UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-KSB/A


Amendment
No. 1




(Mark
One)




x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For the fiscal year
      ended December 31,
      2007o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
      1934
              For
      the transition period
      from                                                    to





0-51313Commission
      file number




SKINNY
      NUTRITIONAL CORP.(Exact
      name of small business issuer as specified in its
  charter)




Nevada
                
                88-0314792(State of incorporation)
                
                (IRS Employer Identification Number)




3
      Bala Plaza East, Suite 101
                    Bala
      Cynwyd, PA 19004(Address
      of principal executive office)




(610)
      784-2000(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 $0.001 per
share





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





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   o





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the 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. x





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





The
issuer had revenues of $752,825 for the fiscal year ended December 31,
2007.





The
aggregate market value of the voting stock held by non-affiliates on December
31, 2007 was approximately $5,214,025 based on the average bid and asked prices
of the issuer’s common stock on such date.





As of
April 11, 2008, the issuer had 105,113,069 shares of common stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE


NONE




Transitional
Small Business Disclosure Format: Yes   o   No   x








SKINNY
NUTRTIONAL CORP.


INDEX
TO ANNUAL REPORT ON FORM 10-KSB





PAGEPart
      IItem
      1.
                  Description
      of Business
                  5Item
      2.
                  Description
      of Property
                  22Item
      3.
                  Legal
      Proceedings
                  22Item
      4.
                  Submission
      Of Matters To A Vote Of the Security Holders
                  23Part
      II
                  
                  23Item
      5.
                  Market
      For Common Equity, Related Stockholder Matters And Small Business Issuer
      Purchases Of Equity Securities
                  23Item
      6.
                  Management's
      Discussion And Analysis Or Plan Of Operation
                  24Item
      7.
                  Financial
      Statements
                  31Item
      8.
                  Changes
      In And Disagreements With Accountants On Accounting And Financial
      Disclosure
                  31Item
      8A.
                  Controls
      And Procedures
                  31Item
      8B.
                  Other
      Information
                  33Part
      III
                  
                  33Item
      9.
                  Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a) Of the Exchange Act
                  33Item
      10.
                  Executive
      Compensation
                  35Item
      11.
                  Security
      Ownership Of Certain Beneficial Owners And Management And Related
      Stockholder Matters
                  37Item
      12.
                  Certain
      Relationships And Related Transactions
                  37Item
      13.
                  Exhibits
                  38Item
      14.
                  Principal
      Accountant Fees And Services
                  40Signatures




2


EXPLANATORY
NOTE





Skinny
Nutritional Corp. (“we,” “us,” or the “Company”) is filing this Amendment
No. 1 (this “Amendment”) to its Annual Report on Form 10-KSB for the year
ended December 31, 2007 filed with the Securities and Exchange Commission
on April 14, 2008 (the “Original Filing”) to restate its consolidated financial
statements and related financial information to correct an error in the
Company’s accounting and disclosures for its convertible debentures and options
and warrants. The Company, after consulting with its independent registered
public accounting firm, concluded that the Company’s method of accounting for
the Debentures and options must be changed. This conclusion was reached
following a thorough evaluation of the Company’s accounting treatment of such
securities in response to a comment letter from the Staff of the Division of
Corporation Finance of the Securities and Exchange Commission (“SEC”) relating
to the Company’s Annual Report on Form 10-K for the year ended December 31,
2007.





This
Amendment is being filed to reflect restatements of (i) the Company’s
consolidated balance sheets at December 31, 2007 and December 31,
2006, and (ii) the Company’s consolidated statements of operations and cash
flows for the year ended December 31, 2007, and the notes related thereto.
The Amendment will reflect an adjustment to the beneficial conversion feature of
certain previously outstanding convertible debentures (the “Debentures”) to give
effect to the reduction of the conversion rate in accordance with FAS 84. The
effect of this adjustment, as is shown in this Amendment is to debit debt
conversion expense in an amount of $3,371,964 and to credit additional paid in
capital by $3,371,964. Due to this, the Company’s net loss for 2007 was impacted
by $3,371,964. The Company determined that the modification of the Debentures
resulted in a fair value of incremental consideration of $3,371,964 based on the
difference between the fair value of the common stock underlying the Debentures
following the reduction in the conversion rate under FAS 84 and the fair value
of the common stock underlying the Debentures with the original conversion
terms.





The
Company also intends to include in this Amendment a credit to its profit and
loss statement in the amount of $69,525 in order to properly reflect on its
financial statements the stock compensation expense that the Company incurred in
fiscal 2007in accordance with SFAS 123R. These changes will be shown on its
Statement of Operations, as an adjustment to “General and Administrative
Expense” by reducing such line item in the net amount of $69,525. This
adjustment will also flow through the Statement of Operations as a reduction in
“Net Loss from Operations” and “Net Loss” in the amount of $69,525. This
adjustment will not impact earnings (loss) per share. In addition, on its
balance sheet contained in the Original Filing, the Company will adjust
“additional paid-in capital” by a net amount of $69,525. The net increase of
$69,525 to additional paid-in capital will flow through the balance sheet as a
decrease to “Total stockholders’ deficit” and an increase to “Total Liabilities
and Stockholders’ Deficit”.





