were solicited pursuantto Regulation 14 under the Exchange Act; there was no solicitation inopposition to our Board of Directors Nominating Committee’snominees listed in the Proxy Statement, and all such nominees wereelected. Directors elected were Mark Andrews, John F. Beaudette, RobertJ. Flanagan, Phillip Frost, M.D., Colm Leen, Richard C. Morrison,Frederick M.  R.  Smith and Kevin Tighe.

The resultsof the election of directors were as follows:

|                      |  |  |     |  |           |         |  |  |  |  |           |  |
|----------------------|--|--|-----|--|-----------|---------|--|--|--|--|-----------|--|
|                 |  |  | For |  |           | Against |
| MarkAndrews          |  |  |     |  | 8,221,963 |         |  |  |  |  | 231,257   |  |
| John F.Beaudette     |  |  |     |  | 7,305,872 |         |  |  |  |  | 1,147,368 |  |
| RobertJ. Flanagan    |  |  |     |  | 8,451,640 |         |  |  |  |  | 1,600     |  |
| PhillipFrost, M.D.   |  |  |     |  | 6,766,582 |         |  |  |  |  | 1,686,658 |  |
| ColmLeen             |  |  |     |  | 7,305,872 |         |  |  |  |  | 1,147,368 |  |
| Richard C.Morrison   |  |  |     |  | 8,450,829 |         |  |  |  |  | 2,411     |  |
| FrederickM.  R.Smith |  |  |     |  | 8,451,640 |         |  |  |  |  | 1,600     |  |
| KevinTighe           |  |  |     |  | 8,451,640 |         |  |  |  |  | 1,600     |  |
|                      |

(c)    Theappointment of Eisner LLP, independent registered public accountingfirm, to audit our consolidated financial statements for the 2007fiscal year was ratified by the followingvote:

|         |  |  |  |  |           |  |
|---------|--|--|--|--|-----------|--|
| For     |  |  |  |  | 8,437,941 |  |
| Against |  |  |  |  | 8,299     |  |
| Abstain |  |  |  |  | 7,000     |  |
|         |

Item5.    Other Information

Creation of a Direct FinancialObligation or an Obligation under an Off-Balance Sheet Arrangement of aRegistrant

As of November  10,  2006, our whollyowned subsidiary Castle Brands (USA) Corp. completed an offering to 11persons of an aggregate of $5,340,000 of additional senior notessecured by accounts receivable and inventories of Castle Brands (USA),pursuant to the First Amended and Restated Indenture of Castle Brands(USA), dated as of June  1,  2004, and amended and restatedas of August  15,  2005. The issuance was made pursuant toRegulation D and Regulation S under the Securities Act of 1933, asamended. The additional senior notes have substantially identical termsto the aggregate principal amount of $4,660,000 of senior notespreviously issued under the indenture in 2004 and 2005 except that theadditional senior notes were issued at a two percent discount to thestated principal amount. The additional senior notes bear interest at arate of 9%, payable semi-annually on November  30th andMay  31st, and mature on May  31,  2009. Theadditional senior notes will be treated as a single class with thepreviously issued senior notes.

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As with the previously issued seniornotes, we have guaranteed payment on the additional senior notes. Wehave also agreed to pay a one time fee equal to 1% of theaggregate principal amount of the additional senior notes, for anaggregate payment of $53,400, in the event that the notes remainoutstanding at December  31,  2007.

The senior notesare subject to customary restrictive covenants. In addition, theconsent of holders of a requisite majority of the aggregate principalamount of these notes is required for Castle Brands (USA) to take anyof the following actions: merge or consolidate or sell all orsubstantially all of its assets other than with an entity formed in theUnited States or to a person or entity that assumes all of ourobligations under the senior notes, engage in a transaction with anaffiliate unless the transaction is on fair and reasonable terms, orchange our jurisdiction of incorporation without giving 60 days priornotice.

