0                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                                   (Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                      For the Year Ended December 31, 2006

                                       OR

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                        For the transition period from to

                         Commission file number: 0-30544

                                 WATER CHEF, INC
                  --------------------------------------------
                 (Name of small business issuer in its charter)

           DELAWARE                                              86-0515678
 ------------------------------                               -----------------
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                         1007 GLEN COVE AVENUE, SUITE 1
                               GLEN HEAD, NY 11545
                 -------------------------------------------------
                (Address of principal executive offices) (Zip Code)

                                 (516) 656-0059
                            -------------------------
                           (Issuer's telephone number)

      Securities registered under section 12(b) of the Exchange Act: None.

     Securities registered under section 12 (g) of the Exchange Act: Common
                             stock, Par value $.001

                   Redeemable Common Stock Purchase Warrants.

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

The issuer's net sales for the most recent fiscal year were $115,000.

The aggregate market value of the voting stock held by non-affiliates based upon
the last sale price on March 15, 2007 was approximately $ 21,140,962.

As of March 26, 2007, the Registrant had 180,040,087 shares of its Common Stock,
$0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE  None

Transitional Small Business Disclosure Format (Check one):  Yes  |_| No |X|

<PAGE>

                                WATER CHEF, INC.
                          ANNUAL REPORT ON FORM 10-KSB



                                TABLE OF CONTENTS
                                                                            PAGE
PART I
     ITEM 1.  DESCRIPTION OF BUSINESS                                          3

     ITEM 2.  DESCRIPTION OF PROPERTY                                          6

     ITEM 3.  LEGAL PROCEEDINGS                                                6

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              7

PART II
     ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS         7

     ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION        8

     ITEM 7.  FINANCIAL STATEMENTS                                            13

     ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE                                        13

     ITEM 8A. CONTROLS AND PROCEDURES                                         13

     ITEM 8B. OTHER INFORMATION                                               14

PART III
     ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS,
              PROMOTERS AND CONTROL PERSONS;
              COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT               15

     ITEM 10. EXECUTIVE COMPENSATION                                          17

     ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT AND RELATED STOCKHOLDER MATTERS                      18

     ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                  19

     ITEM 13. EXHIBITS                                                        19

     ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                          21

SIGNATURES                                                                    22


                                        2

<PAGE>


ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

Water Chef, Inc. (the "Company," "Water Chef"), designs and markets water
purification equipment. Water coolers and filters were a substantial part of the
Company's business from 1993 until the fourth quarter of 2001, at which time
this business was sold so that Water Chef could concentrate on the further
development, manufacturing, and marketing of their patented line of "PureSafe"
water purification systems. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern. To date, the
Company has shipped 26 PureSafe units. Revenue has been recognized on only 8
PureSafe units, as 18 units that were shipped to the Kingdom of Jordan have not
met the criteria for revenue recognition due to no reasonable assurance of
collectibility. In addition, the Company received deposits in 2005 for two units
that were shipped in 2006.

BACKGROUND

The Company was originally incorporated under Arizona law in 1985 and merged
into a Delaware corporation in 1987. In 1993, the Company, then known as Auto
Swap, U.S.A., entered into a reverse merger with Water Chef, Inc., a Nevada
corporation, which manufactured and marketed water coolers and filters.

PRODUCTS

In 2001 the Company decided to concentrate its efforts on the further
development, manufacturing and marketing of the PureSafe Water Station (the
"PureSafe"), because although Water Chef believed that its water dispensers and
its wide variety of consumer oriented water filtration products met or exceeded
the design, quality and performance of competitive products, market
considerations were such as to limit the opportunities for profit and growth.

In 1998, searching for a "killer application," Water Chef management focused on
the worldwide need for safe drinking water for populations who are not served by
municipal water treatment facilities, or are served by municipal systems that
have malfunctioned because of improper maintenance or faulty design. The result
of that activity is the PureSafe Water Station, a turn-key unit that converts
"gray," or bathing grade, water into EPA grade drinking water. The PureSafe
eliminates all living pathogens that pollute non-processed water - bacteria,
cysts, viruses, parasites, etc. - at an affordable cost for the emerging
economies of the world.

The PureSafe was tested by H2M Labs, Inc. which has been approved by Nassau and
Suffolk counties in New York to perform drinking water testing for the various
municipalities in those counties. The specific test performed was a total and
fecal coliform bacteria test, wherein the source water storage tank which feeds
the PureSafe was tested for the presence of total and fecal coliform bacteria.
The source water tank was found to have 50 colonies of coliform bacteria
present. The source water tank was then "spiked" with a three (3) liter
concentration of laboratory grown and cultured bacteria and the storage tank was
measured again with 80,000,000 colonies of bacteria detected. After being
processed through the PureSafe system, the water was tested again, and "FEWER
THAN 2 COLONIES" were detected. In addition to the laboratory test conducted for
Water Chef by H2M Labs, the available scientific literature, in industry
journals such as Water Technology and Water Conditioning and Purification
International, supports the statement that an ozone system such as the one
utilized in the PureSafe effectively eliminates all living pathogens. Ozone was
first used in municipal water treatment in Nice, France in 1904, and then in the
Jerome Park Reservoir in the Bronx, New York in 1906.

The PureSafe is a self-contained, six stage water purification center. It is
housed in the equivalent of a small storage container - approximately four feet
wide, seven feet long, and six and one-half feet high. The unit weighs
approximately eleven hundred pounds (without water) and has been configured for
portability, durability, and easy access to its essentially off-the-shelf
components. It is constructed with weather and UV resistant fiberglass, aluminum
and steel, and is equipped with internal and external lighting.

The core version of the PureSafe can purify and dispense up to 15,000 gallons of
water per day for an all-inclusive cost (labor, power, amortization of the
capital cost, replacement filters, cartridges and media) of approximately
one-half cent per gallon. The process wastes very little water, producing
approximately one gallon of pure drinking water for every gallon processed. The
unit can be moved with a single fork-lift and is transportable by truck or
helicopter. Operating the PureSafe is simple and straightforward. Due to its
turn-key design, minimum wage personnel can be trained to operate the unit. A
system of fail-safes is built into the operation, and aside from easily
installable spares such as filters and cartridges, a maintenance and oversight
program established by Water Chef should maintain the operating efficiencies
built into the system. Water Chef warrants each unit for a period of one year so
long as the consumer adheres to required maintenance protocols, using Water Chef
supplied parts, as prescribed in the maintenance manual. The Company also offers
larger stand-alone versions of the PureSafe to provide pure water in quantities
up to 20,000 gallons per hour. To date, there have been no warranty claims for
the PureSafe product operating in the field.

                                       3

<PAGE>


While each unit is configured to respond to the particular water quality of a
particular site, such as arsenic removal, seawater desalination, oil separation,
etc., the typical unit contains the following components:

a.   Inlet connection with macro-filter - designed to strain the input water,
     removes large particulates and directs water into the system 2 PRODUCTS
     (continued)

b.   Inlet pump - self-priming pump which maintains water pressure at minimum 40
     p.s.i. throughout the system

c.   Pre-depth media filter - a multi-media mixed bed to remove pollutants.
     Pressure gauges mounted on the exterior front panel of the unit allow for
     visible monitoring of system performance.

d.   Ozone generator - provides a rich ozone source that effectively kills all
     living pathogens such as bacteria, viruses, cysts, parasites, etc. Unused
     ozone reverts to oxygen and produces no harmful byproducts.

e.   Ozone mixing tank - Water Chef's proprietary process for effectively mixing
     the ozone into the water and maintaining the required contact time to
     ensure oxidation of contaminants.

f.   Process pump - provides optimal operation of the ozone processing.

g.   Post-depth media filter - another, different, multi-media mixed bed
     designed to filter out oxidized or precipitated pollutants and contaminants
     after the ozone treatment. Effectively removes metals, organics and
     inorganics. Pressure gauges on the front panel indicate the need for
     backwashing to maintain optimal performance.

h.   Ultraviolet treatment - provided by a UV lamp as a redundant sterilizer
     step to eliminate any surviving pathogens or micro-organisms. The UV lamp
     is tuned to a frequency which also converts O3 (ozone) back to O2 (oxygen).

i.   KDF filter - an ion exchange media containing a proprietary blend of
     copper, zinc and other alloys, effectively absorbs chlorine and biological,
     inorganic and metallic contaminants.

j.   Carbon filter - prevents bacteria re-growth while removing inorganic
     compounds and improves water taste and removes odor. The carbon filter also
     acts as a redundant ozone destruct mechanism.

k.   Mixer - sends ozone treated water to the bottle washing stations.

l.   Bottle washing stations - incorporated on the outside front of the unit for
     easy access in order to effectively clean bottles used to carry water
     treated at the site.

m.   Dispensing stations - four individual dispensing lines, each with flow
     adjusting valves to help regulate a smooth, steady flow of water into clean
     bottles.

MANUFACTURING

In 2000, the Company entered into a subcontracting agreement with Davis Aircraft
Products Inc, ("Davis") for the manufacture of the PureSafe. Based upon the
experience and the resources of Davis, Water Chef's management believes that
Davis can provide the production and manufacturing support services necessary to
supply Water Chef's requirements over the foreseeable future at a price, and
with the quality and performance standards necessary to meet, or exceed, the
needs of the markets that the Company expects to serve. In addition, Davis
supervises much of the Company's research and development activities.

RAW MATERIALS

The PureSafe has been designed to use, for the most part, readily available
off-the-shelf components, sub-systems and equipment. Inasmuch as each of the
components and sub-systems are available from multiple vendors, the Company does
not believe that obtaining these for its sub-contractor, for itself, or for
others if it chooses to manufacture elsewhere, will be a problem.

COMPETITION

Water Chef's modular, turn-key PureSafe Water Station directly addresses the
drinking water needs of those environs which do not today, and are unlikely to
enjoy access to municipally treated water. The Company has produced a turnkey
solution that produces pure water to meet U.S. EPA drinking water standards.
This is a far different market than that addressed by the segment of the
industry which has concentrated on the multi-billion dollar municipal water
treatment sector, or the equally large residential sector. The municipal
solution requires significant investment for infrastructure development
(building plants and laying miles of distribution pipes), and products for
residential markets do not offer the performance or features to meet the needs
of the underdeveloped nations of the world.

                                       4

<PAGE>


COMPETITION (continued)

Management does recognize that its potential competitors have far more
resources, and that being first to the marketplace is no assurance of success.
It must be assumed that others are working on systems that, if successfully
brought to market, could seriously impact the viability of the Company.

The Company currently has contracts to sell PureSafe units in Laos and China. In
addition, the Company is actively marketing its products to potential customers
in Bangladesh, China, Peru, Egypt, India and Honduras, and to agencies and
departments of the U.S. Government.

MARKETING

The potential market for the PureSafe is substantial and is both worldwide and
domestic. According to studies performed by the World Health Organization (WHO)
and the United Nations, major parts of Africa, the Middle East, Southeast Asia,
the Indian sub-continent, Latin and South America, the Caribbean, and much of
Eastern Europe is in need of adequate supplies of pure water. Parts of Florida,
Georgia, and other regions in the United States have also reported fresh water
deficits. In part, solving this problem has been a question of appropriate
technology. Secondarily, but just as important, in a vast part of the world is
the need to secure third party financing so that the local populace can enjoy
the benefits of clean water.

Water Chef believes that it has demonstrated that it possesses the technology.
The Company also believes that financing is available for third world economies
from a variety of sources. The challenge for the Company, a virtual unknown in
the industry and with limited capital, is getting its message in front of
decision makers. To this end, Water Chef has enlisted the aid of some of the
world's most outstanding experts in water purification, especially as it relates
to the needs of underdeveloped countries.

The Company's Scientific Advisory Board is chaired by Dr. Ronald Hart, former
Director of The National Center for Toxicological Research and a U.S. Food and
Drug Administration "Distinguished Scientist in Residence." The Board also
includes Dr. Mohamed M. Salem, Professor of Occupational and Environmental
Medicine, Cairo University; Dr. Richard Wilson, Mallinckrodt Research Professor
of Physics, Harvard University; and Dr. Mostafa K. Tolba, former
Under-Secretary-General of the United Nations and Director of the U.N.'s
Environmental Program.

Not only have the members of the Scientific Advisory Board provided valuable
input and guidance to the Company with respect to system design, technological
input, remediation approaches and a great deal of information relative to the
unique water problems facing many areas of the world, but they have also been
active in introducing Water Chef to commercial opportunities

During 2004, Water Chef established a relationship with the International
Multiracial Shared Cultural Organization (IMSCO), an NGO (non-governmental
organization) specialized with the Economic and Social Council of the United
Nations. As a result of this relationship Water Chef has received United Nations
certification for its pure water humanitarian projects in Honduras and
Bangladesh, and became eligible to apply for third party funding of these
projects. As of year-end 2004, the Company has submitted these projects for
funding approval, but has received no assurance of funding.

In September 2006, WaterChef appointed The Marshall Group as exclusive sales
representative of the Company's products for India. With the pure water demands
of its growing middle class and with increased attention being placed on the
contamination of India's ground and surface water resources, the Company
believes that the Indian market for its products is extremely attractive.

PATENTS

The Company filed for patent protection on its PureSafe Water Station in October
of 1998 and received formal notification that the patent had been issued on
February 19, 2002. The Company feels that this patent upholds its claims that
the PureSafe system is a unique product. In addition to its U.S. patent, the
Company has filed for patent protection in the countries of the European Union,
and in Canada, Mexico, China, Hong Kong, Korea and Japan. The patent application
for the European Union (01-126 980.0) was filed on November 13, 2001; Canadian
Application No. 2,362,107 was filed on November 3, 2001; Mexican Application No.
PA/a/2001/12042 was filed on November 23, 2001;the Chinese Application No.
01136187.5 was filed on November 21, 2001, and was found to be in compliance on
June 20, 2003; the Hong Kong Application No. 03107837.9 was filed on October 3,
2003; and the Korean Patent Application No. 10-2001-0070453 was filed on
November 20, 2001. Each of the patent applications has been accepted, Requests
for Examination have been made, and the Company currently has patent protection
in the requested venues. In January 2006, the Chinese State Intellectual
Property Office granted the patent rights for the invention, and, in September
2006, WaterChef was advised by patent counsel that the European Patent Office
had decided to grant our patent for the European Union.

                                       5

<PAGE>


PATENTS (continued)

The name PureSafe Water Station and the stylized water droplet mark have been
trademarked in the United States.

Water Chef has also incorporated patented and proprietary technology in the
PureSafe and is confident that it can protect this intellectual capital
throughout the manufacturing and distribution cycle.

There can be no assurance that any application of the Company's technologies
will not infringe patent or proprietary rights of others, or that licenses which
might be required for the Company's processes or products would be available on
favorable terms. Furthermore, there can be no assurance that challenges will not
be made against the validity of the Company's patent, or that defenses
instituted to protect against patent violation will be successful.

SEASONALITY

The Company does not expect the Pure Safe to be influenced by seasonality.