None of
the foregoing modifications to the Company’s accounting for the Debentures or
the options and warrants will affect the Company’s revenue or cash flows nor
will the modifications concerning the Debentures have a net effect on
stockholders’ equity.





The
restatement will also reflect a reclassification of the Company’s expense
incurred in connection with its private placement of securities in 2007. This
reclassification consists of a credit to “general and administrative” expense on
the Company’s statement of operations of $435,749 and an offsetting debit to
additional paid in capital of an equivalent amount. This event will not have a
net effect on stockholders’ equity as reported in the Original
Filing.





For a
more detailed description of these restatements, see Note 2, “Restatement of
Financial Statements,” to the accompanying audited consolidated financial
statements and the section entitled “Restatement” in Management’s Discussion and
Analysis of Financial Condition and Results of Operations in this
Amendment.  In addition, the Company is making appropriate
corresponding adjustments to the disclosures contained in Item 1 (Description of
Business) and Item 6 (Managements Discussion and Analysis) in the Original
Filing to reflect the changes to the financial statements. In addition, as
discussed in Item 8A, Controls and Procedures (as restated), management
identified a control deficiency that relates to the restatement that, under the
circumstance constitutes a material weakness. Further, this Amendment includes
the correction of certain typographical errors that appeared in Items 1, 5, 6,
11 and 13 of the Original Filing and the correction of certain errors deemed
immaterial for comparative purposes.





In
preparing this restatement, the Company also corrected an error in its
stockholders’ equity, adjusting the aggregate number of outstanding shares of
common stock as of December 31, 2007 from 94,972,225 to 93,822,225 shares of
common stock. This adjustment resulted in corresponding modifications to the
financial statements and in the notes to the financial statements. The Company
also made conforming changes in the text of the Amendment in Items 5 and
11.





This
Amendment also includes new certifications as exhibits 31.1, 31.2, 32.1 and 32.2
by our principal executive officer and principal financial officer as required
by Rules 12b-15 and 13a-14 promulgated under the Securities Exchange Act of
1934, as amended. The information contained in this Amendment, including the
financial statements and the notes thereto, amends only the Items of the
Original Filing described in the immediately preceding paragraphs solely to
reflect the restatement discussed herein and to correct certain typographical
and other immaterial errors. No other information in the Original Filing is
amended hereby. Currently-dated certifications from our Chief Executive Officer
and our Chief Financial Officer and the consent of our independent registered
public accounting firm have been included as exhibits to this
Amendment.




3


The
foregoing items have not been updated to reflect other events occurring after
the filing date of the Original Filing or to modify or update those disclosures
affected by subsequent events. Except for the foregoing amended information,
this Amendment continues to describe conditions as of the date of the Original
Filing, and we have not updated the disclosures contained herein to reflect
events that occurred at a later date.


4




PART
I




Item
1.  Description of Business




Forward
Looking Statements





This
Report contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and the Securities
Exchange Act of 1934. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions,
including those described in “Risk factors.” No forward-looking statement is a
guarantee of future performance and you should not place undue reliance on any
forward-looking statement. Our actual results may differ materially from those
projected in any forward-looking statements, as they will depend on many factors
about which we are unsure, including many factors which are beyond our control.
The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,”
“intend,” “plan,” and “estimate,” as well as similar expressions, are meant to
identify such forward-looking statements. Forward-looking statements contained
herein include, but are not limited to, statements relating to:





•
            Our
      future financial results;





•
            Our
      future growth and expansion into new markets;
  and




•
            Our
      future advertising and marketing
activities.




Except
as otherwise required by law, we undertake no obligation to update or revise any
forward-looking statement contained in this Annual Report. The safe harbors for
forward-looking statements provided by the Securities Litigation Reform Act of
1995 are unavailable to issuers not previously subject to the reporting
requirements set forth under Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, and whose securities are considered to be a “penny
stock” and accordingly may not be available to us.




As
used in this Report, references to the “we,” “us,” “our” refer to Skinny
Nutritional Corp. unless the context indicates otherwise.





(a)   Business
Development





Skinny
Nutritional Corp. (“Skinny”), formerly known as Creative Enterprises
International, Inc., is the exclusive worldwide licensee of several trademarks
for the use of the term “Skinny.” We develop a line of functional beverages, all
branded with the name “Skinny” that are marketed and distributed primarily to
weight conscious consumers. Our business strategy is to develop a variety of
functional beverages utilizing our licensed Skinny trademarks. These trademarks
include Skinny Water, Skinny Tea, Skinny Shakes, Skinny Java and others.
 In 2004 we began implementing our business plan of marketing and
distributing Skinny Water as a dietary supplement. As described in greater
detail below, in October 2006 we restructured our supplier relationships and
changed our corporate name to Skinny Nutritional Corp. to evidence our focus on
marketing and distributing nutritional products branded “Skinny” designed to
assist consumers in their weight-management efforts.