If we or Castle Brands (USA) were to default on thepayment of principal or interest on the senior notes and the defaultcontinues for 20 business days, breach any representation, warranty orcertification made in the senior note documents, default in theperformance of the material obligations under the senior notedocuments, which default is unremedied for a period of 60 days afterreceipt of notice of such default, enter into any arrangement for thebenefit of creditors or otherwise wind-up or dissolve, then the holdersof the senior notes could declare all principal and interest to beimmediately payable.

We intend to use the proceeds from the saleof the additional senior notes to fund operating expenses and forgeneral corporate purposes.

    Unregistered Issuance ofEquity Securities

In conjunction with the sale and issuanceof the additional senior notes described above, purchasers ofadditional senior notes were issued warrants to purchase40 shares of our common stock at $8.00 a share for every $1,000principal amount of such notes, for an aggregate of213,600 shares. The warrants will expire on March 31, 2012. Theissuance was made pursuant to Regulation D and Regulation S under theSecurities Act of 1933, as amended (the ‘‘SecuritiesAct’’).

For the warrants offered and sold in theUnited States, we made the determination that the warrants were offeredand sold in reliance on Regulation D based on the representations ofeach investor for whom we relied upon such exemption, which included,in pertinent part, that each investor is an ‘‘accreditedinvestor’’ within the meaning of Rule 501 of Regulation Dpromulgated under the Securities Act, and that each investor wasacquiring the warrants for investment purposes for his, her or its ownaccount and not as nominee or agent, and not with a view to the resaleor distribution, and that each investor understood that such securitiesmay not be sold or otherwise disposed of without registration under theSecurities Act or an applicable exemption therefrom.

For thewarrants offered and sold outside of the United States, we made thedetermination that the warrants were offered and sold in reliance onRegulation S based on the representations of each investor for whom werelied upon such exemption, which included, in pertinent part, thateach investor is not a ‘‘U.S. Person’’ and waslocated outside of the United States, in each case within the meaningof Regulation S promulgated under the Securities Act, and that eachinvestor was acquiring the warrants for investment purposes for his,her or its own account and not as nominee or agent, and not with a viewto the resale or distribution, and that each investor understood thatsuch securities may not be sold or otherwise disposed of withoutregistration under the Securities Act or an applicable exemptiontherefrom.

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Item6.    Exhibits

|               |  |  |                                                                                                                                                                                                                                                                                                                                                  |
|---------------|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                                                                                                                                                                      |
| 10.63         |  |  | StockPurchase Agreement, dated as of October  12,  2006, amongChester F. Zoeller III, Brittany Lynn Zoeller Carlson and Beth AllisonZoeller Willis and the Company. (incorporated herein by reference toExhibit 10.1 to our Current Report on Form 8-K (File No. 001-32849)filed with the Securities and Exchange Commission on October16,2006). |
| 10.64         |  |  | 9%Senior Note of Castle Brands (USA)Corp.                                                                                                                                                                                                                                                                                                        |
| 10.65         |  |  | Form ofWarrant                                                                                                                                                                                                                                                                                                                                   |
| 31.1          |  |  | CertificationPursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of2002.                                                                                                                                                                                                                                     |
| 31.2          |  |  | CertificationPursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of2002.                                                                                                                                                                                                                                     |
| 32.1          |  |  | CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of2002.                                                                                                                                                                                                                             |
|               |

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

|        |  |  |                  |  |  |                                                         |
|--------|--|--|------------------|--|--|---------------------------------------------------------|
|   |  |  | CASTLEBRANDSINC. |
|   |  |  | By:              |  |  | /s/Keith A. Bellinger                                   |
|   |  |  |             |  |  | Keith A.Bellinger                                       |
|   |  |  |             |  |  | President and ChiefOperating Officer                    |
|   |  |  |             |  |  | (Duly AuthorizedOfficer and Principal FinancialOfficer) |
|   |  |  |             |  |  | November14, 2006                                        |
|        |

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