GOVERNMENT APPROVALS

The Company's marketing efforts to date have been directed to Central and South
America, the Asian sub-continent, China and the Middle East. No specific
government approvals are required, except for the possibility that export
licenses will be required in specific instances.

RESEARCH AND DEVELOPMENT

Research and development takes place at the Company's office. Testing, modeling,
simulation and prototype manufacturing are outsourced, with much of the ongoing
development taking place at the Company's contract manufacturing facilities
under the supervision of Davis Water Products. The Company estimates to date
that the design, prototyping, development and marketing of the PureSafe Water
Station has cost in excess of $2 million.

INSURANCE

The Company maintains Directors' and Officers' Insurance in the aggregate amount
of $2,000,000, and a $2,000,000 general business liability policy. The Company
believes its insurance coverage to be adequate.

EMPLOYEES

As of December 31, 2006, the Company employed one executive officer and one
administrative employee in its headquarters.

The Company believes there are a sufficient number of persons available at
prevailing wage rates in or near our manufacturing locations that should
expansion of its production require additional employees, they would be readily
available. The Company has no collective bargaining agreement with any of its
employees.

ITEM 2. DESCRIPTION OF PROPERTY

The Company presently has no owned or leased manufacturing facilities, nor does
the Company have a plan to acquire its own manufacturing facility. The PureSafe
Water Station is manufactured for the Company under a contract by Davis Water
Products.

The Company maintains its principal place of business at 1007 Glen Cove Avenue,
Suite 1, Glen Head, New York 11545. The company leases 1,100 square feet in such
building at $2,731 per month on a month-to-month basis.

To the extent possible, the Company intends to utilize leased space for its
future needs.

ITEM 3. LEGAL PROCEEDINGS

On July 14, 2006, Funding Group, Inc. filed a complaint with the Supreme Court
of the State of New York in New York County seeking damages due to an alleged
breach of contract related to a $25,000 loan made by the plaintiff to the
Company. On October 11, 2006, the Company filed a counter claim against Funding
Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.

                                       6

<PAGE>


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

Not Applicable

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

The Company's common stock is traded on the Over-The-Counter Electronic Bulletin
Board ("OTCBB") under the symbol WTER.OB. This market is categorized as being
"thin" which means that there is generally a paucity of buyers and sellers as
found in the more heavily traded Small Cap and NASDAQ markets. OTCBB stocks
generally do not have the trading characteristics of more seasoned companies as
they lack the market-makers that will make orderly markets as well as the buyers
and sellers that give depth, liquidity and orderliness to those markets. In
addition, the solicitation of orders and/or the recommendations for purchase of
OTCBB stocks is restricted in many cases by the National Association of
Securities Dealers and by individual brokerage firms as well.

The chart below sets forth the range of high and low bid prices for the
Company's common stock based on high and low bid prices during each specified
period as reported by the National Quotation Bureau, Inc. The prices reflect
inter-dealer prices without retail mark-up, markdown, quotation or commission
and do not necessarily represent actual transactions.



                                    HIGH             LOW

                  2005

              First Quarter         .28              .14
              Second Quarter        .21              .11
              Third Quarter         .29              .13
              Fourth Quarter        .17              .06

                  2006

              First Quarter         .19              .07
              Second Quarter        .23              .10
              Third Quarter         .13              .09
              Fourth Quarter        .15              .07


As of the close of business on December 31, 2006, there were 836 common stock
holders of record.

DIVIDENDS

We have not paid any cash dividends on our common stock since our inception and
do not anticipate paying any cash dividends in the foreseeable future. We plan
to retain our earnings, if any, to provide funds for the expansion of our
business. Subject to our obligations to the holders of our Series A and Series D
Preferred shares, and to the holders of our Series F convertible preferred
stock, the holders of our common stock are entitled to dividends when and if
declared by our Board of Directors from legally available funds. Our Board of
Directors will determine future dividend policy based upon conditions at that
point, including our earnings and financial condition, capital requirements and
other relevant factors.

                                       7

<PAGE>
<TABLE>
<CAPTION>


EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2006 with respect to
our shares of Common Stock that may be issued under our existing equity
compensation plans:

                                                                              (a)                                (c)
                                                                           Number of            (b)            Number of
                                                                        securities to be     Weighted-        securities
                                                                           issued upon        average          remaining
                                                                           exercise of    exercise price     available for
                                                                           Outstanding    of outstanding    future issuance
                                                                            options,         options,        under equity
                                                                            warrants,        warrants,       compensation
                                                                           and rights       and rights         plans (1)

Plan Category
-------------
<S>                                                                         <C>                <C>               <C>
Equity compensation plans approved by security holders                         --               --                --
Equity compensation plans not approved by security Holders:
Stock option plans (2)                                                      5,000,000          $0.25             None


(1)  Excludes securities listed in column (a)

(2)  Consists of 5,000,000 stock appreciation rights granted to David A. Conway
     that vest over 5 years.

On January 29, 2007, David A. Conway resigned as President and Chief Executive
 Officer and surrendered his Stock Appreciation Rights to the Company.

RECENT ISSUANCES OF UNREGISTERED SECURITIES

None issued during 4th Quarter ended December 31, 2006.



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

INTRODUCTION

DEVELOPMENT OF THE COMPANY

The Company was originally incorporated under Arizona law in 1985 and merged
into a Delaware corporation in 1987. In 1993, the Company, then known as Auto
Swap, U.S.A., entered into a reverse merger with Water Chef, Inc., a Nevada
corporation that manufactured and marketed water coolers and filters.

The PureSafe has been designed by the Company to meet the needs of communities
who either did not have access to municipal water treatment systems, or of those
whose systems had been compromised, either by environmental factors or by faulty
design or maintenance.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet debt nor did we have any transactions,
arrangements, obligations (including contingent obligations) or other
relationships with any entities or other persons that may have a material
current or future effect on financial conditions, changes in financial
conditions, result of operations, liquidity, capital expenditures, capital
resources, or significant components of revenue or expenses.

RESULTS OF OPERATIONS

Sales for the years ended December 31, 2006 and 2005 were $115,000 and $260,000,
respectively. During the year ended December 31, 2006, the Company recognized
the sale of two PureSafe Water Station Systems.

                                       8
</TABLE>

<PAGE>


Cost of sales increased from $42,000 for the year ended December 31, 2005, to
$114,000 for the year ended December 31, 2006, an increase of $72,000, or 171%.
An analysis of the components of cost of sales follows:

   Cost of Sales        Product       Rent and Overhead        Total Cost
      Period              CGS      Payments to Manufacturer     of Sales
       2006             $30,000            $84,000              $114,000
       2005             $  --              $42,000              $ 42,000

Selling, general and administrative expenses for the year ended December 31,
2006 were $1,559,464 compared to $1,194,577 for the year ended December 31,
2005, an increase of $364,887 or 31%.

Interest expense for the year ended December 31, 2006 was $380,553 compared to
$244,191 for the year ended December 31, 2005, an increase of $136,362.

The net loss for the year ended December 31, 2006 was $2,072,917 compared to
$1,168,328 for the year ended December 31, 2005, an increase of $904,589.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2006, the Company had a stockholders' deficiency of $3,625,706
and a working capital deficiency of $3,123,220. In addition, the Company has a
net loss of $2,072,917 and $1,168,328 for the years ended December 31, 2006 and
2005, respectively. The financial statements have been prepared assuming that
the Company will continue as a going concern. The Independent Registered Public
Accounting Firm's report on its financial statements included elsewhere herein
contains an explanatory paragraph about conditions that raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with respect to these matters include restructuring its existing debt and
raising additional capital through future issuances of stock and/or debt. The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.

In October 2006, the Company entered into a loan agreement with Southridge
Partners LP, pursuant to which the Company received a convertible loan of
$300,000, less legal fees, secured by four million shares of the Company's
common stock owned by the former President and Chief Executive Officer. The loan
principal and interest was due and payable, in cash or shares of common stock,
in February 2007.

Under the terms of the note, the Company is currently in default. Subsequent to
the year end, the Company issued 948,670 shares of common stock for the
settlement of $100,000 of principal and $3,249 of accrued interest. The Company
plans to issue additional shares of common stock under the terms of the note for
the settlement of the remaining principal and accrued interest.

The Company, during 2006 and 2005, raised $568,000 and $494,960, respectively,
through the sale of its common and preferred stock.

Water Chef was a defendant in a legal action brought by certain debenture
holders ("Bridge Loans") in New Hampshire Superior Court seeking repayment of
debenture principal of $300,000 and accrued interest from 1997. On June 22, 2002
a settlement was reached whereby the Company agreed to (i) issue a minimum of
3,000,000 shares of common stock valued at $497,500 in lieu of the principal and
interest owed to the debenture holders who participated in this legal action.
The Company recorded the debentures at $300,000, plus accrued interest of
$39,400, for a total of $339,400. The difference between the $497,500, the value
for the 3,000,000 shares, divided by the average daily trading price for the 30
days subsequent to the settlement, was greater than the original 3,000,000
shares. Due to these requirements, the Company was obligated to issue an
additional 14,037,671 shares. As of December 31, 2004, the Company has issued
the 3,000,000 shares and the additional 14,037,671 shares originally valued at
$497,500. Attached to the original Bridge Loans were warrants for the purchase
of 1,666,667 shares of the Company's common stock at $0.15 per share. The
debenture holders that participated in the legal action had the lives of their
warrants extended from March 2002 to March 2004. In connection with the issuance
of the Bridge Lenders' shares the Company further extended the expiration date
of the warrants to a date twelve months after the effective date of the
Registration Statement filed with the Securities and Exchange Commission on
January 24, 2005 which was declared effective by the Securities and Exchange
Commission on June 7, 2005. The warrants expired on June 6, 2006.

In addition to the above settlement with Bridge Lenders who participated in the
legal action, the Company settled its obligation with debenture holders that did
not participate ("non-participating debenture holders") in the legal action.
These non-participating debenture holders had total debentures of $75,000, plus
accrued interest of $9,850, totaling $84,850 as of the settlement date. In
conjunction with the above settlement, the Company settled these outstanding
non-participating debentures, plus accrued interest, with the issuance of
750,000 shares of common stock valued at $0.0292 per share, or $21,900. The
terms of their warrants were not extended, nor are they entitled to receive
additional shares based on the Company's common stock achieving a certain
average trading price 30 days subsequent to the settlement with the
participating debenture holders. During 2004, the Company issued the 750,000
settlement shares.

                                       9

<PAGE>


Management is currently attempting to settle or restructure the remaining debt,
and plans to satisfy its existing obligations with the cash derived from the
profitable sale of its product.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparation of the
statements in accordance with these principles requires that we make estimates,
using available data and our judgment, for such things as valuing assets,
accruing liabilities and estimating expenses. The following is a list of what we
believe are the most critical estimations that we make when preparing our
financial statements.

Revenue Recognition

Revenue is recognized when products are shipped, title passes and collectibility
is reasonably assured. Allowances for estimated bad debts, sales allowance and
discounts are provided when such sales are recorded.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS 123R which replaces SFAS
123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure is no longer an alternative to financial
statement recognition. The adoption of this standard had no effect on operations
for the year ended December 31, 2006 as the Company did not issue any options
during the period and the Company did not have any vested or unvested options
outstanding.

The Black-Scholes option valuation model is used to estimate the fair value of
the options granted. The model includes subjective input assumptions that can
materially affect the fair value estimates. The model was developed for use in
estimating the fair value of traded options or warrants that have no vesting
restrictions and that are fully transferable. For example, the expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted. In management's opinion,
this valuation model does not necessarily provide a reliable single measure of
the fair value of its employee stock options. During the year ended December 31,
2006 and 2005, the Company did not issue any employee stock options.

Prior to the adoption of SFAS 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by APB 25 and related
interpretations, to account for its stock options to employees. Under this
method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. As permitted
by SFAS 123, the Company elected to continue to apply the intrinsic-value-based
method of accounting described above, and adopted only the disclosure
requirements of SFAS 123. The fair-value-based method used to determine
historical pro forma amounts under SFAS 123 was similar in most respects to the
method used to determine stock-based compensation expense under SFAS 123R.

In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.

We did not grant stock options to employees or directors during the year ended
December 31, 2006 and 2005.

We have used stock in the past to raise capital and as a means of compensation
to employees.


Derivative Financial Instruments

EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock'" ("EITF No. 05-4") addresses financial instruments, such as stock
purchase warrants, which are accounted for under EITF No. 00-19 that may be
issued at the same time and in contemplation of a registration rights agreement
that includes a liquidated damages clause. The consensus of EITF No. 05-4 has
not been finalized.

                                       10

<PAGE>


In November 2005 and October 2006, the Company issued convertible promissory
notes and warrants and entered into registration rights agreements (See Note 6).
Based on the interpretive guidance in EITF Issue No. 05-4, due to certain
factors and the liquidated damage provision in the registration rights
agreement, the Company determined that the embedded conversion option and the
warrants are derivative liabilities and the registration statement becoming
effective in January 2006 and 2007, the value of the registration rights was
deemed to be de minimus.

Effects of Recent Accounting Policies

In June 2005, the FASB published Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154
establishes new standards on accounting for changes in accounting principles.
Pursuant to the new rules, all such changes must be accounted for by
retrospective application to the financial statements of prior periods unless it
is impracticable to do so. SFAS 154 completely replaces Accounting Principles

Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
pronouncements with respect to accounting for changes in estimates, changes in
the reporting entity, and the correction of errors. The requirements in SFAS 154
are effective for accounting changes made in fiscal years beginning after
December 15, 2005. We will apply these requirements to any accounting changes
after the implementation date. The adoption of this pronouncement did not have
an impact on our financial position, results of operations, or cash flows.

In June 2006, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
05-1, "Accounting for the Conversion of an Instrument That Becomes Convertible
upon the Issuer's Exercise of a Call Option" ("EITF No. 05-1"), which indicates
that no gain or loss should be recognized upon the conversion of an instrument
that becomes convertible as a result of an issuer's exercise of a call option
pursuant to the original terms of the instrument. EITF No. 05-1 is effective for
annual or interim periods beginning after June 28, 2006. The adoption of this
pronouncement did not have an impact on our financial position, results of
operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.

SFAS 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009 The adoption of this pronouncement is not expected
to have an impact on our financial position, results of operations or cash
flows.

In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", to include scope exceptions for registration payment arrangements.

FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement is not expected to have an impact on the Company's financial
position, results of operations or cash flows.

                                       11

<PAGE>


Effects of Recent Accounting Policies (continued)

In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered "conventional" for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. We have applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on our financial position,
results of operations, or cash flows.

In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 is effective for the first interim or annual reporting period beginning
after December 15, 2005. We adopted EITF No. 05-7 as of the beginning of our
interim reporting period that began on January 1, 2006. The adoption of this
pronouncement did not have an impact on our financial position, results of
operations, or cash flows.