We
were originally incorporated on June 20, 1984, in the State of Utah as Parvin
Energy, Inc. Our name was later changed to Sahara Gold Corporation and on July
26, 1985 we changed our corporate domicile to the State of Nevada and on January
24, 1994 we changed our name to Inland Pacific Resources, Inc. On December 18,
2001, we entered into an agreement and plan of reorganization with Creative
Enterprises, Inc., a Delaware corporation, and changed our name to Creative
Enterprises International, Inc. This agreement provided that all shares of
common stock of the Delaware corporation issued and outstanding on that date be
exchanged for shares of common stock issued by the Nevada corporation, which
changed its name after the reorganization to Creative Enterprises International,
Inc. Prior to the reorganization, we had 32,659,591 shares of common stock
outstanding and pursuant to the agreement, we effected a 1 for 16.33 reverse
stock split. This reduced the number of outstanding shares to 2,000,000. We then
issued an additional 2,500,000 post-split common shares in the acquisition. On
September 18, 2002 we filed a registration statement on Form SB-2 with the
Securities and Exchange Commission. This registration statement was amended on
five occasions and ultimately withdrawn on September 30, 2004 prior to being
declared effective by the SEC. The registration statement was filed solely on
behalf of certain of our security holders and in conjunction with an offering of
warrants to our then-current stockholders and did not attempt to register shares
to be sold directly by our company. This filing was withdrawn for a number of
reasons. First, the shares of common stock held by the proposed selling security
holders became eligible to be resold pursuant to Rule 144(k) and accordingly did
not require us to further prosecute the registration statement. In addition, as
we were entering into a new line of business shortly after filing the final
amendment to the registration statement, the additional expense and effort
required was not justified in light of availability of the exemption provided by
Rule 144(k). We decided to change our line of business as management
subsequently determined that it would not be cost-effective for us to continue
to attempt to develop a market in the United States for the products described
in that registration statement. In 2004, management was able to negotiate
license agreements with Peace Mountain Natural Beverage Corporation (as
described below) in order to provide us with the rights to various Skinny
trademarks necessary to engage in our present business line. On November 15,
2006, holders of approximately 53% of our issued and outstanding common stock
consented in writing to the adoption of resolutions approving, among other,
things, the change in our corporate name to “Skinny Nutritional
Corp.”




5


For our
2007 fiscal year, we generated revenues of $752,825 and incurred a net loss of
$5,698,643. Since our formation and prior to 2005, our operations were devoted
primarily to startup and development activities, including obtaining start-up
capital; developing our corporate hierarchy, including establishing a business
plan; and identifying and contacting suppliers and distributors of functional
beverages and dietary supplements.





Starting
in our 2006 fiscal year, we have been able to devote increasing amounts of
resources to marketing and sales activities regarding our consumer products,
including the procurement of a number of purchase orders from distributors and
retailers. This trend continued in our 2007 fiscal year.





(b)   Business of the
Issuer




Overview





We
operate our business in the rapidly evolving weight loss and beverage industries
and are currently focused on developing, distributing and marketing
nutritionally enhanced functional beverages.





Our
Skinny Water product, which we originally introduced in 2005, has been
reformulated to include three new flavors: Peach, Lemon and Raspberry, and we
expect to launch new flavors and new formulations in our second fiscal quarter
of 2008.




We are
currently developing new product extensions and formulations of new functional
beverages. Our current business strategy is to develop and maintain our current
distribution relationship with Target Corporation, focus in establishing a
market for the Skinny Beverages in the United States and generate sales and
brand awareness through sampling, street teams, radio, print, television
advertising and internet sales as well as building a national sales and
distribution network to take our products into retail and direct store delivery
(DSD) distribution channels.




Our
principal executive offices are located at 3 Bala Plaza East, Suite 117, Bala
Cynwyd, Pennsylvania. Our telephone number is (610) 784-2000.





Business Developments in 2007





Financing
Activities





As
described in greater detail below under the caption “Liquidity and Capital
Resources” during the twelve months ended December 31, 2007 we have raised a
total of $1,188,613 in gross proceeds from private transactions with accredited
investors. There were three private offerings made during the year; the first,
which commenced in December 2006, raised $482,625 during calendar 2007 with
6,435,004 shares being issued. The second offering, which commenced in March
2007, raised $502,238 during calendar 2007 with 6,696,509 shares being issued.
The third placement, which commenced in September 2007, raised $203,750 with
2,716,666 shares issued. There were 2,759,390 warrants issued to “Selling
Agents” for the private placements of common stock during calendar year
2007.





Selling
agents received $106,954 dollars in commissions for private placement of common
shares leaving the company with $1,081,659 dollars in net proceeds from private
placements. In addition, a total of 9,809,332 shares were also issued to
shareholders from prior subscriptions in the form of reset shares required by
the convents established in the previous subscription agreements. . We have used
the proceeds from these transactions for working capital and the repayment of
debt owed to third parties. The securities sold in this financing have not been
registered under the Securities Act of 1933, as amended, and were offered and
sold in reliance upon the exemption from registration set forth in Section 4(2)
thereof and Regulation D, promulgated under the Securities Act. We believe that
the investors are “accredited investors” as such term is defined in Rule 501(a)
promulgated under the Securities Act.





On March
23, 2007, the holder of a debenture with an outstanding principal amount of
$100,000 and $4,274 in accrued interest converted its debt into 2,011,020
shares of common stock. In addition, the holder of a convertible debenture in
the aggregate principal amount of $25,000 converted such debenture into common
stock in two transactions: in January 2007, such holder converted $12,500 in
principal and $1,170 in interest into 273,425 shares of common stock.
Thereafter, in April 2007, this holder converted the remaining $12,500 in
principal into 250,000 in common shares of stock. Interest of $6,670 was
converted to 95,275 common shares on 1/17/07.





In
addition, holders of an aggregate principal amount of $2,070,000 of convertible
debentures converted such amount into shares of common stock as follows. In the
first quarter, holders of principal of $1,755,000 converted such amount into
17,550,000 shares of common stock. Also in the first quarter one debt holder
converted $20,000 in debt to 40,000 shares of common stock. In the second
quarter two debt holders converted their debt into 400,000 common shares
reducing the principal balance by $40,000 dollars. During the fourth quarter an
additional conversion of $188,333 in principal and $37,667 in interest were
converted into 3,013,333 shares of common stock at a conversion rate of $.075 a
share. During December 2007, in a fourth conversion 1,600,000 shares of common
stock were issued upon conversion of $66,667 in principal and $13,333 in
interest at a conversion rate of $.05 per share. One investor was paid $20,000
dollars in principal and $4,000 dollars in interest to retire his debenture. In
addition, we issued an aggregate of 765,000 common stock purchase warrants upon
the conversion of outstanding debentures in 2007. Of these warrants, 225,000
warrants are exercisable at $0.20 per share and the remainder are exercisable at
$0.50 per share. All warrants expire three years from the date of
issuance.




6


The
securities issued upon the conversion of debentures were not registered under
the Securities Act of 1933, as amended, and were issued in reliance upon the
exemption from registration set forth in Section 3(a)(9) thereof.





Reorganization





In
October 2006, we began to reorganize our business operations to completely focus
on our “Skinny” brand, including a change in our company name to “Skinny
Nutritional Corp.”, a change in management, modification of certain of our
contractual relationships, conducting financing activities and restructuring our
debt.




On
October 4, 2006, we entered into an agreement with Mr. James Robb, at the time a
member of our board of directors, modifying the convertible note issued in June
2006. Pursuant to this agreement, we modified the repayment terms of the note by
paying to Mr. Robb an amount of $10,000 upon the initial closing of our October
2006 financing and the balance of the principal and accrued and unpaid interest
within 60 days thereafter. Following a further modification of the repayment
obligation, the principal of this note was paid on March 13, 2007. On October 4,
2006, we entered into a Separation Agreement with Mr. Christopher Durkin, our
former President, Chief Executive Officer and a director. Pursuant to this
agreement, Mr. Durkin agreed to resign from all positions with us effective upon
his receipt of payment of $32,500 as payment of accrued but unpaid compensation
and expenses. Mr. Durkin also agreed to provide us with a general release of
claims in the separation agreement. We made the cash payment to Mr. Durkin on
October 5, 2006 and his resignation is effective as of such date. As additional
severance compensation, we agreed to issue Mr. Durkin 300,000 shares of Common
Stock.





Further,
on October 4, 2006, Mr. Michael R. Reis was appointed as our interim Chief
Operating Officer and also elected him as a director. In addition, on October 6,
2006, we appointed Mr. Donald J. McDonald to serve as our new Chief Executive
Officer, President and as a member of our board of directors.





On
October 4, 2006, we also entered into an amendment to our License and
Distribution Agreement with Peace Mountain Natural Beverages Corporation.
Pursuant to this amendment, we agreed to pay Peace Mountain an amount of $30,000
in two equal monthly installments commencing on the date of the amendment in
satisfaction of allegations of non-performance by Peace Mountain. In addition,
the parties agreed to amend and restate our royalty obligation to Peace Mountain
and we now have a minimum royalty obligation to Peace Mountain based on a
percentage of wholesale sales with a quarterly minimum of $15,000.





On
October 10, 2006, we entered into an agreement with Jamnica, d.d. and Jana North
America, Inc., which agreement is effective as of September 20, 2006, pursuant
to which the parties confirmed the termination of the distribution agreement
dated July 21, 2004, between Skinny and Jamnica. In the new agreement, the
parties agreed to the following arrangements: (a) our obligation to Jamnica, in
an amount of $207,321, is eliminated; (b) Jamnica and Jana North American shall
pay an amount of $23,125 on our behalf in satisfaction of storage and
warehousing fees; (c) receivables due to us from select accounts shall be
transferred to Jana North America; and (d) we shall make available to Jana North
America all inventory of Jana bottled waters in our possession. In addition, the
parties agreed that we will cease use of the Jana trademarks and logos and
Jamnica and Jana North America agreed not to use any of our licensed trademarks
or logos concerning the our ‘‘Skinny’’ product line. Pursuant to the agreement,
we will also provide additional assistance to Jamnica and Jana North America in
the transition for the marketing and distribution of the Jana bottled waters.
Each of the parties also agreed to release the other from any obligations or
claims arising from the distribution agreement.