In September 2005, the FASB ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"
("EITF No. 05-8"), which addresses the treatment of convertible debt issued with
a beneficial conversion feature as a temporary difference under the guidance in
SFAS 109. In addition, deferred taxes recognized for a temporary difference of
debt with a beneficial conversion feature should be recognized as an adjustment
of additional paid-in capital. Entities should apply the guidance in EITF No.
05-8 in the first interim or annual reporting period that begins after December
15, 2005. Its provisions should be applied retrospectively under the guidance in
SFAS 154 to all convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF No. 00-27 "Application of EITF
Issue No. 98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios." We have applied the
requirements of EITF No. 05-8 to all previously existing convertible debt
instruments with a beneficial conversion feature and will apply the requirements
of EITF No. 05-8 for all new convertible debt instruments with a beneficial
conversion feature. The adoption of this pronouncement for new convertible debt
instruments with a beneficial conversion feature did not have an impact on our
financial position, results of operations or cash flows.

In February 2006, the FASB published Statement of Financial Accounting Standards
No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140" ("SFAS 155"). SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement 133
to Beneficial Interests in Securitized Financial Assets." The requirements in
SFAS 155 are effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. The adoption of this pronouncement is not expected to have an impact on
our financial position, results of operations, or cash flows.

In July 2006, the FASB released Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting and reporting for uncertainty in income tax
law. FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. The provisions of FIN 48
are effective after December 15, 2006. Earlier adoption is permitted as of the
beginning of an enterprise's fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN 48
will be recorded as an adjustment to accumulated deficit as of the beginning of
the period of adoption. The adoption of this pronouncement is not expected to
have an impact on our financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
U.S., and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any cumulative effect
will be recorded as an adjustment to the opening accumulated deficit balance, or
other appropriate component of equity. The adoption of this pronouncement is not
expected to have an impact on our financial position, results of operations, or
cash flows.

                                       12

<PAGE>


In September 2006, the SEC staff issued Staff Accounting Bulleting ("SAB") No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years' financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement is not expected to have an
impact on our financial position, results of operations, or cash flows.

In October 2005, the FASB issued FSP FAS 123(R)-2, "Practical Accommodation to
the Application of Grant Date as Defined in FASB Statement No. 123(R)", which
provides clarification of the concept of mutual understanding between employer
and employee with respect to the grant date of a share-based payment award. This
FSP provides that a mutual understanding of the key terms and conditions of an
award shall be presumed to exist on the date the award is approved by management
if the recipient does not have the ability to negotiate the key terms and
conditions of the award and those key terms and conditions will be communicated
to the individual recipient within a relatively short time period after the date
of approval. This guidance was applicable upon the initial adoption of SFAS
123(R). The adoption of this pronouncement did not have an impact on our
financial position, results of operations, or cash flows.

ITEM 7. FINANCIAL STATEMENTS

The Company's financial statements for the years ended December 31, 2006 and
2005 are included herein and consist of:



         Report of Independent Registered Public Accounting Firm          F-1

         Balance Sheet                                                    F-2

         Statements of Operations                                         F-3

         Statement of Changes in Stockholders' Deficiency                 F-4-9

         Statements of Cash Flows                                         F-10

         Notes to Financial Statements                                    F-11


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

During the year ended December 31, 2006, no change in accountants occurred and
there were no disagreements with accountants.

ITEM 8A. CONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures
-------------------------------------------------

The Company, under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, has evaluated the effectiveness of the design and operation
of the Company's "disclosure controls and procedures," as such term is defined
in Rules 13a-15e promulgated under the Exchange Act as of this report. Based
upon that evaluation, the principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures
were not effective as of the end of the period covered by this report to provide
reasonable assurance that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.

Our independent registered public accountants have reported to our Board of
Directors certain matters involving internal controls that they considered to be
reportable conditions and material weaknesses, under standards established by
the Public Accounting Oversight Board. The first reportable condition we
identified relates to limited segregation of duties.

Management is aware that there is a lack of segregation of duties at the Company
due to the small number of employees managing administrative and financial
matters. This constitutes a significant deficiency in the financial reporting.
Management has mitigated these factors by hiring an independent
accountant/bookkeeper to review and compile our financial statements on a
quarterly and annual basis.At this time, management has decided that considering
the employees involved, the control procedures in place and the potential
benefits of adding additional employees to clearly segregate duties does not
justify the additional expense.Management will periodically reevaluate this
situation. If the situation changes and sufficient capital is secured, it is the
Company's intention to increase staffing to mitigate the current lack of
segregation of duties within the general administrative and financial functions.

                                       13

<PAGE>


The second reportable condition identified is in our inability to ensure that
the accounting for our debt and equity-based transactions is accurate and
complete. This condition was considered a material weakness. In recent years we
have consummated a series of complex debt and equity transactions involving the
application of highly specialized accounting principles. We are evaluating
certain corrective measures we may take including the possibility of hiring an
outside consultant to provide us with the guidance we need at such times that we
may engage in these complex transaction.

Changes in Internal Controls
----------------------------

Management has evaluated the effectiveness of the disclosure controls and
procedures as of December 31, 2006. Based on such evaluation, management has
concluded that the disclosure controls and procedures were not effective for
their intended purpose described above.

Given these reportable conditions and material weaknesses, management devoted
additional resources to resolving questions that arose during the period covered
by this report. As a result we are confident our financial statements as of
December 31, 2006 and 2005 and for the years then ended fairly present in all
material respects our financial condition and results of operations.

There were no other changes to the internal controls during the fourth quarter
ended December 31, 2006 that have materially affected or that are reasonably
likely to affect the internal controls.

Limitations on the Effectiveness of Controls
--------------------------------------------

A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. The
Company's disclosure controls and procedures are designed to provide reasonable
assurance of achieving its objectives. The Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective at that reasonable assurance level.

ITEM 8B. OTHER INFORMATION

NONE

                                       14

<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

At year-end 2006, the Company's Directors, Executive Officers and Scientific
Advisory Board Members were:



     Name                         Age           Position(s) with the Company

     David A. Conway               65           Director, Chairman,President,
                                                Chief Executive Officer and
                                                Chief Financial Officer

     John J. Clarke ++             64           Director

     Ronald W. Hart +              64           Chairman, Scientific
                                                   Advisory Board

     Mohamed M. Salem +            55           Scientific Advisory Board

     Marshall S. Sterman++         75           Director

     Richard Wilson +              81           Scientific Advisory Board

     Mostafa K. Tolba +            85           Scientific Advisory Board


+    Members of the Advisory Board will receive an honorarium, in the form of
     cash or common stock, for their service at the discretion of the Board of
     Directors.

++   Member of Audit Committee and Compensation Committee. Mr. Sterman, by
     reason of education, training and experience is the Company's "recognized
     financial expert" on the Audit Committee. In February 2007, John J. Clarke
     replaced Mr. Sterman as the Company's "recognized financial expert" on the
     Audit Committee

David A. Conway

Mr. Conway was elected to the Board of Directors in 1997 and joined the Company
as President and Chief Executive Officer in 1998. Previously, he held the
positions of President and COO of a privately held public relations and
marketing company; Director and VP Administration of KDI Corporation (NYSE); VP
Administration Keene Corporation (NYSE) and earlier positions with CBS and
Goldman Sachs & Co. Mr. Conway, who served as an infantry officer in the US
Army, holds undergraduate and graduate degrees from Fordham University and is
listed in Who's Who in America.

John J. Clarke

John J. Clarke rejoined the Company's Board of Directors in March 2004. Mr.
Clarke had previously served as a member of the Company's Board of Directors
from July 1997 to February 2000 when he resigned from the Board due to his heavy
workload. Mr. Clarke is a Principal and co-founder of the Baldwin and Clarke
Companies, a diversified financial services organization, where he has been
employed since 1976, and is a founding director of two New Hampshire commercial
banks. Mr. Clarke currently serves as a Director of Centrix Bank.

Ronald W. Hart (Ph.D.)

Dr. Hart agreed to form the Board of Scientific Advisors in 2000 and became
Chairman at that time. Dr. Hart is an internationally recognized scientist and
scholar who was Director of the National Center for Toxicological Research and
was named "Distinguished Scientist in Residence" by the US Food and Drug
Administration in 1992. Recognized for his pioneering work on aging and his
studies on nutrition and health, Dr. Hart has been appointed visiting professor
at a number of universities, including Cairo University, Seoul National
University and Gangzhou University. He received his doctorate in physiology and
biophysics from the University of Illinois.

                                       15

<PAGE>


Mohamed M. Salem (MD/PhD.)

Dr. Salem was appointed to the Scientific Advisory Board in early 2001. Dr.
Salem is Professor of Occupational and Environmental Medicine at the Kasr
El-Aini School of Cairo University. An internationally recognized expert on the
health effects of environmental and water contaminants including pesticides,
lead and other metals, Dr. Salem is credited with establishing infectious
disease control programs at medical centers and other public entities throughout
the Middle East. Dr. Salem is a principal of Salem Industries, an import and
export company, which is one of the leading suppliers of chemicals and oil field
equipment in the Middle East. Dr. Salem holds both an M.D. and Ph.D. from Cairo
University.

Marshall S. Sterman

Mr. Sterman was elected to the Board of Directors in 2000. Mr. Sterman is
President of the Mayflower Group, a Massachusetts based merchant bank, where he
has been employed since 1986. He previously served as managing partner of
Cheverie and Company and MS Sterman & Associates, merchant banking firms and
principal of Sterman & Gowell Securities, an investment banking and securities
firm. Mr. Sterman served as an officer in the US Navy and holds his BA from
Brandeis University and his MBA from Harvard University.

Richard Wilson (Ph.D.)

Dr. Wilson was appointed to the Scientific Advisory Board in February 2001. Dr.
Wilson is the Mallinckrodt Research Professor of Physics at Harvard University.
Dr. Wilson is one of the foremost scientific authorities in the fields of water
quality remediation and purification, and is currently Professor of the Energy
Research Group at the University of California. Dr. Wilson is a member of the
Advisory Board of the Atlantic Legal Foundation, and is one of the principal
scientists studying the resolution of the water problems in Chernobyl and in
Bangladesh where toxic levels of arsenic contaminate the water supply. Dr.
Wilson holds his Ph.D. from Oxford University.

Mostafa K. Tolba (Ph.D.)

Dr. Tolba joined the Scientific Advisory Board in June 2001. Dr. Tolba served as
Under-Secretary-General of the United Nations, and Executive Director of the
United Nations Environmental Program from 1976 to 1992. Dr. Tolba is currently
President of the International Center for Environment and Development
headquartered in Geneva, Switzerland, and Emeritus Professor of Science at the
Kasr El-Aini School of Medicine at Cairo University. He received his Ph.D. in
Macrobiology from Imperial College, London, England.

Marshall S. Sterman and John J. Clarke are the members of the Company's Audit
Committee. The Board of Directors has determined that Mr. Sterman is an "audit
committee financial expert" as defined in Item 401(e) of Regulation S-B.

On January 15, 2007, Leslie J. Kessler was appointed President of WaterChef,
Inc. On February 1, 2007, Ms. Kessler was appointed Chief Executive Officer and
was elected to the Board of Directors.

On January 19, 2007, Dr. Ronald W. Hart, Chairman of the Company's Board of
Scientific Advisors, was appointed to the Board of Directors of WaterChef, Inc.

On January 29, 2007, Mr. Conway resigned as President and Chief Executive
Officer of the Corporation, and as a member of the Board of Directors. On
February 12, 2007, Marshall Sterman resigned as a member of the Board of
Directors.

Effective with Mr. Conway's resignation, Mr. Clarke became Chairman of the
Board, and upon Mr. Sterman's resignation he became Chairman of the Audit and
Compensation Committees of the Board.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers and directors, and persons who beneficially own more than ten
percent of our common stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than ten percent beneficial owners are required
by Securities and Exchange Commission regulations to furnish us with copies of
all Section 16(a) forms they file. Based upon a review of the copies of such
forms furnished to us and written representations from our executive officers
and directors, we believe that during the year ended December 31, 2006 there
were no delinquent filers except as follows: Marshall S. Sterman filed a Form
5/A on February 8, 2007 in which he reported transactions that occurred on May
15, 2006, May 24, 2006, June 6, 2006, and June 12, 2006 that were not timely
reported on a Form 4 (four transactions) and John J. Clarke filed a Form 5 on
February 8, 2007 for transactions that occurred on May 24, 2006,and June 6, 2006
that were not timely reported on a Form 4 (two transactions).

                                       16

<PAGE>
<TABLE>
<CAPTION>


Code of Ethics

We adopted a code of ethics in 2005 that was filed as Exhibit 14.1 to our
Quarterly Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 15, 2005. The code of ethics applies to each of our
directors and officers, including the chief financial officer and chief
executive officer, and all of our other employees and the employees of our
subsidiaries.


ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
                                                           All
Name and Principal                                    Other Annual
Position                          Salary     Bonus    Compensation     Total
                         Year      ($)        ($)         ($)           ($)
                         ----     ------     ------   ------------    --------
David A. Conway          2006    $350,000      --         --          $350,000
President/CEO
--------------------------------------------------------------------------------
EMPLOYMENT AGREEMENTS

Mr. Conway entered into a five-year employment agreement in January 2004. The
agreement provides for base salary of $350,000 per year, participation in the
Company's employee benefit programs and a life insurance policy in the amount of
$5,000,000 which was never purchased. In addition, Mr. Conway was granted a
stock appreciation right, vesting at 20% per year for five years, for 5,000,000
shares of Water Chef common stock at a strike price of $0.25 per share. Mr.
Conway was originally granted stock options in January 2004 that were later
converted to stock appreciation rights. Under the terms of the Employment
Agreement if the employee is terminated by the Company for other than cause, the
Employee is entitled to receive an amount equal to his monthly base pay
multiplied by 24 months. In the event of a Change of Control the Company is
required to pay to the Employee an amount equal to his monthly base salary
multiplied by thirty-six. Upon his resignation as President and Chief Executive
Officer, Mr. Conway relinquished his right to unpaid, accrued salary and to the
unexercised stock appreciation rights.

The Company did not issue any stock options or common stock appreciation rights
during fiscal 2006.

The Company has no long-term incentive plans at this time.

--------------------------------------------------------------------------------------------------------------------------------
                                             Outstanding Equity Awards at Fiscal Year-End
--------------------------------------------------------------------------------------------------------------------------------
                                                                      Equity Incentive
                                                                        Plan Awards;
                             Number of              Number of            Number of
                            Securities              Securities           Securities
                             Underlying              Underlying          Underlying
                        Unexercised Options     Unexercised Options      Unexercised          Option Exercise    Option Exercise
    Name                 (#) exercisable         (#) exercisable      Unearned Options            Price               Date
--------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>                     <C>                       <C>                 <C>                <C> <C>
 David A. Conway            3,600,000               1,400,000                 0                   $0.25              1/6/09
--------------------------------------------------------------------------------------------------------------------------------

 DIRECTORS' COMPENSATION



--------------------------------------------------------------------------------------------------------
                           Fees Earned or Paid in
    Name                           Cash                   Stock Awards      Option Awards         Total
--------------------------------------------------------------------------------------------------------
 John J. Clarke                  $25,000                    $   --             120,600           145,600
--------------------------------------------------------------------------------------------------------
 Marshall S. Sterman              25,000                        --             120,600           145,600
--------------------------------------------------------------------------------------------------------


 Directors of the Company do not receive cash compensation for serving as
 members; they are reimbursed for their out of pocket expenses related to
 meetings and other Company related activity for which they are called upon. In
 the past certain directors have received common stock for service to the
 Company.