On
November 15, 2006, holders of approximately 53% of our issued and outstanding
common stock consented in writing to the adoption of resolutions approving (1)
amendments to our Articles of Incorporation to (a) change our corporate name to
“Skinny Nutritional Corp.” and (b) increase the number of authorized shares of
common stock 250,000,000 shares and (2) an amendment to our Employee Stock
Option Plan to increase the number of shares of common stock available to be
issued there under to 20,000,000 shares. These actions became effective as of
December 27, 2006. Also effective as of such date, we granted an aggregate of
10,650,000 options to certain of our employees under our Employee Stock Option
Plan.




General
Business Developments





Recent Private Offering of
Securities: The Company has commenced a private offering of up to
$2,000,000 of shares of Common Stock at a per share price of $0.04. The shares
are being offered to accredited investors only. The shares being offered will
not be registered under the Securities Act of 1933, as amended (the “Act”) and
will be offered in reliance upon the exemption from registration set forth in
Section 4(2) and Regulation D, promulgated under the Act. Such shares may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements.




7


The
Company intends to engage registered broker-dealers to serve as selling agents
(the “Selling Agents”), for the sale of the Units and pay commissions and other
compensation to the Selling Agents who procure purchasers of the Units. We will
pay and issue to each Selling Agent a warrant (the “Agent Warrants”) to purchase
such number of Shares as equals 10% of the total number of Shares actually sold
in the Offering to Purchasers procured by each Selling Agent. Agent Warrants
shall be exercisable at the per share price of $0.09 for a period of five years
from the date of issuance. The Company intends to use the proceeds from the
offering for working capital and payment of accrued compensation.





There can
be no assurance that the Company will complete the offering on the anticipated
terms, or at all. The Company’s ability to complete the offering will depend,
among other things, on market conditions. In addition, the Company's ability to
complete this offering and its business are subject to risks described in the
Company's filings with the Securities and Exchange Commission. This disclosure
does not constitute an offer to sell or the solicitation of an offer to buy any
the Company’s securities, nor will there be any sale of these securities by the
Company in any state or jurisdiction in which the offer, solicitation or sale
would be unlawful. The disclosure is being issued pursuant to and in accordance
with Rule 135c of the Act.




Compensation Matters: On
January 12, 2007, our Board of Directors approved modifications in the monthly
compensation rates, effective as of January 1, 2007, payable to each of our
Chairman and Chief Executive Officer. Each of these executives will now receive
a monthly fee of $7,500, plus reimbursement of approved corporate expenses. In
addition, on such date, the Board granted to our Chairman options to purchase
3,000,000 shares of common stock pursuant to our Employee Stock Option Plan.
These options are exercisable for a period of five years at a per share exercise
price of $0.26. Of the options granted, 20% of the total grants amount vest
immediately and the balance vests in equal annual installments of 20% on the
each anniversary date of the date of grant. On November 28, 2007, our Board of
Directors approved additional modifications in the monthly compensation rates,
effective December 1, 2007, payable to each our Chairman and Chief Executive
Officer. Michael Salaman will receive a monthly fee of $12,500, plus
reimbursement of approved corporate expenses including a monthly automobile
allowance of $700 dollars. Donald McDonald will receive a monthly fee of $11,667
dollars, plus reimbursement of approved corporate expenses including a monthly
automobile allowance of $700 dollars. The Board granted to our Chairman options
to purchase 3,000,000 shares of common stock pursuant to our Employee Stock
Option Plan. These options are exercisable for a period of three years at a per
share exercise price of $0.08. The Board granted to our CEO options to purchase
2,500,000 shares of common stock pursuant to our Employee Stock Option Plan.
These options are exercisable for a period of three years at a per share
exercise price of $0.08 . Also, on this date, our Board authorized an issuance
of 2,000,000 restricted shares of common stock to Michael Salaman in
consideration for his agreement to personally guarantee the Company’s loan
facility from Valley Green Bank.




Distribution Agreement: On
February 27, 2007, we entered into a Marketing and Distribution Agreement
with Geltech Sales, LLC for the national distribution of our Skinny-branded
products. The initial term of the Agreement was for three years, and it is
renewable in one-year increments. Under the Agreement, Geltech agreed to solicit
orders for our products through its distribution channels, which includes mass
merchandisers, supermarkets, convenience stores, mass drug stores, as well as
establishing distribution agreements with local, regional, and national direct
store delivery (DSD) companies. The Agreement is exclusive subject to certain
contractually-specified exceptions. Either party may terminate the Agreement
upon written notice if the other party is in material breach of any provision
thereof, subject to applicable cure periods. Moreover, we may elect to terminate
the Agreement if Geltech fails to meet its performance obligations or terminate
the Agreement without cause upon sixty (60) days prior written notice. In
consideration for Geltech’s services, we agreed to pay Geltech a commission
based on the quantity of product sold through its network and agreed to issue to
Geltech, or its designees, an aggregate of 1,500,000 common stock purchase
warrants. The warrants are exercisable for a seven year period at a price of
$0.24 per share. We will have the right to redeem up to 750,000 of the warrants
in the event that Geltech does not satisfy the performance requirement of
assisting us place product in 20,000 stores within two years from the date we
commence selling products under our distribution agreement. In addition, on
February 27, 2007, we issued an additional total of 300,000 warrants to two
consultants in consideration of the services rendered by such persons in
connection with the negotiation and execution of the Agreement. On October 16,
2007, we notified Geltech that we elected to terminate this agreement with
Geltech based on performance obligations; resulting in a cancellation of
1,075,000 warrants.




Subsequent Events On March 20,
2008, the Company announced it established an advisory board to provide advice
on matters relating to the Company’s products. The Company will seek to appoint
up to five individuals to its advisory board. On such date, the Company
appointed the following individuals to its advisory board: Pat Croce, Ron Wilson
and Michael Zuckerman. The Company also entered into a consulting agreement with
Mr. Croce, pursuant to which the Company agreed to issue warrants to purchase
3,000,000 shares of common stock at $.05 per share consideration of his
agreement to serve on the Company’s Advisory Board and for providing the
marketing services for the Company’s products. In addition to serving on the
Advisory Board, Croce agreed to endorse and advertise, through
an affiliate, the Company’s products. In additional consideration for
his   agreement to provide the endorsement and marketing services, the
Company agreed to pay a royalty with respect to the sale of its products that he
endorses for the duration of his endorsement services. The Company issued each
of the other initial members of its advisory board warrants to purchase
1,500,000 shares of Common Stock, exercisable for a period of five years at a
price of $0.05. The securities sold in or issued in connection with the
financing have not been registered under the Securities Act of 1933, as amended,
and were offered and sold in reliance upon the exemption from registration set
forth in Section 4(2) thereof. We believe that the investors and the selling
agent are “accredited investors”; as such term is defined in Rule 501(a)
promulgated under the Securities Act.




8


During
the 2008 fiscal year, we have converted additional convertible debt securities
into equity as follows. On January 25, 2008, the Company issued 900,000 shares
of common stock and 112,500 common stock purchase warrants upon the conversion
of an aggregate amount of $45,000 (inclusive of accrued interest of $15,000) of
outstanding convertible debentures. The warrants issued upon conversion of these
debentures are exercisable for a period of three years at an exercise price of
$0.50 per share. On March 3, 2008, the Company issued 300,000 shares of common
stock upon the conversion of an aggregate amount of $15,000 of outstanding
convertible debentures. On March 20, 2008, the Company issued 1,125,000 shares
of common stock and 112,500 common stock purchase warrants upon the conversion
of an aggregate amount of $45,000 (inclusive of accrued interest of $7,500) of
outstanding convertible debentures. The warrants issued upon conversion of these
debentures are exercisable for a period of three years at an exercise price of
$0.50 per share. These securities have not been registered under the Securities
Act of 1933, as amended, and are being issued in reliance upon the exemption for
registration set forth in Section 3(a)(9) thereof.




Our
Industry





Weight
management is a challenge for a significant portion of the U.S. population. The
2003-2004 National Health and Nutrition Examination Study estimated that 66% of
the adult population is overweight and 33% is obese, an increase from 47% and
15%, respectively, in 1976.  According to the U.S. Department of Health and
Human Services, overweight or obese individuals are increasingly at risk for
diseases such as diabetes, heart disease, certain types of cancer, stroke,
arthritis, breathing problems and depression. However, there is evidence that
weight loss may reduce the risk of developing these diseases.





In
addition to the health risks, there are also cultural implications for those who
are overweight or obese. U.S. consumers are inundated with imagery in media,
fashion, and entertainment that depicts the thin body as the ideal type. Despite
the high percentage of overweight or obese individuals in the U.S., the
popularity of dieting would seem to indicate consumers’ desire to be thin.
According to Gallup surveys, approximately 62 million people in the United
States were on a diet during 2006. Approximately 6 million participated in
commercial weight loss programs and 49 million conducted some form of
self-directed diet. We believe our products are well positioned to attract both
types of dieters.




Our
products compete in the dietary supplement market and in the case of Skinny
Water also as functional beverages. The functional beverage market includes a
wide variety of beverages with one or more added ingredients to satisfy a
physical or functional need. This category includes: vitamin and herbal enhanced
flavored waters, ready-to-drink (RTD) teas, sports drinks, energy drinks, and
single-serve (SS) fresh juice. These industries are highly competitive and are
subject to continuing changes with respect to the manner in which products are
provided and how products are selected. Pressures to reduce the cost of our
products because of market forces could adversely impact our
revenues.




Dietary
supplements are sold in a variety of forms other than liquids, including
tablets, capsules, bars, etc., and consist of vitamins, minerals, hormonal
supplements, herbal products and specialty combination formulas. Dietary
supplements are also marketed through various channels, including health food
stores and mass-market (which may include retail and grocery store chains). As a
product, Skinny Water competes with dietary supplements in each of product types
mentioned above as well as all of the functional beverages mentioned
above.





Our Products





Our line
of products currently consists of three flavors of Skinny Water. Skinny Water,
which was introduced in 2005, has been reformulated and was launched in our
second fiscal quarter of 2007. Management intends to release additional Skinny
Water flavors and formulas in our second quarter of 2008. The company intends to
market additional “Skinny” beverages in the future, when it believes that market
conditions are favorable.