                                       17
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<TABLE>
<CAPTION>
 In 2006, Mr. Sterman was compensated at the rate of $6,000 per month for
 consulting services performed for the Company. The Company may pay for these
 services in cash or stock. The Company terminated this agreement in June 2006.
 There is $317,500 due to him for this service as of December 31, 2006. On
 February 12, 2007, Mr. Sterman resigned from the Board of Directors and waived
 his rights to any accrued compensation owed to him by the Company.

 The Company's directors have been paid success fees for helping the Company in
 various equity and debt financings in previous years. These payments have been
 both in cash and common stock, such payments being made based on industry-wide
 standards and arms-length transactions.

 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
 RELATED STOCKHOLDER MATTERS

 Set forth below is information as of December 31, 2006, concerning stock
 ownership of all persons known by the Company to own beneficially 5% or more of
 the any class of the securities of the Company, all Directors, the Executive
 Officers, and all Directors and Executive Officers of the Company as a group
 based on the number of shares of common stock issued and outstanding as of the
 date of this report. For purposes of the report, beneficial ownership is
 defined in accordance with the Rules of the Securities and Exchange Commission
 and generally means the power to vote and/or dispose of the securities
 regardless of any economic interest.

                                        Common Stock               Series A       Series D Preferred        Series F Convertible
                                    Beneficially Owned(1)      Preferred Stock    Stock Beneficially          Preferred Stock
                                                                 Beneficially           Owned(1)                Beneficially
                                                                    Owned(1)                                      Owned(1)
                                      Shares         %           Shares     %         Shares     %             Shares      %
                                      ------        ---          ------    ---        ------    ---            ------     ---
<S>                                 <C>            <C>            <C>      <C>         <C>      <C>              <C>      <C>
 David A. Conway (2) (3)            25,110,782     12.6%           --       --          --       --               --       --
 Water Chef, Inc.
 1007 Glen Cove Ave., Suite 1
 Glen Head, NY  11545

 Marshall S. Sterman                 2,100,000(5)   1.1%           --       --          --       --               --       --
 46 Neptune Street
 Beverly, MA  01915

 John J. Clarke                      2,631,700(6)   1.4%           --       --          --       --               --       --
 116B S. River Rd.
 Bedford, NH 03110

 Goldman, Sachs & Co. (4)           16,773,651      8.4%           --       --          --       --               --       --
 85 Broad Street
 New York, NY  10004

 Jerome Asher & Anne Asher JTWROS          --        --           5,000     9.5%        --       --               --       --
 2701 N Ocean Blvd Apt E-202
 Boca Raton, FL 33431

 Robert D. Asher                           --        --           5,000     9.5%        --       --               --       --
 72 Old Farm Road
 Concord, MA 01742

 John A. Borger                            --        --            --       --        10,000    10.8%             --       --
 806 E Avenida Pico
 Suite I PMB #262
 San Clemente, CA 92673

 C Trade Inc                               --        --            --       --          --       --              9,375    21.6%
 25-40 Shore Blvd., Ste. 6C
 Astoria, NY 11102

 Robert Kaszovitz                          --        --            --       --          --       --             10,000    23.0%
 1621 51st Street
 Brooklyn, NY 11204

 Kollel Metzioynim Lhoroah                 --        --            --       --          --       --              5,000    11.5%
 254 Wallabout St., Apt. 2
 Brooklyn, NY 11206

 Olshan Grundman Frome                     --        --            --       --          --       --              5,000    11.5%
 Rosenzweig & Wolosky LLP
 65 East 55th Street
 New York, NY 10022

 Shirley M. Wan                           --         --            --       --          --       --              5,000    11.5%
 5455 Chelsen Wood Dr.
 Lawrence, NY 11559

 All executive officers and         27,742,482     15.0%           --       --          --       --               --       --
 directors as a
 Group (2)

                                                               18
</TABLE>

<PAGE>

1.   Total Voting Shares are comprised of all common shares issued and
     outstanding.

2.   Includes 6,310,464 shares held in an IRA Trust.

3.   Effective with his resignation as President and Chief Executive Officer on
     January 29, 2007 Mr. Conway has returned to the Company 20,000,000 shares
     of common stock owned by him and his affiliates.

4.   According to a Schedule 13G/a filed by Goldman, Sachs & Co. filed on
     February 12, 2007, it and The Goldman Sachs Group, Inc. have sole
     dispositive power and sole voting power with respect to the 16,773,651
     shares.

5.   Includes 850,000 shares of common stock owned directly by Marshall Sterman
     and warrants to purchase 1,250,000 shares of common stock.

6.   Includes 1,381,700 shares of common stock owned directly by John J. Clarke
     and warrants to purchase 1,250,000 shares of common stock.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Beginning on January 1, 2002, Mr. Sterman was compensated at the rate of $6,000
per month for consulting services performed for the Company. In 2004 Mr.
Sterman's monthly compensation increased to $10,000. The Company may pay for
these services in cash or stock . Mr. Sterman's consulting agreement was
terminated in June 2006. Mr. Sterman resigned from the Board of Directors on
February 12, 2007 and waived his right to any accrued compensation and director
fees owed to him by the Company.


ITEM 13. EXHIBITS

(a) Exhibits:

    Number          Description of Exhibit
    ------          ----------------------

         3.1        Amended and Restated By-Laws of Water Chef, Inc. -
                    Incorporated herein by reference to Exhibit 3(ii) to the
                    Form 10-KSB/A filed November 17, 2003.

         3.2        Amended and Restated Certificate of Incorporation of Water
                    Chef, Inc. - Incorporated herein by reference to Exhibit 3.2
                    to the Form SB-2 filed January 24, 2005.

         3.3        Certificate of Amendment of Restated Certificate of
                    Incorporation of Water Chef, Inc. dated August 2, 1993 -
                    Incorporated herein by reference to Exhibit 3.3 to the Form
                    SB-2 filed January 24, 2005.

         3.4        Certificate of Amendment of Restated Certificate of
                    Incorporation of Water Chef, Inc. dated August 2, 1992 -
                    Incorporated herein by reference to Exhibit 3.4 to the Form
                    SB-2 filed January 24, 2005.

         3.5        Certificate for Renewal and Revival of Certificate of
                    Incorporation - Incorporated herein by reference to Exhibit
                    3.5 to the Form SB-2 filed January 24, 2005.

         3.6        Certificate of Amendment of Restated Certificate of
                    Incorporation of Water Chef, Inc. dated February 20, 2002 -
                    Incorporated herein by reference to Exhibit 3.6 to the Form
                    SB-2 filed January 24, 2005.

         3.7        Certificate of Correction filed to correct a certain error
                    in the Certificate of Amendment of the Restated Certificate
                    of Incorporation of Water Chef, Inc. dated May 7, 2004 -
                    Incorporated herein by reference to Exhibit 3.7 to the Form
                    SB-2 filed January 24, 2005.

         4.1        Certificate of Designation of Series A Preferred Stock of
                    Water Chef, Inc. - Incorporated herein by reference to
                    Exhibit 4.1 to the Form 10-KSB/A filed November 17, 2003.

         4.2        Certificate of Designation of Series C convertible preferred
                    stock of Water Chef, Inc. - Incorporated herein by reference
                    to Exhibit 4.2 to the Form 10-KSB/A filed November 17, 2003.

         4.3        Certificate of Designation of Series D Preferred Stock of
                    Water Chef, Inc. - Incorporated herein by reference to
                    Exhibit 4.3 to the Form 10-KSB/A filed November 17, 2003.

         4.4        Certificate of Designation of Series F convertible preferred
                    stock of Water Chef, Inc. - Incorporated herein by reference
                    to Exhibit 4.4 to the Form SB-2 filed January 24, 2005.

                                       19
<PAGE>


    Number          Description of Exhibit
    ------          ----------------------


         4.5        Series B Warrant to Purchase Common Stock and Allonge to and
                    Amendment and Extension of Common Stock Purchase Warrant -
                    Incorporated herein by reference to Exhibit 4.4 to the Form
                    10-KSB/A filed November 17, 2003.

         4.6        Series B Second Allonge to and Amendment and Extension of
                    Common Stock Purchase Warrant - Incorporated herein by
                    reference to Exhibit 4.6 to the Form SB-2 filed January 24,
                    2005.

         4.7        Subordinated Debentures - Incorporated herein by reference
                    to Exhibit 4.5 to the Form 10-KSB/A filed November 17, 2003.

        10.1        Loan Agreement, dated as of November 16, 2005, by and
                    between Water Chef, Inc. and Southridge Partners LP -
                    Incorporated herein by reference to Exhibit 99.1 to the Form
                    8-K filed November 23, 2005.

        10.2        Registration Rights Agreement, dated as of November 16,
                    2005, by and between Water Chef, Inc. and Southridge
                    Partners LP - Incorporated herein by reference to Exhibit
                    99.2 to the Form 8-K filed November 23, 2005.

        10.3        Promissory Note issued by Water Chef, Inc. on November 16,
                    2005 to Southridge Partners LP for the principal sum of
                    $250,000 - Incorporated herein by reference to Exhibit 99.3
                    to the Form 8-K filed November 23, 2005.

        10.4        Three Year Warrant issued to Southridge Partners LP, dated
                    November 16, 2005, to purchase 430,000 shares of common
                    stock at a price of $0.14 per share - Incorporated herein by
                    reference to Exhibit 9.4 to the Form 8-K filed November 23,
                    2005.

        10.5        Loan Agreement, dated as of October 11, 2006, by and between
                    Water Chef, Inc. and Southridge Partners LP - Incorporated
                    herein by reference to Exhibit 9.4 to the Form 8-K filed
                    October 19, 2006.

        10.6        Registration Rights Agreement, dated as of October 11, 2006,
                    by and between Water Chef, Inc. and Southridge Partners LP -
                    Incorporated herein by reference to Exhibit 9.4 to the Form
                    8-K filed October 19, 2006.

        10.7        Promissory Note issued by Water Chef, Inc. on October 11,
                    2006 to Southridge Partners LP for the principal sum of
                    $300,00 - Incorporated herein by reference to Exhibit 9.4 to
                    the Form 8-K filed October 19, 2006.

        10.8        Three Year Warrant issued to Southridge Partners LP, dated
                    October 11, 2006, to purchase 882,352 shares of common stock
                    at a price of $0.085 per share - Incorporated herein by
                    reference to Exhibit 9.4 to the Form 8-K filed October 19,
                    2006.

         31.1*      Certification of Chief Executive Officer and Chief Financial
                    officer pursuant to Section 302 of the Sarbanes-Oxley Act.

         32.2*      Certification of Chief Executive Officer and Chief Financial
                    Officer pursuant to 8 U.S.C. Section 1350 As adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
                    filed herewith

                                       20

<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES

Our principal accountant for the audit of our annual financial statements for
our fiscal years ended December 31, 2005 and 2004 was Marcum & Kliegman LLP
("M&K").

The following table shows the fees paid or accrued by us during the periods
indicated.

                                                         Year ended
                                                         ----------
                 Type of Service                   2006              2005
                 ---------------                   ----              ----
       Audit fees (1)                            $125,000          $105,000
       Audit-Related Fees (2)                        --                --
       Tax Fees (3)                                  --                --
       All Other Fees (4)                            --                --
                                                 --------          --------
       Total                                     $125,000          $105,000
                                                 ========          ========


(1) Comprised of the audit of our annual financial statements and reviews of our
quarterly financial statements.

(2) Comprised of assurance services in connection with employee benefit plan
audits, due diligence related to mergers and acquisitions, accounting
consultations related to mergers and acquisitions, internal control reviews,
attest services that are not required by statute or regulation and consultation
concerning financial accounting and reporting standards.

(3) Comprised of services for tax compliance, tax return preparation, tax advice
and tax planning.

(4) Fees related to other filings with the SEC.

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
by the Company's independent accountants must now be approved in advance by the
Audit Committee to assure that such services do not impair the accountants'
independence from the Company. Accordingly, the Audit Committee has adopted an
Audit and Non-Audit Services Pre-Approval Policy (the "Policy") which sets forth
the procedures and the conditions pursuant to which services to be performed by
the independent accountants are to be pre-approved. Pursuant to the Policy,
certain services described in detail in the Policy may be pre-approved on an
annual basis together with pre-approved maximum fee levels for such services.
The services eligible for annual pre-approval consist of services that would be
included under the categories of Audit Fees, Audit-Related Fees, Tax Fees and
All Other Fees in the above table as well as services for limited review of
actuarial reports and calculations. If not pre-approved on an annual basis,
proposed services must otherwise be separately approved prior to being performed
by the independent accountants. In addition, any services that receive annual
pre-approval but exceed the pre-approved maximum fee level also will require
separate approval by the Audit Committee prior to being performed. The Audit
Committee may delegate authority to pre-approve audit and non-audit services to
any member of the Audit Committee, but may not delegate such authority to
management.

All of the engagements and fees for the year ended December 31, 2006 were
approved by the Audit Committee. Of the total number of hours expended during
M&K's engagement to audit the Company's financial statements for the year ended
December 31, 2006, none of the hours were attributed to work performed by
persons other than M&K's full-time, permanent employees.

                                       21

<PAGE>



                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                            WATERCHEF, INC.