Skinny Water (R)





Skinny
Water is water containing a proprietary, natural appetite suppressant, available
in 3 flavors with a natural water appearance. We initially introduced Skinny
Water (R) under
the “Jana” brand. However, we now currently offer it under its own brand -
“Skinny”. To market this product, we rely on the licenses from Peace Mountain
and Interhealth. We worked closely with these companies to agree upon the
ingredient blend utilized in Skinny Water. We have reformulated Skinny Water in
3 flavors and launched it in our second quarter of 2007. Skinny Water is being
bottled at Adirondacks Beverages in upstate New York, a co-packer of functional
beverages. We purchase finished product in 24 bottle cases ready for shipment to
retailers and distributors anywhere in the U.S.





Skinny
Water’s main dietary ingredient, “SuperCitriMax,” is available for use in
beverages and foods in the U.S. and a number of other countries. Super CitriMax
has been affirmed GRAS (Generally Recognized as Safe) for use in functional
beverages by the Burdock Group, a toxicology specialist that evaluates the
safety of food and beverage ingredients. This process involved an intensive
review of all safety and toxicology data by a panel of scientific experts.
(Source: Interhealth Nutraceuticals, Inc.). Further, human clinical studies of
Super Citrimax, conducted through Georgetown University Medical Center resulted
in findings that included, weight loss, reduction in appetite, and an increase
in fat burning and metabolism when used in conjunction with diet and exercise.
The results of their findings are published in the peer-reviewed journal,
Nutrition Research (24(1): 45-58, 2004).





Skinny
Water is ephedrine-free and contains no caffeine or sugar. Skinny Water’s
formula features the all natural, clinically tested ingredient, Hydroxycitric
Acid (“Super CitriMax”) plus a combination of calcium and potassium. Super
CitriMax has been shown to suppress appetite and increase fat burning, without
stimulating the nervous system when used in conjunction with diet and exercise.
Skinny Water also includes Chromate (R)  which is a patented
form of biologically active niacin-bound chromium called chromium nicotinate or polynicotinate that we also
obtain from Interhealth.




9


On August
1, 2004 we entered into a three year license agreement with Peace Mountain
Natural Beverages Corporation pursuant to which we license the exclusive right
to bottle and distribute the “Skinny Products” worldwide. Under this agreement,
Skinny Products include “Skinny Water”, “Diet Water”, “Skinny Tea”, “Skinny
Juice” and “Skinny Shake”. Skinny Water’s proprietary formula has an all-natural
appetite suppressant that helps people lose weight when taken in conjunction
with diet and exercise. Pursuant to this agreement, we must utilize only
ingredients that are generally recognized as safe and must use concentrate and
formulations agreed to by Peace Mountain. Our license agreement with Peace
Mountain Natural Beverages Corporation is for a three year term and
automatically renews for additional one year periods unless terminated, provided
that we satisfy the minimum purchase amount specified in the contract or make a
$10,000 monthly payment.





On
October 4, 2006, we entered into an amendment to our License and Distribution
Agreement with Peace Mountain Natural Beverages Corporation. Pursuant to this
amendment, we agreed to pay Peace Mountain an amount of $30,000 in two equal
monthly installments commencing on the date of the amendment in satisfaction of
allegations of non-performance by Peace Mountain. In addition, the parties
further agreed to amend and restate the company’s royalty obligation to Peace
Mountain, pursuant to which amendment, we will have a minimum royalty obligation
to Peace Mountain based on a percentage of wholesale sales with a quarterly
minimum of $15,000. Skinny’s rights to the trademarks are in perpetuity as long
as it satisfies the quarterly minimum payment of $15,000.




On June
7, 2004 we entered into an agreement with Interhealth Nutraceuticals
Incorporated and obtained the right to sell, market, distribute and package
Super CitriMax (R) in
bottled liquid dietary supplement products. This right was granted by
Interhealth on a non-exclusive basis. We use Super CitriMax (R) in our
Skinny Water products Further; we must purchase quantities of Super CitriMax
(R)
from the manufacturer and are licensed to use InterHealth’s trademarks and logos
in marketing products containing Super CitriMax (R) . Our
agreement with Interhealth will continue unless terminated by either
party.





Planned
Products





We intend
to expand our product line to introduce the following products at such times as
management believes that market conditions are appropriate. Products under
development or consideration include Java’s, Smoothies and Teas.





Distribution,
Sales and Marketing





Marketing
and Sales Strategy





Our
primary marketing objective is to cost-effectively promote our brand and to
build sales of our products through our retailer accounts, distributor
relationships, and electronic media. We will use a combination of sampling,
radio, online advertising, public relations and promotional/event strategies to
accomplish this objective. Management believes that proper in-store
merchandising is a key element to providing maximum exposure to its brand and
that retailer’s focus on effective shelf and display merchandising in order to
yield increased revenue per shopping customer.





Through
our arrangement with Target Corporation we continue to sell Skinny Water through
approximately 1,200 stores around the country. The company has initiated contact
with several retailers who are reviewing our Skinny Waters . These retailers
include convenience stores, supermarkets, drug stores and club stores. As
described below, we are also developing a National Direct Store Delivery (DSD)
network of distributors in local markets.