March 30, 2007                              /s/  Leslie J. Kessler
                                            -----------------------------------
Date                                             Leslie J. Kessler
                                                 President, Chief Executive
                                                 Officer and Chief Financial
                                                 Officer (Principal Operating
                                                 Officer)

                                       22

<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Water Chef, Inc.
Glen Head, New York

We have audited the accompanying balance sheet of Water Chef, Inc., (a
development stage company) as of December 31, 2006 and the related statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 2006 and 2005 and for the period from January 1, 2002 (commencement as a
development stage company) to December 31, 2006. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Water Chef, Inc., (a
development stage company) as of December 31, 2006 and the results of its
operations and its cash flows for the years ended December 31, 2006 and 2005 and
for the period from January 1, 2002 (commencement as a development stage
company) to December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has had recurring losses, and has a working capital and
stockholders' deficiency as of December 31, 2006. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





                                            /s/  Marcum & Kliegman LLP
                                            -----------------------------
                                                 Marcum & Kliegman LLP


New York, New York
March 19, 2007

                                      F-1

<PAGE>


                                WATER CHEF, INC.
            (A Development Stage Company Commencing January 1, 2002)
                                  BALANCE SHEET
                                DECEMBER 31, 2006


                                     ASSETS

Current Assets:
   Cash                                                             $    99,716
   Prepaid expenses                                                      19,282
                                                                    -----------

       Total Current Assets                                             118,998

Patents and trademarks, Net                                              15,403

Deferred financing  costs                                                 4,687

Other assets                                                              3,162
                                                                    -----------

TOTAL ASSETS                                                        $   142,250
                                                                    ===========

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:
   Accounts payable and accrued expenses                            $   385,975
   Accrued compensation                                                 561,583
   Accrued consulting and director fees                                 468,333
   Notes payable (including accrued interest of $343,265)               990,856
   Convertible promissory note including accrued interest
     of $5,000 and net of debt discount of $69,800)                     235,200
   Fair-value of detachable warrants and options                        293,000
   Fair-value of embedded conversion option                             117,400
   Accrued dividends payable                                            189,871
                                                                    -----------

       Total Current Liabilities                                      3,242,218

Long-Term Liabilities:
    Loans payable to stockholder (including accrued
     interest of $152,957)                                              525,738
                                                                    -----------

TOTAL LIABILITIES                                                     3,767,956
                                                                    -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY:

Preferred stock, $.001 par value;
    10,000,000 shares authorized;
    188,917 shares issued and outstanding,
    (liquidation preference $2,267,350)                                     189
Common stock, $.001 par value;
    340,000,000 shares authorized;
    198,977,497 shares issued;
    198,973,097 shares outstanding                                      198,977
Additional paid-in capital                                           22,836,764
Treasury stock, 4,400 common shares, at cost                        (     5,768)
Accumulated deficit through December 31, 2001                       (14,531,596)
Deficit accumulated during development stage                        (12,124,272)
                                                                    -----------

TOTAL STOCKHOLDERS' DEFICIENCY                                      ( 3,625,706)
                                                                    -----------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                      $   142,250
                                                                    ===========


   The accompanying notes are an integral part of these financial statements.
                                       F-2

<PAGE>
<TABLE>
<CAPTION>


                                              WATER CHEF, INC.

                          (A Development Stage Company Commencing January 1, 2002)

                                          STATEMENTS OF OPERATIONS


                                                                                            For the
                                                                                      period from January 1,
                                                                                         2002 (Date of
                                                                                        Commencement as
                                                                                         a Development
                                                                                         Stage Company)
                                                           Years Ended December 31,      to December 31,
                                                            2006             2005             2006
                                                        -------------    -------------    -------------
<S>                                                     <C>              <C>              <C>
Sales                                                   $     115,000    $     260,000    $     471,290
                                                        -------------    -------------    -------------
Costs and Expenses (Income):
     Cost of sales                                            114,000           42,000          552,680
     Selling, general and administrative -
       including stock based compensation of
       $767,699 and $53,827 for the year
       ended December 31, 2006 and 2005, respectively
       and $1,545,089 for the period from
       January 1, 2002 to December 31, 2006                 1,559,464        1,194,577        5,657,051
     Non-dilution agreement termination costs                    --               --          2,462,453
     Interest expense (including interest expense
       for related party of $23,868 in both
       2006 and 2005 and $119,340 for the period
       January 1, 2002 to December 31, 2006)                  380,553          244,191        1,106,561
     Financing costs - extension of warrants                     --             74,700           74,700
     Loss on settlement of debt                                  --               --          2,614,017
     Stock appreciation rights                                   --        (   121,340)            --
     Change in fair value of warrants and
       embedded conversion option                             133,900      (     5,800)         128,100
                                                        -------------    -------------    -------------
                                                            2,187,917        1,428,328       12,595,562
                                                        -------------    -------------    -------------
Net loss                                                   (2,072,917)      (1,168,328)     (12,124,272)

Deemed dividend on preferred stock                               --               --        ( 2,072,296)

Preferred stock dividends                                  (   42,401)      (   66,436)     (   509,067)
                                                        -------------    -------------    -------------

Net loss applicable to
     common stockholders                                $ ( 2,115,318)   $ ( 1,234,764)   $ (14,705,635)
                                                        =============    =============    =============

Basic and Diluted Loss Per Common Share                 $ (      0.01)   $ (      0.01)
                                                        =============    =============
Weighted Average Common Shares Outstanding -
     Basic and Diluted                                    193,408,939      166,132,433
                                                        =============    =============


                 The accompanying notes are an integral part of these financial statements.
                                                     F-3

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                          WATER CHEF, INC.
                                                STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                   For the Period from January 1, 2002 (Date of Commencement as a
                                          Development Stage Company) to December 31, 2006
                                                              Preferred Stock                   Common Stock           Additional
                                                        ----------------------------    ---------------------------     Paid-in
                                                           Shares          Amount          Shares         Amount        Capital
                                                        ------------    ------------    ------------   ------------   ------------
<S>                                                          <C>        <C>               <C>          <C>            <C>
BALANCE - JANUARY 1, 2002                                    145,500    $        146      86,614,286   $     86,614   $ 12,339,469

  Extension of life of warrants                                 --              --              --             --          111,000

  Proceeds from sale preferred stock
    ($1.00 per share)                                        125,000             125            --             --          117,375

  Proceeds from sale of common stock
    ($0.025 per share)                                          --              --         2,500,000          2,500         97,500

  Common stock issued for services
    ($0.08 per share)                                           --              --           450,000            450         35,550

  Collection of subscription receivable                         --              --              --             --             --

  Net Loss                                                      --              --              --             --             --
                                                        ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2002                                  270,500    $        271      89,564,286   $     89,564   $ 12,700,894

  Proceeds from sale of preferred stock
   March 31, 2003
    ($1.00-$2.00 per share)                                   62,500              63            --             --           74,937
   June 30, 2003
    ($0.50 per share)                                         75,000              75            --             --           37,425
   September 30, 2003
    ($1.00-$2.40 per share)                                  163,281             163            --             --          228,346
   December 31, 2003
    ($1.33-$2.80 per share)                                  145,450             145            --             --          258,717

  Preferred stock issued for services
   March 31, 2003
    ($1.00 per share)                                         30,000              30            --             --           29,970
   June 30, 2003
    ($1.00 per share)                                         51,250              51            --             --           51,199
   September 30, 2003
    ($1.00 per share)                                         67,035              67            --             --           66,968
   December 31, 2003
    ($1.88-$4.00 per share)                                   22,150              22            --             --           65,378

  Collection of subscription receivable                           --              --            --             --             --

  Write-off of subscription receivable                            --              --            --             --             --

  Net Loss                                                        --              --            --             --             --
                                                        ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2003                                  887,166    $        887      89,564,286   $     89,564   $ 13,513,834

  Proceeds from sale of preferred stock
   March 31, 2004
    ($2.40-$4.80 per share)                                  130,077             130            --             --          400,126
   June 30, 2004
    ($0.80 per share)                                         15,625              16            --             --           12,484

  Preferred stock issued for services
   March 31, 2004
    ($2.00-$4.80 per share)                                   49,433              49            --             --          158,483

  Proceeds from sale of common stock
   September 30,2004
    ($0.03-$0.15 per share)                                     --              --         2,541,595          2,541        205,059
   December 31, 2004
    ($0.05-$0.10 per share)                                     --              --         2,487,500          2,488        187,512

  Common stock issued for services
   March 31, 2004
    ($0.05 Per share)                                           --              --           477,133            477         23,380
  September 30,2004
    ($0.05-$0.15 per share)                                     --              --         1,857,800          1,858        126,792
  December 31, 2004
    ($0.08-$0.10 per share)                                     --              --           532,500            533         40,968

 Preferred stock dividend                                       --              --              --             --          (81,034)

 Common stock issued for satisfaction of liabilities
  June 30, 2004
    ($0.15 per share)                                           --              --        37,786,629         37,787      5,635,934
  December 31, 2004
    ($0.134 per share)                                          --              --           411,100            411         54,839
                             The accompanying notes are an integral part of these financial statements.
                                                                 F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                          WATER CHEF, INC.
                                                STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                   For the Period from January 1, 2002 (Date of Commencement as a
                                          Development Stage Company) to December 31, 2006
                                                              Preferred Stock                   Common Stock           Additional
                                                        ----------------------------    ---------------------------     Paid-in
                                                           Shares          Amount          Shares         Amount        Capital
                                                        ------------    ------------    ------------   ------------   ------------
<S>                                                     <C>             <C>             <C>            <C>            <C>
 Preferred stock converted to common stock
  June 30, 2004                                             (133,250)           (133)      5,108,332          5,108         (4,975)
  September 30, 2004                                        (269,263)           (269)     12,103,854         12,104        (11,835)
  December 31, 2004                                          (65,375)            (65)      3,015,000          3,015         (2,950)

 Net loss                                                      --              --              --             --             --
                                                        ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2004                                  614,413    $        615     155,885,729   $    155,886   $ 20,258,617

  Proceeds from sale of common stock
   March 31,2005
    ($0.05 per share)                                           --              --           200,000            200          9,800
   June 30,2005
    ($0.05-$0.06 per share)                                     --              --           700,000            700         39,300
   September 30,2005
    ($0.07-$0.10 per share)                                     --              --         2,455,357          2,455        202,545
   December 31, 2005
    ($0.05-$0.07 per share)                                     --              --         3,879,283          3,879        236,081

  Common stock issued for services
   March 31, 2005
    ($0.05-$0.10 per share)                                     --              --           230,000            230         17,770
   December 31, 2005
    ($0.05-$0.06 per share)                                     --              --           407,500            408         21,219

 Preferred stock dividend                                       --              --              --             --          (66,436)

 Extension of 1,666,667 warrants                                --              --              --             --           74,700

 Common stock issued for satisfaction of liabilities
  September 30, 2005
    ($0.07 per share)                                           --              --           571,428            571         39,429
  December 31, 2005
    ($0.142 per share)                                          --              --           100,000            100         14,100

 Preferred stock converted to common stock
  March 31, 2005                                             (55,970)            (56)      2,518,800          2,519         (2,463)
  June 30, 2005                                              (34,020)            (34)      1,360,800          1,361         (1,327)
  September 30, 2005                                        (286,650)           (287)     13,382,583         13,383        (13,096)
  December 31, 2005                                           (2,188)             (2)         87,520             87            (85)

 Net loss                                                       --              --              --             --             --
                                                        ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2005                                  235,585    $        236     181,779,000   $    181,779   $ 20,830,154

  Proceeds from sale of common stock
   March 21, 2006
    ($0.07 per share)                                           --              --         3,600,000          3,600        246,400
   May 8, 2002
    ($0.08-$0.10 per share)                                     --              --         3,769,230          3,769        276,231
   June 28, 2006
    ($0.10 per share)                                           --              --           100,000            100          9,900
   August 17, 2006
    ($0.07 per share)                                           --              --           400,000            400         27,600

  Common stock issued for services
   March 21, 2006
    ($0.06 per share)                                           --              --           250,000            250         14,750
   May 8, 2006
    ($0.05 per share)                                           --              --           450,000            450         22,050
   June 6, 2006
    ($0.15 per share)                                           --              --           166,666            166         24,833

 Common stock issued for repayment of debt
  February 13, 2006
    ($0.11 per share)                                           --              --           438,785            439         48,046
  April 3, 2006
    ($0.08 per share)                                           --              --           614,131            614         50,790
  April 6, 2006
    ($0.08 Per share)                                           --              --         1,959,631          1,960        154,614
  June 6, 2006
    ($0.10-$0.15 per share)                                     --              --         3,583,334          3,583        390,517

 Preferred stock converted to common stock                   (46,668)            (47)      1,866,720          1,867         (1,820)

                             The accompanying notes are an integral part of these financial statements.
                                                                 F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                          WATER CHEF, INC.
                                               STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                   For the Period from January 1, 2002 (Date of Commencement as a
                                           Development Stage Company) to December 31, 2006



                                                              Preferred Stock                   Common Stock           Additional
                                                        ----------------------------    ---------------------------     Paid-in
                                                           Shares          Amount          Shares         Amount        Capital
                                                        ------------    ------------    ------------   ------------   ------------
<S>                                                     <C>             <C>             <C>            <C>            <C>
 Reclassification of derivative liabilities upon
  conversion of debt                                           --              --              --             --           368,800

 4,000,000 Warrants granted for services,
  May 18, 2006                                                 --              --              --             --           464,000

 2,500,000 Warrants granted for services,
  May 24, 2006
                                                               --              --             --              --           241,200

 Reclassification of warrants
 and embedded conversion option upon
 issuance of convertible debt                                 --               --             --             --          (288,900)

 Preferred stock dividend                                      --              --              --             --          (42,401)

 Net loss                                                      --              --              --             --             --
                                                         ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2006                                  188,917    $        189     198,977,497   $    198,977   $ 22,836,764
                                                         ============    ============    ============   ============   ============


                             The accompanying notes are an integral part of these financial statements.
                                                                 F-6
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                          WATER CHEF, INC.
                                                STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                   For the Period from January 1, 2002 (Date of Commencement as a
                                           Development Stage Company) to December 31, 2006
                                                                                      Accumulated      Deficit
                                                                                        Deficit       Accumulated
                                                         Stock                          Through         During           Total
                                                      Subscription      Treasury        December      Development     Stockholders'
                                                       Receivable         Stock         31, 2001         Stage         Deficiency
-continued-                                           ------------    ------------    ------------    ------------    ------------
<S>                                                   <C>             <C>             <C>             <C>             <C>
BALANCE - JANUARY 1, 2002                             $    (67,500)   $     (5,768)   $(14,531,596)   $       --      $ (2,178,635)

  Extension of life of warrants                               --              --              --              --           111,000

  Proceeds from sale preferred stock
    ($1.00 per share)                                         --              --              --              --           117,500

  Proceeds from sale of common stock
    ($0.025 per share)                                        --              --              --              --           100,000

  Common stock issued for services
    ($0.08 per share)                                         --              --              --              --            36,000

  Collection of subscription receivable                     30,200            --              --              --            30,200

  Net Loss                                                    --              --              --        (1,589,746)     (1,589,746)
                                                      ------------    ------------    ------------    ------------    ------------
BALANCE - DECEMBER 31, 2002                                (37,300)         (5,768)    (14,531,596)     (1,589,746)     (3,373,681)

  Proceeds from sale of preferred stock
   March 31, 2003
    ($1.00-$2.00 per share)                                   --              --              --              --            75,000
   June 30, 2003
    ($0.50 per share)                                         --              --              --              --            37,500
   September 30, 2003
    ($1.00-$2.40 per share)                                   --              --              --              --           228,509
   December 31, 2003
    ($1.33-$2.80 per share)                                   --              --              --              --           258,862

  Preferred stock issued for services
   March 31, 2003
    ($1.00 per share)                                         --              --              --              --            30,000
   June 30, 2003
    ($1.00 per share)                                         --              --              --              --            51,250
   September 30, 2003
    ($1.00 per share)                                         --              --              --              --            67,035
   December 31, 2003
    ($1.88-$4.00 per share)                                   --              --              --              --            65,400

  Collection of subscription receivable                     15,500            --              --              --            15,500

  Write-off of subscription receivable                      21,800            --              --              --            21,800

  Net Loss                                                    --              --              --        (3,535,479)     (3,535,479)
                                                      ------------    ------------    ------------    ------------    ------------
BALANCE - DECEMBER 31, 2003                                   --            (5,768)   ( 14,531,596)   (  5,125,225)     (6,058,304)
  Proceeds from sale of preferred stock
   March 31, 2004
    ($2.40-$4.80 per share)                                   --              --              --              --           400,256
   June 30, 2004
    ($0.80 per share)                                         --              --              --              --            12,500

  Preferred stock issued for services
   March 31, 2004
    ($2.00-$4.80 per share)                                   --              --              --              --           158,532

  Proceeds from sale of common stock
   September 30,2004
    ($0.03-$0.15 per share)                                   --              --              --              --           207,600
   December 31, 2004
    ($0.05-$0.10 per share)                                   --              --              --              --           190,000

  Common stock issued for services
   March 31, 2004
    ($0.05 per share)                                         --              --              --              --            23,857
   September 30,2004
    ($0.05-$0.15 per share)                                   --              --              --              --           128,650
   December 31, 2004
    ($0.08-$0.10 per share)                                   --              --              --              --            41,501

  Preferred stock dividend                                    --              --              --              --           (81,034)
  Common stock issued for satisfaction of liabilities
   June 30, 2004
    ($0.15 per share)                                         --              --              --              --         5,673,721
   December 31, 2004
    ($0.134 per share)                                        --              --              --              --            55,250
                             The accompanying notes are an integral part of these financial statements.
                                                                 F-7
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                           WATER CHEF, INC.
                                                STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                   For the Period from January 1, 2002 (Date of Commencement as a
                                          Development Stage Company) to December 31, 2006
                                                                                      Accumulated      Deficit
                                                                                        Deficit       Accumulated
                                                         Stock                          Through         During           Total
                                                      Subscription      Treasury        December      Development     Stockholders'
                                                       Receivable         Stock         31, 2001         Stage         Deficiency
-continued-                                           ------------    ------------    ------------    ------------    ------------
<S>                                                   <C>             <C>             <C>             <C>             <C>
  Preferred stock converted to common stock
   June 30, 2004                                              --              --              --              --              --
   September 30, 2004                                         --              --              --              --              --
   December 31, 2004                                          --              --              --              --              --

  Net loss                                                    --              --              --        (3,757,802)     (3,757,802)
                                                      ------------    ------------    ------------    ------------    ------------
BALANCE - DECEMBER 31, 2004                                   --      $     (5,768)   $(14,531,596)   $ (8,883,027)   $ (3,005,273)

 Proceeds from sale of common stock
   March 31,2005
    ($0.05 per share)                                         --              --              --              --            10,000
   June 30,2005
    ($0.05-$0.06 per share)                                   --              --              --              --            40,000
   September 30,2005
    ($0.07-$0.10 per share)                                   --              --              --              --           205,000
   December 31, 2005
    ($0.05-$0.07 per share)                                   --              --              --              --           239,960

  Common stock issued for services
   March 31, 2005
    ($0.05-$0.10 per share)                                   --              --              --              --            18,000
   December 31, 2005
    ($0.05-$0.06 per share)                                   --              --              --              --            21,627

  Preferred stock dividend                                    --              --              --              --           (66,436)

  Extension of 1,666,667 warrants                             --              --              --              --            74,700

  Common stock issued for satisfaction of liabilities
   September 30, 2005
    ($0.07 per share)                                         --              --              --              --            40,000
   December 31, 2005
    ($0.142 per share)                                        --              --              --              --            14,200

 Preferred stock converted to common stock
  March 31, 2005                                              --              --              --              --              --
  June 30, 2005                                               --              --              --              --              --
  September 30, 2005                                          --              --              --              --              --
  December 31, 2005                                           --              --              --              --              --

  Net loss                                                    --              --              --        (1,168,328)     (1,168,328)
                                                        ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2005                                   --      $     (5,768)   $(14,531,596)   $(10,051,355)   $ (3,576,550)

  Proceeds from sale of common stock
   March 21, 2006
    ($0.07 per share)                                         --              --              --              --           250,000
   May 8, 2006
    ($0.08-$0.10 per share)                                   --              --              --              --           280,000
   June 28, 2006
    ($0.10 per share)                                         --              --              --              --            10,000
   August 17, 2006
    ($0.07 per share)                                         --              --              --              --            28,000

  Common stock issued for services
   March 21, 2006
    ($0.06 per share)                                         --              --              --              --            15,000
   May 8, 2006
    ($0.05 per share)                                         --              --              --              --            22,500
   June 6, 2006
    ($0.15 per share)                                         --              --              --              --            24,999

  Common stock issued for repayment of debt
   February 13, 2006
    ($0.11 per share)                                         --              --              --              --            48,485
   April 3, 2006
    ($0.08 per share)                                         --              --              --              --            51,404
   April 6, 2006
    ($0.08 per share)                                         --              --              --              --           156,574
   June 6, 2006
    ($0.10-$0.15 per share)                                   --              --              --              --           394,100

  Preferred stock converted to common stock                   --              --              --              --              --
                             The accompanying notes are an integral part of these financial statements.
                                                                 F-8
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                          WATER CHEF, INC.
                                               STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                   For the Period from January 1, 2002 (Date of Commencement as a
                                           Development Stage Company) to December 31, 2006



                                                                                      Accumulated      Deficit
                                                                                        Deficit       Accumulated
                                                         Stock                          Through         During           Total
                                                      Subscription      Treasury        December      Development     Stockholders'
                                                       Receivable         Stock         31, 2001         Stage         Deficiency
-continued-                                           ------------    ------------    ------------    ------------    ------------

<S>                                                   <C>             <C>             <C>             <C>             <C>
  Reclassification of derivative liabilities upon
   Conversion of debt                                          --              --              --              --           368,800

  4,000,000 Warrants granted for services,
   May 18, 2006                                                --              --              --              --           464,000

  2,500,000 Warrants granted for services,
   May 24, 2006
                                                              --              --               --              --           241,200
 Reclassification of warrants
  and the convertible preferred stock
  embedded conversion option upon
  issuance of convertible debt                                 --              --               --              --         (288,900)



  Preferred stock dividend                                     --              --              --              --           (42,401)

  Net loss                                                     --              --              --        (2,072,917)     (2,072,917)

                                                         ------------    ------------    ------------   ------------   ------------
BALANCE - DECEMBER 31, 2006                               $    --      $     (5,768)   $(14,531,596)   $(12,124,272)   $(3,625,706)
                                                         ============    ============    ============   ============   ============


                             The accompanying notes are an integral part of these financial statements.
                                                                 F-9
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                     WATER CHEF, INC.

                                 (A Development Stage Company Commencing January 1, 2002)

                                                  STATEMENTS OF CASH FLOWS

                                                                                                           For the
                                                                                                    Period from January 1,
                                                                                                        2002 (Date of
                                                                                                         Commencement
                                                                                                       as a Development
                                                                                                        Stage Company)
                                                                       Year Ended December 31,          to December 31,
                                                                       2006               2005               2006
                                                                   -------------      -------------      -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                <C>                <C>                <C>
  Net loss                                                         $(  2,072,917)     $(  1,168,328)     $( 12,124,272)
     Adjustments to reconcile net loss to
      net cash used in operating activities
       Amortization of patents                                             1,854              1,854              9,270
       Interest expense - deferred financing                               7,500              2,813             10,313
       Stock based compensation                                          767,699             53,827          1,545,089
       Accretion of debt discount                                        217,320             75,200            292,520
       Change in fair value of warrants and
         embedded conversion option                                      133,900             (5,800)           128,100
       Loss on settlement of debt                                           --                 --            2,614,017
       Non-dilution agreement termination cost                              --                 --            2,462,453
       Inventory reserve                                                    --                 --              159,250
       Write-off of stock subscription receivable                           --                 --               21,800
       Financing costs - warrant extension                                  --               74,700             74,700
     Change in assets and liabilities
       Inventory                                                          30,000            (30,000)              --
       Prepaid expenses                                                    3,682             (5,851)            37,218
       Accounts payable, accrued expenses, accrued dividends,
         accrued compensation, accrued consulting and director
         fees, customer deposits and other current liabilities           (74,148)           422,350          1,397,991
                                                                   -------------      -------------      -------------
NET CASH USED IN OPERATING ACTIVITIES                               (    985,110)      (    579,235)      (  3,371,551)
                                                                   -------------      -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Reduction of stock subscription receivable                             --               20,000             65,700
     Proceeds from sale of preferred stock                                  --                 --            1,130,127
     Proceeds from sale of common stock                                  568,000            494,960          1,540,560
     Proceeds from sale of common stock to be issued                        --                 --              200,000
     Deferred financing costs                                       (      7,500)      (      7,500)      (     15,000)
     Proceeds from convertible promissory note                           300,000            250,000            550,000
     Repayment of notes payable                                     (     20,269)      (     15,362)      (     35,631)
                                                                   -------------      -------------      -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                840,231            742,098          3,435,756
                                                                   -------------      -------------      -------------

NET (DECREASE) INCREASE IN CASH                                     (    144,879)           162,863             64,205

CASH AT BEGINNING OF YEAR                                                244,595             81,732             35,511
                                                                   -------------      -------------      -------------

CASH AT END OF YEAR                                                $      99,716      $     244,595      $      99,716
                                                                   =============      =============      =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid during the year for:
       Interest                                                    $     312,293      $      44,638      $     356,931
                                                                   =============      =============      =============
NON-CASH FINANCING ACTIVITIES:

COMPENSATION SATISFIED BY ISSUANCE OF COMMON STOCK                 $        --        $        --        $      55,250
                                                                   =============      =============      =============

COMMON STOCK ISSUED IN SATISFACTION OF LIABILITIES                 $     650,563      $      40,000      $   6,364,284
                                                                   =============      =============      =============

RECLASSIFICATION OF DERIVATIVE LIABILITIES UPON
     CONVERSION OF DEBT                                            $     368,800      $        --        $     368,800
                                                                   =============      =============      =============

RECLASSIFICATION OF EQUITY INSTRUMENTS TO LIABILITIES              $     288,900      $        --        $     288,900
UPON ISSUANCE OF CONVERTIBLE DEBT                                  =============      =============      =============


                        The accompanying notes are an integral part of these financial statements.
                                                           F-10
</TABLE>

<PAGE>



                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS


1. DESCRIPTION OF BUSINESS

Water Chef, Inc. (the "Company"), is a Delaware Corporation currently engaged in
the design, marketing and sale of water dispensers and purification equipment
both in and outside the United States. The Company's corporate headquarters is
in Glen Head, NY.

2. BASIS OF PRESENTATION AND CONTINUED OPERATIONS

Basis of Presentation

The Company discontinued its water cooler and filtration operations in November
2001. As a result, the Company has refocused its efforts on raising capital and
developing markets for its proprietary technology. Therefore, for financial
purposes, the Company has determined that it has re-entered the development
stage commencing January 1, 2002. The Company's statements of operations,
stockholders' deficiency and cash flows for the year ended December 31, 2006
represent the financial information cumulative, from inception/commencement,
required by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Development Stage Enterprises."

Going Concern

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern and the realization
of assets and the satisfaction of liabilities in the normal course of business.
The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company incurred a net loss of $2,072,917 and $1,168,328 for the years ended
December 31, 2006 and 2005, respectively. The Company has a working capital
deficit and a stockholders' deficiency of approximately $3,123,219 and
$3,625,725 at December 31, 2006, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.

Management's plans with respect to these matters include restructuring its
existing debt and raising additional capital through future issuances of stock
and/or debt. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Patents and Trademarks - Patents and trademarks are amortized ratably over 9 to
14 years. The Company assesses the carrying value of its patents for impairment
each year. Based on its assessments, the Company did not incur any impairment
charges for the years ended December 31, 2006 and 2005, respectively.

Stock-Based Compensation -
Effective January 1, 2006, the Company adopted SFAS 123R which replaces SFAS
123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Pro forma disclosure is no longer an alternative to financial
statement recognition. The adoption of this standard had no effect on operations
for the year ended December 31, 2006 as the Company did not issue any options
during the period and the Company did not have any vested or unvested options
outstanding.

The Black-Scholes option valuation model is used to estimate the fair value of
the options granted. The model includes subjective input assumptions that can
materially affect the fair value estimates. The model was developed for use in
estimating the fair value of traded options or warrants that have no vesting
restrictions and that are fully transferable. For example, the expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted. In management's opinion,
this valuation model does not necessarily provide a reliable single measure of
the fair value of its employee stock options. During the year ended December 31,
2006 and 2005, the Company did not issue any employee stock options.

                                      F-11

<PAGE>


                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Prior to the adoption of SFAS 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by APB 25 and related
interpretations, to account for its stock options to employees. Under this
method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. As permitted
by SFAS 123, the Company elected to continue to apply the intrinsic-value-based
method of accounting described above, and adopted only the disclosure
requirements of SFAS 123. The fair-value-based method used to determine
historical pro forma amounts under SFAS 123 was similar in most respects to the
method used to determine stock-based compensation expense under SFAS 123R.

In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.

The Company did not incur stock based compensation for issuance of options
during the year ended December 31, 2005. As such, the pro forma net loss is
identical to the net loss as reported in the financial statements of operations.
Revenue Recognition - Revenues are recognized when product is shipped, title
passes and collectibility is reasonably assured. Allowances for estimated bad
debts, sales allowances and discounts are provided when such sales are recorded.

Inventories - Inventories consists of finished goods and are stated at the lower
of cost or market utilizing the first-in, first-out method. As of December 31,
2006, the Company had no inventory on hand.

Shipping and Handling Costs - Shipping and handling costs are expensed as
incurred as part of cost of sales. These costs were deemed to be immaterial
during each of the reporting periods.

Advertising Costs - Advertising costs are expensed as incurred. Advertising
costs, which are included in selling, general and administrative expenses, were
diminimus for the years ended December 31, 2006 and 2006, respectively.

Income Taxes - Income taxes are accounted for under SFAS No. 109, "Accounting
for Income Taxes," which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Valuation allowances are established when necessary
to reduce deferred assets to the amounts expected to be realized.

Loss Per Share - Basic loss per share was computed using the weighted average
number of outstanding common shares. Diluted loss per share includes the effect
of dilutive common stock equivalents from the assumed exercise of options,
warrants and convertible preferred stock. Common stock equivalents were excluded
from the computation of diluted loss per share since their inclusion would be
anti-dilutive. Total shares issuable upon the exercise of options, warrants and
the conversion of preferred stock and convertible debt for the years ended
December 31, 2006 and 2005, were 12,719,202 and 21,270,105 respectively.

Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.

                                      F-12

<PAGE>


                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value of Financial Instruments - The carrying amounts of the financial
instruments reported in the balance sheet approximate their fair market value
due to the short-term maturities of these instruments. The fair value of the
Company's long-term debt is estimated using quoted market prices and estimated
rates which would be available to the Company for debt with similar terms.

Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of an asset may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to fair value is
required.

Research and Development - Research and development costs consist of
expenditures incurred during the course of planned research and investigation
aimed at the discovery of new knowledge, which will be useful in developing new
products or processes. The Company expenses all research and development costs
as incurred. There were no research and development costs incurred during the
years ended December 31, 2006 and 2005, respectively.

Deferred Financing Costs - Costs incurred in conjunction with the convertible
promissory notes have been capitalized and will be amortized over the term of
the notes.

Recent Accounting Pronouncements

In June 2005, the Financial Accounting Standards Board ("FASB") published SFAS
No. 154, "Accounting Changes and Error Corrections - a Replacement of APB
Opinion No. 20 and FASB No. 3" ("SFAS 154"). SFAS 154 establishes new standards
on accounting for changes in accounting principles. Pursuant to the new rules,
all such changes must be accounted for by retrospective application to the
financial statements of prior periods unless it is impracticable to do so. SFAS
154 completely replaces Accounting Principles Bulletin No. 20 and SFAS 3, though
it carries forward the guidance in those pronouncements with respect to
accounting for changes in estimates, changes in the reporting entity, and the
correction of errors. The requirements in SFAS 154 are effective for accounting
changes made in fiscal years beginning after December 15, 2005. The adoption of
this pronouncement did not have an impact on the Company's financial position,
results of operations, or cash flows.

In June 2006, the FASB ratified EITF Issue No. 05-1, "Accounting for the
Conversion of an Instrument That Becomes Convertible upon the Issuer's Exercise
of a Call Option" ("EITF No. 05-1"), which indicates that no gain or loss should
be recognized upon the conversion of an instrument that becomes convertible as a
result of an issuer's exercise of a call option pursuant to the original terms
of the instrument. EITF No. 05-1 became effective for annual or interim periods
beginning after June 28, 2006. The adoption of this pronouncement did not have
an impact on the Company's financial position, results of operations, or cash
flows.

In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument" in EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered "conventional" for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.

EITF No. 05-2 became effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The Company has applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on the Company's financial
position, results of operations, or cash flows.

                                      F-13

<PAGE>
                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 became effective for the first interim or annual reporting period
beginning after December 15, 2005. The Company adopted EITF No. 05-7 as of the
beginning of the Company's interim reporting period that began on January 1,
2006. The adoption of this pronouncement did not have an impact on the Company's
financial position, results of operations, or cash flows.

In September 2005, the FASB ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"
("EITF No. 05-8"), which addresses the treatment of convertible debt issued with
a beneficial conversion feature as a temporary difference under the guidance in
SFAS 109. In addition, deferred taxes recognized for a temporary difference of
debt with a beneficial conversion feature should be recognized as an adjustment
of additional paid-in capital. Entities should apply the guidance in EITF No.
05-8 in the first interim or annual reporting period that begins after December
15, 2005. Its provisions should be applied retrospectively under the guidance in
SFAS 154 to all convertible debt instruments with a beneficial conversion
feature accounted for under the guidance in EITF No. 00-27 "Application of EITF
Issue No. 98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios." The Company has applied
the requirements of EITF No. 05-8 to all previously existing convertible debt
instruments with a beneficial conversion feature and will apply the requirements
of EITF No. 05-8 for all new convertible debt instruments with a beneficial
conversion feature. The adoption of this pronouncement for new convertible debt
instruments with a beneficial conversion feature did not have an impact on the
Company's financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." The requirements in SFAS 155 are effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The adoption of this pronouncement is
not expected to have an impact on the Company's financial position, results of
operations, or cash flows.

In July 2006, the FASB released Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting and reporting for uncertainty in income tax
law. FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. The provisions of FIN 48
are effective after December 15, 2006. Earlier adoption is permitted as of the
beginning of an enterprise's fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN 48
will be recorded as an adjustment to accumulated deficit as of the beginning of
the period of adoption. The adoption of this pronouncement is not expected to
have an impact on the financial position, results of operations, or cash flows
of the Company.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
U.S., and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any cumulative effect
will be recorded as an adjustment to the opening accumulated deficit balance, or
other appropriate component of equity. The adoption of this pronouncement is not
expected to have an impact on the Company's financial position, results of
operations, or cash flows.

In September 2006, the SEC staff issued Staff Accounting Bulleting ("SAB") No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years' financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement is not expected to have an
impact on the Company's financial position, results of operations, or cash
flows.

                                      F-14
<PAGE>


                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In October 2005, the FASB issued FSP FAS 123(R)-2, "Practical Accommodation to
the Application of Grant Date as Defined in FASB Statement No. 123(R)", which
provides clarification of the concept of mutual understanding between employer
and employee with respect to the grant date of a share-based payment award. This
FSP provides that a mutual understanding of the key terms and conditions of an
award shall be presumed to exist on the date the award is approved by management
if the recipient does not have the ability to negotiate the key terms and
conditions of the award and those key terms and conditions will be communicated
to the individual recipient within a relatively short time period after the date
of approval. This guidance was applicable upon the initial adoption of SFAS
123(R). The adoption of this pronouncement did not have an impact on the
Company's financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.

SFAS 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009 The adoption of this pronouncement is not expected
to have an impact on the Company's financial position, results of operations or
cash flows.

In December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", to include scope exceptions for registration payment arrangements.

FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement is not expected to have an impact on the Company's financial
position, results of operations or cash flows.

EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock'" ("EITF No. 05-4") addresses financial instruments, such as stock
purchase warrants, which are accounted for under EITF No. 00-19 that may be
issued at the same time and in contemplation of a registration rights agreement
that includes a liquidated damages clause. The consensus of EITF No. 05-4 has
not been finalized.

                                      F-15

<PAGE>


                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


4. PATENTS AND TRADEMARKS

Patents and trademarks as of December 31, 2006 consist of the following:


         Patents                                     $      24,500
         Trademarks                                          1,555
                                                     -------------
         Total cost                                         26,055
         Accumulated amortization                      (    10,652)
                                                     -------------
         Patents and Trademarks, Net                 $      15,403
                                                     =============

Amortization expense for the years ended December 31, 2006 and 2005 was $1,854
and $1,854, respectively. The following table presents the Company's estimate
for amortization expense for each of the five succeeding years and thereafter.

         2007                                        $       1,854
         2008                                                1,854
         2009                                                1,854
         2010                                                1,854
         2011                                                1,854
         2012 and thereafter                                 6,133
                                                     -------------
                                                     $      15,403
                                                     =============

5. NOTES PAYABLE

Notes payable and accrued interest at December 31, 2006 consists of the
following:

                          (a)         $      187,470
                          (b)                635,933
                          (c)                167,453
                                      --------------

                          Total       $      990,856
                                      ==============

(a): These are unsecured notes bearing interest ranging from 10% to 15% per
     annum, with no specific due date for repayment. The amount due on these
     notes, inclusive of $104,249 interest is $187,470 at December 31, 2006. No
     demands for repayment have been made by the note holder.

(b)  In April 2001, the Company issued a $400,000 promissory note at an interest
     rate of 2% per month. In consideration for the issuance of this note,
     500,000 shares of the Company's common stock were issued to the note holder
     and a $74,000 debt discount was recorded and fully amortized in the year
     ended December 31, 2001. The principal balance and accrued interest was
     payable on September 1, 2001. The Company did not make such payment and was
     required to issue an additional 100,000 penalty shares of its common stock
     to the note holder. The Company recorded additional interest expense of
     $12,300 related to the issuance of these penalty shares. The amount due on
     this note, inclusive of $235,933 in interest, is $635,933 at December 31,
     2006.

(c)  In November 2000, the Company entered into a Convertible Promissory Note
     agreement, whereby the Company may be advanced a maximum of $300,000. The
     Company was advanced the following: $100,000 in November 2000, $50,000 in
     December 2000 and $50,000 in January 2001. No further cash advances were
     made to the Company. The Convertible Promissory Note agreement also called
     for the payment of $100,000 of Company expenses. The advances bear interest
     at 10% per annum and were to have been repaid as of January 15, 2002. A
     maximum of 6,000,000 shares could have been issued upon conversion had the
     full $300,000 been advanced. As of December 31, 2006, the balance of the
     convertible promissory note principal was $167,453 inclusive of interest in
     the amount of $3,082.

                                      F-16

<PAGE>

                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


6. CONVERTIBLE PROMISSORY NOTES

In November 2005, the Company entered into a Convertible Promissory Note
agreement for $250,000 which included 430,000 warrants, which are exercisable at
$0.14 per share and have a life of three years. The warrants carry a cashless
exercise provision. The Convertible Promissory Note bore interest at a rate of
8% per annum and matured in March 2006.

The note included certain conversion features as follows:

     o    convertible at any time after the maturity date, at the option of the
          holder,
     o    convertible at 85% of the average of the three 3 lowest closing bid
          prices for the common stock, for the ten trading days ending on the
          trading day immediately before the conversion date.

The Convertible Promissory Note agreement required the Company to file a
registration statement no later than sixty business days from the date of the
agreement for no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or (b) one hundred twenty days.

The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:

     a.   for each 30 day period after the filing date that transpires until the
          date that the Company files the registration statement, and
     b.   for each 30 day period after the effective date that transpires until
          such date as the registration statement is declared effective.

The gross proceeds of $250,000 were recorded net of a discount of $188,000. The
debt discount consisted of $47,200 related to the warrants and $140,800 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, View A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.

Accordingly, the warrants and the embedded conversion option were marked to
market through earnings at the end of each reporting period. The Company
determined that the value of the registration rights was deemed to be de minimis
and the related registration statement became effective in January 2006. The
warrants and the conversion option were valued using the Black-Scholes valuation
model. For the year ended December 31, 2006, the Company reflected a loss of
$186,600 representing the change in the value of the warrants and conversion
option. During the year ended December 31, 2006, the Company charged to interest
expense $112,800 for the accretion of the debt discount.

During the year ended December 31, 2006, the Company issued 3,012,547 shares of
common stock for the settlement of the debt and accrued interest. As a result of
the conversion the Company reclassified to equity $368,800 of the derivative
liabilities.

This Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company. At the date of conversion the officer was released from
the security interest.

On October 17, 2006, the Company entered into a Convertible Promissory Note for
proceeds of $300,000. The loan has a stated interest rate of 8% per annum and
matures on February 17, 2007. The Company issued a warrant for 882,352 shares of
the Company's common stock, exercisable at $0.085 per share and has a life of
three years. The warrant has a cashless exercise provision. The note and accrued
interest is convertible at any time after the maturity date into shares of the
Company's common stock at a conversion price equal to the current market price
multiplied by eighty-five percent.

The Convertible Promissory Note agreement requires the Company to file a
registration statement no later than thirty business days from the date of the
agreement and no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or one hundred twenty days.

                                      F-17
<PAGE>
                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued

6. CONVERTIBLE PROMISSORY NOTES (continued)

The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:

     (a)  for each 30 day period after the filing date the transpires until the
          date that the Company files the registration statement, and
     (b)  for each 30 day period after the effective date that transpires until
          such date as the registration statement is declared effective.

The Company accounted for the above transaction in accordance with EITF issue
No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has determined that
there is an embedded conversion option of the warrants and derivative
liabilities. Accordingly, the warrants and the embedded conversion option are
recorded at fair market value and marked to market through earnings at the end
of each reporting period.

The gross proceeds of $300,000 were recorded net of a discount of $174,200. The
debt discount consisted of $12,800 related to the warrants and $161,400 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, View A "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.

Accordingly, the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. The Company
determined that the value of the registration rights was deemed to be de minimis
and the related registration statement became effective in January 2007. The
warrants and the conversion option are valued using the Black-Scholes valuation
model. For the year ended December 31, 2006, the Company reflected a gain of
$85,900 representing the change in the value of the warrants and conversion
option. During the year ended December 31, 2006, the Company charged to interest
expense $104,520 for the accretion of the debt discount.

The Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company.

Under the terms of the note the Company is currently in default, subsequent to
the year end the Company issued 948,670 shares of common stock for the
settlement of $100,000 of principal and $3,249 of accrued interest. The Company
plans to issue additional shares of common stock for the settlement of the
remaining principal an accrued interest.

Under accounting guidance provide by EITF 00-19, the conversion price of the
convertible promissory note did not have a determinable number of shares the
note could be settled in. As a result, previously granted warrants as well as
the embedded conversion option of the Series F Convertible Preferred Stock were
required to be reclassified from equity and presented as a derivative liability
in the amount of $288,900. Accordingly, the warrants, options and conversion
option will be marked to market through earnings at the end of each reporting
period. For the year ended December 31, 2006, the Company incurred an additional
charge of $33,200 representing the change in the fair value of the warrants and
embedded conversion option of the Series F Convertible Preferred Stock.

7. LOANS PAYABLE - STOCKHOLDER

At December 31, 2006, the Company has been obligated to its Chief Executive
Officer who is also a significant stockholder for loans and advances made to the
Company totaling $372,781, plus accrued interest of $152,956. These advances
were accruing interest ranging from 6% to 12% per annum. The loans have no
repayment terms and the stockholder has agreed not to demand payment until
January 1, 2008 at the earliest. The Company reported the obligation as a
long-term liability on the balance sheet. In January 2007, in conjunction with
the resignation of the Chief Executive Officer (Note 15) these loans plus
accrued interest were forgiven.

8. COMMON STOCK ISSUED

On March 14, 2006, at the Company's annual meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred, Series F Preferred
stockholders (together the "Stockholders"), voting as a single class, voted and
approved a proposal to amend the Certificate of Incorporation to increase the
Company's authorized capital stock from 200,000,000 shares to 350,000,000
shares, consisting of 340,000,000 shares of common stock and 10,000,000 shares
of preferred stock.

                                      F-18
<PAGE>


                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


8. COMMON STOCK ISSUED (continued)

During the year ended December 31, 2006, the Company recorded the following
transactions:

a. Cash

During the year ended December 31, 2006, the Company raised $568,000 through the
sale of 7,869,230 shares of common stock

b. Services

During the year ended December 31, 2006, the Company issued 866,666 shares of
common stock for services for a value of $62,499.

On May 18, 2006, the Company granted 4,000,000 warrants to a consultant for past
services. The warrants fully vested the date of the grant, have a life of 3
years and are exercisable at $0.10 per share. The Company incurred a stock based
compensation charge of $464,000.

On May 24, 2006, the Company granted 2,500,000 warrants to two directors for
past services. The warrants fully vested on the date of the grant, have a life
of 3 years and are exercisable at $0.15 per share. The Company incurred a stock
based compensation charge of $241,200.

c. Conversion of preferred stock into common stock

During year ended December 31, 2006, the Company issued to various parties
1,866,720 shares of its common stock in connection with the conversion of 46,668
shares of preferred stock.

Subsequent to December 31, 2006, the Company issued to various parties 113,920
shares of its common stock in connection with the conversion of 2,848 shares of
preferred stock.

                                      F-19

<PAGE>
<TABLE>
<CAPTION>


                                WATER CHEF, INC.

            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued

8. COMMON STOCK ISSUED (continued)

d. Settlement of debt

During year ended December 31, 2006, the Company issued 6,595,881 shares of
common stock for debt and accrued interest of $650,563.



9. PREFERRED STOCK

The Company is authorized to issue 10,000,000 shares of $.001 par value
preferred stock, issuable in series with rights, preferences, privileges and
restrictions as determined by the board of directors.

At December 31, 2006, outstanding preferred shares were as follows:
                                                                                       Liquidation
                                                   Current                              Preference
                                                    Annual       Total      Dividend   (including
            Authorized   Outstanding     Par       Dividend     Dividend    Arrearage    dividend
              Shares       Shares       Value    Requirement   Arrearage    Per Share   arrearage)
<S>           <C>           <C>      <C>          <C>          <C>          <C>         <C>
Series A      400,000       52,500   $       53   $   52,500   $  622,600   $  11.86    $1,147,600
Series D    2,000,000       93,000           93       55,800      585,000       6.29     1,119,750
Series F    1,000,000       43,417           43         --        189,871        --          --
                        ----------   ----------   ----------   ----------               ----------

                           188,917   $      189   $  108,300   $1,397,471               $2,267,350
                        ==========   ==========   ==========   ==========               ==========

Series A:

The Series A preferred stock provides for a 10% cumulative dividend, based on
the $10 per share purchase price, payable annually in the Company's common stock
or cash, at the Company's option. The Series A preferred stock is not
convertible, and is redeemable solely at the Company's option at a price of $11
per share plus accrued dividends. The Series A preferred stockholders have
voting rights equal to common stockholders.

In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of the Series A preferred stock are
entitled to receive out of the assets of the Company the sum of $10.00 per share
of Series A preferred stock then outstanding, plus a sum equal to all dividends
(whether or not earned or declared) on such shares accrued and unpaid thereon to
the date of final payment or distribution, before any payment or distribution
upon dissolution, liquidation or winding up shall be made on any series or class
of capital stock ranking junior to Series A preferred stock as to such payment
or distribution.


                                      F-20

</TABLE>

<PAGE>


                                WATER CHEF, INC.
            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


9. PREFERRED STOCK (continued)

Series C:

During the year ended December 31, 2002, the Company sold Series C 15%
Convertible Preferred stock at $1.00 per share. These shares convert in one
year. All dividends are cumulative and are payable in shares of the Company's
common stock valued at the then-current market price per share, or upon
conversion, whichever is earlier. The conversion rate for shares, and accrued
dividends payable, is 33.33 shares of common for each $1.00 of preferred stock
and dividends payable, or $0.03 for each share of common stock. The Series C
Preferred stockholders have voting rights equal to the common stockholders. The
Series C preferred stock has no stated rights in the assets of the Company upon
liquidation. During 2002, the Company sold 125,000 shares of Series C preferred
stock. For each share of preferred stock purchased, the buyers also receive the
right to receive an additional 33.33 shares of common stock upon conversion, as
the market value of the stock was $0.015 at issuance.

Series D:

The Series D preferred stock provides for a 12% cumulative dividend, based on
the $5 per share purchase price, payable semi-annually in the Company's common
stock or cash, at the Company's option. The Series D preferred stock is not
convertible, and is redeemable solely at the Company's option at a price of
$5.75 per share plus accrued dividends. The Series D Preferred stockholders have
voting rights equal to the common stockholders.

In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of the Series D preferred stock are
entitled to receive out of the assets of the Company the sum of all dividends
(whether or not earned or declared) on such shares accrued and unpaid thereon to
the date of final payment or distribution, before any payment or distribution
upon dissolution, liquidation or winding up shall be made on any series or class
of capital stock ranking junior to Series D preferred stock as to such payment
or distribution.

Series F:

In April 2003, management authorized the Company to raise up to $550,000 through
a private placement by issuing 10% two-year convertible preferred instruments.
The preferred, designated as Series F, and provided for one million shares in
total and can be convertible into shares of Water Chef's common stock at such
time as the stockholders of the corporation approve an increase in the
authorized capital stock of the corporation, which occurred on June 4, 2004. All
dividends are cumulative and are payable in shares of the Company's common stock
valued at the then current market price per share, at the time of maturity, or
upon conversion, whichever is earlier. The conversion rate for shares and
accrued dividends payable is 40 shares of common for each share of preferred
stock. The Series F convertible preferred stockholders have voting rights equal
to the common stockholders. The Series F convertible preferred stock has no
stated rights in the assets of the Company upon liquidation.

Although there was a discount upon the issuance of all of the Series F preferred
stock in accordance with EITF 98-5, a security is not yet convertible if certain
contingencies exist which are dependent upon the occurrence of a future event
outside the control of the security holder. In this case, the shares can only be
converted into common stock after the stockholders of the Company approve an
increase in the authorized capital stock of the corporation. In accordance with
EITF 98-5, any beneficial conversion (discount) feature is measured at the
commitment date, but will not be recognized as an adjustment to earnings until
the contingency is resolved, (the date the increase in shares are approved). In
June 2004, the Company voted and approved a proposal to amend the Certificate of
Incorporation to increase the Company's authorized capital stock from
100,000,000 to 200,000,000 shares, consisting of 190,000,000 shares of common
stock and 10,000,000 shares of preferred stock. During June 2004, the Company
recorded the deferred contingent beneficial conversion adjustment of $2,072,296
as a deemed dividend since the contingency was resolved.

In connection with Series F Preferred Stock conversions, the Company recorded
dividends of $42,401 and $66,436 for each of the years ended December 31, 2006
and 2005, respectively.

                                      F-21
<PAGE>


                                WATER CHEF, INC.
            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


10. STOCK OPTION, STOCK APPRECIATION RIGHTS AND WARRANT GRANT PLAN

The Company's President and Director were issued in the aggregate 6,000,000
options to purchase common stock of the Company in January 2004. The total
options granted may be converted to common stock at an exercise price of $0.25
and expire in five years. Those options were converted to stock appreciation
rights [the "Conversion"] in November 2004. The Conversion consisted of
5,000,000 stock appreciation rights granted to the President which vest over 5
years and 1,000,000 stock appreciation rights granted to the director which vest
over 2 years.

In March 1997, the Company, in connection with Bridge Loans for $375,000 issued
warrants to purchase 2,500,001 shares of common stock at $.15 per share. These
warrants had a life of five years and were to have expired in March 2002. For
the year ended December 31, 2000, a total of 333,334 common shares were issued
upon the exercise of a like number of warrants, for net proceeds of $50,000. Of
the remaining 2,166,667 un-exercised warrants at March 2002, a total of
1,666,667 warrants had their lives extended for an additional two years until
March 2004 and then later for another twelve months until March 2005. The
remaining balance of 500,000 warrants was not extended and, accordingly, they
have expired. The extension of the exercise date was part of a settlement that
the Company had reached with certain debenture holders that had brought legal
action against the Company. In June 2005, the Company extended for the second
time the life of the warrants for one year. The Company recorded an additional
charge of $74,700, which has been included in the statements of operations.

The fair value of each stock option, or warrant granted, is estimated on the
date of grant using the Black-Scholes option-pricing model. During the year
ended December 31, 2005, the Company granted 433,000 warrants in connection with
the Convertible Promissory Note and 883,000 warrants during the year ended
December 31, 2006.

The following tables illustrate the Company's warrant issuances and balances
outstanding as of, and during the years ended December 31, 2006 and 2005:



                                   Shares Underlying   Weighted Average
                                       Warrants         Exercise Price
                                   -----------------   ----------------
Outstanding at December 31, 2004       1,666,667            $ 0.15
   Granted                               433,000              0.14
   Expired                                     -                 -
   Exercised                                   -                 -
                                   -----------------    ---------------
Outstanding at December 31, 2005       2,099,667            $ 0.15
   Granted                             7,382,352              0.12
   Expired                            (1,666,667)            (0.15)
   Exercised                                   -                 -
                                   -----------------    ---------------
Outstanding at December 31, 2006       7,815,352            $ 0.12
                                   =================    ===============

The following is additional information with respect to the Company's warrants
as of December 31, 2006:



              WARRANTS OUTSTANDING                     WARRANTS EXERCISABLE
 -----------------------------------------------   -----------------------------
                            Weighted
                             Average    Weighted
             Number of     Remaining     Average    Number of      Weighted
 Exercise  Outstanding    Contractual   Exercise   Exercisable      Average
  Price      Warrants        Life        Price      Warrants     Exercise Price
---------  ------------   ------------   -------  ------------   --------------
  $ 0.09       882,352     2.8 years      $0.09       882,352        $0.09
  $ 0.10     4,000,000     2.4 years      $0.10     4,000,000        $0.10
  $ 0.14       433,000     1.8 years      $0.14       433,000        $0.14
  $ 0.15     2,500,000     2.4 years      $0.15     2,500,000        $0.15
---------  ------------   ------------   -------  ------------   --------------
             7,815,352                               7,815,352
           ============                           ============

                                      F-22

<PAGE>


                                WATER CHEF, INC.
            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


11. LEASES

The Company's lease for its administrative facilities located in Glen Head, New
York is on a month to month basis. This lease terminated on March 31, 2006.

Rent expense, for the years ended December 31, 2006 and 2005 was $31,935 and
$30,189, respectively.

The Company entered into a month to month lease beginning April 2, 2007 in
Melville, New York for its administrative facilities.

12. LITIGATION

On July 14, 2006, Funding Group, Inc. filed a complaint with the Supreme Court
of the State of New York in New York County seeking damages due to an alleged
breach of contract related to a $25,000 loan made by the plaintiff to the
Company. On October 11, 2006, the Company filed a counter claim against Funding
Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.

13. INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the financial
statements and tax basis of assets and liabilities, and for the expected future
tax benefit to be derived from tax loss and tax credit carry forwards. SFAS No.
109 additionally requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets.

For the year ended December 31, 2006 and 2005, no provision for income taxes has
been provided for, as a result of continued net operating losses. The Company is
subject to certain state and local taxes based on capital. The state and local
taxes based on capital were immaterial for each of the years ended December 31,
2006 and 2005.

The effective tax rate differs from the statutory rate of 34% due to the
increase of the valuation allowance.

The Company has net operating loss carry-forwards for federal income tax
purposes totaling approximately $23,600,000 at December 31, 2006. These
carry-forwards expire between the years 2009 through 2026. Utilization of these
loss carry-forwards may be limited under Internal Revenue Code Section 382. The
deferred tax asset arising from the net operating loss carry-forwards has been
offset by a corresponding valuation allowance.

The valuation allowance primarily relates to the federal and state net operating
losses for which utilization in future periods is uncertain. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. The Company considers projected future taxable income and tax
planning strategies in making this assessment. Based on projections for future
taxable income over the periods that the deferred tax assets are deductible, the
Company believes it is more likely than not that the Company will not realize
the benefits of these deductible differences in the near future and therefore a
full valuation allowance of $8,750,000 is provided. The valuation allowance
increased approximately $1,800,000 during 2006 related to increased net
operating losses.

14. MAJOR CUSTOMERS

During the year ended December 31, 2006, the Company sold two systems to one
customer and recognized revenues of $115,000. During the year ended December 31,
2005, the Company sold five systems to two customers and recognized revenue of
$260,000.

                                      F-23

<PAGE>


                                WATER CHEF, INC.
            (A Development Stage Company Commencing January 1, 2002)

                          NOTES TO FINANCIAL STATEMENTS
                                    Continued


15. COMMITMENTS AND CONTINGENCIES

In January 1, 2004, the Company entered into a 5 year employment agreement with
its Chief Executive Officer ("Employee"). The Company agreed to pay to the
Employee for the services to be rendered a base salary at an annual rate of
three hundred and fifty thousand dollars. The Company granted to its employee a
five-year option for 5,000,000 shares of the Company's outstanding common stock
for an option price of $.25 per share. The option will vest in fifty equal,
consecutive monthly increments of 100,000 shares each on the first day of each
month beginning with January of 2004 and ending with February of 2008. Those
options were converted to stock appreciation rights in November 2004. As of
December 31, 2006, approximately $471,600 was owed and is included on the
balance sheet as part of accrued compensation. On January 29, 2007, the
Company's Chief Executive Officer resigned and surrendered his Stock
Appreciation Rights, any severance under his employment agreement, returned
20,000,000 shares of common stock, forgave $525,738 of notes payable and accrued
interest and relinquished his rights to approximately $471,600 of unpaid and
accrued salary. The Company will reclassify to equity in the first quarter ended
2007 approximately $471,600 for the relinquishment of his rights to the unpaid
and accrued salary and $525,738 notes payable and accrued interest. The return
of the shares will be recorded as a retirement and cancellation of the common
stock. The cancellation of the stock appreciation rights did not have an
accounting impact.

On March 9, 2004, the Company extended for two additional years the consulting
agreement with a director. The Company agreed to increase his monthly payment to
$10,000 per month. The Company also gave him the right to purchase one million
shares of the Company's common stock at a price of $0.25 per share, such right
to vest at the rate of 50% per year. Those options were converted to stock
appreciation rights in November 2004. For each of the years ended December 31,
2006 and 2005, the Company incurred a charge of $60,000 and $120,000
respectively, which has been included in the statement of operations as part of
selling general and administrative costs. In addition, the director earned
approximately $25,000 of director fees. On February 12, 2007 the director
resigned from the Board of Directors and waived his rights to any accrued
compensation owed to him by the Company. The Company will reclassify the debt of
approximately $330,000 during the first quarter ended 2007 to equity for the
relinquishment of his rights to the unpaid and accrued consulting and director
fees.


16. CREDIT RISK

The Company maintains its cash in accounts with major financial institutions in
the United States. From time to time, these balances may exceed the amounts of
insurance provided on such deposits. As of December 31, 2006, there were no
uninsured balances.


17. SUBSEQUENT EVENTS

In January 2007, David Conway resigned as President and Chief Executive Officer
of the Corporation, and as a member of the Board of Directors. In February 2007,
Marshall Sterman resigned as a member of the Board of Directors.

In January 2007, Leslie J. Kessler was appointed as President of the Company. In
connection with her employment, she is to receive a salary of $9,000 per month.
In addition, Ms. Kessler will be issued 2,000,000 shares of the Company's common
stock and a warrant to purchase 2,000,000 shares of the Company's common stock.
The Company plans to implement a performance-based cash incentive plan for Ms.
Kessler as well. The complete terms of the employment agreement have not been
finalized.

In February 2007, Ms. Kessler was appointed Chief Executive Officer and was
elected to the Board of Directors.

In January 2007, Dr. Ronald W. Hart, Chairman of the Company's Board of
Scientific Advisors, was appointed to the Board of Directors of Water Chef, Inc.

Effective with David Conway's resignation, John J. Clarke became Chairman of the
Board, and upon Marshall Sterman's resignation he became Chairman of the Audit
and Compensation Committees of the Board.

                                      F-24

<PAGE>