Distribution
Strategy





The
company’s distribution strategy is to build out a national direct store delivery
(DSD) network of local distributors, creating a national distribution system to
sell our products. Distributors include beer wholesalers, Non alcoholic
distributors, and energy beverage distributors. The company’s products are being
reviewed by several DSD’s and we plan to enter into agreements with several
DSD’s in 2008.




We also
distribute our products directly to select national retail accounts based on
purchase order relationships. Distribution will target category leaders in
grocery, convenience, health clubs, retail drug, and health food establishments.
We will contract with independent trucking companies or arrange pick up by the
retailer from contract packers to independent warehouses, and then on to
distributors or retail outlets. Distributors will then sell and deliver our
products either to sub-distributors or directly to retail outlets, and such
distributors or sub-distributors stock the retailers’ shelves with the products.
We are responsible for managing our network of distributors and brokers and the
hiring of sales managers, who are responsible for their respective specific
channel of sales distribution.




10


Sources
and Availability of Raw Materials; Manufacturing





We
exclusively license a variety of trademarks from Peace Mountain and some of the
ingredients that make up our formulas from Interhealth. We license Skinny Water
from Peace Mountain on an exclusive basis and we purchase the ingredient of
Super CitriMax and Chromemate from Interhealth on a non-exclusive basis. Super
CitriMax and Chromemate are utilized in Skinny Water. Skinny Water requires
bottles, labels, caps, water, and other ingredients, including Super CitriMax
and Chromemate. We fulfill these requirements through purchases from various
sources, including purchases from Interhealth. Other than Super CitriMax and
Chromemate, we believe there are adequate suppliers of the aforementioned
products at the present time, but cannot predict future availability or prices
of such products and materials. Since Super CitriMax is only available from
Interhealth, the termination of that agreement may have a materially adverse
impact on our business and results of operations. We also expect the above
referenced supplies to experience price fluctuations. The price and supply of
materials will be determined by, among other factors, demand, government
regulations and legislation.





Skinny
Water is produced through a packing, or co-pack, facility in the United States.
The co-pack facility assembles our products and charges us a fee, by the case.
We follow a “fill as needed” manufacturing model to the best of our ability and
we have no significant backlog of orders. Substantially all of the raw materials
used in the preparation, bottling and packaging of our products are purchased by
us or by our contract packers in accordance with our
specifications.





Generally,
we obtain the ingredients used in our products from domestic suppliers and each
ingredient has several reliable suppliers; however, as described above, we rely
on InterHealth Nutraceuticals for Super CitriMax and Chromemate. We have no
major supply contracts with any of our suppliers. As a general policy, we select
ingredients in the development of our products that have multiple suppliers and
are common ingredients. This provides a level of protection against a major
supply constriction or calamity.





We
believe that as we continue to grow, we will be able to keep up with increased
production demands. We believe that our current co-packing arrangement has the
capacity to handle increased business we may face in the next twelve months. To
the extent that any significant increase in business requires us to supplement
or substitute our current co-packer, we believe that there are readily available
alternatives, so that there would not be a significant delay or interruption in
fulfilling orders and delivery of our products. In addition, we do not believe
that growth will result in any significant difficulty or delay in obtaining raw
materials, ingredients or finished product.





Competition





The
weight loss industry consists of pharmaceutical products and weight loss
programs, as well as a wide variety of diet foods, meal replacement bars, shakes
appetite suppressants, and nutritional supplements. The weight loss market is
served by a diverse array of competitors. Potential customers seeking to manage
their weight can turn to traditional center-based competitors such as
NutriSystems, Weight Watchers, Jenny Craig and LA Weight Loss, online
diet-oriented sites such as eDiets.com and WeightWatchers.com, self-administered
products and programs such as Atkins and the South Beach Diet and medically
supervised programs. These competitors are greater in size and financial,
personnel, distribution and other resources than we are and sell broader product
lines than we do. These brands have the advantage of being seen widely in the
national market and being commonly well known for years through well-funded ad
campaigns. We believe that the principal competitive factors in the functional
beverage and weight loss market are:





•
            
            brand
      recognition and trustworthiness;




•
            
            functionality
      of product formulations;




•
            
            pricing;





•
            
            new
      flavors;•
            
            attractive
      packaging; and





•
            
            The
      ability to attract and retain customers through promotion and personal
      referral.





The
market for functional beverages is also highly competitive. In order to compete
effectively, we believe that we must convince independent distributors that our
products have the potential to be a leading brand in the segments in which we
compete. Pricing of the products is an important component of our competitive
strategy. We will seek to ensure that the price for our products is competitive
with the other products with which we compete.





We
compete with other companies not only for consumer acceptance but also for shelf
space in retail outlets and for marketing focus by distributors, most of whom
also distribute other brands with which our products compete. The principal
methods of competition include product quality, trade and consumer promotions,
pricing, packaging and the development of new products. We expect our
distributors to assist us in generating demand for our products.




11


Significant
competitors for Skinny Water in the functional beverage category are product
lines sold by Fuze, Enviga, Trimspa, SoBe, and Vitamin Water. Skinny Water will
also compete more broadly with all beverages available to consumers. The
beverage market is highly competitive, and includes international, national,
regional and local producers and distributors, many of whom have greater
financial, management and other resources than us. These brands have enjoyed
broad, well-established national recognition for years, through well-funded ad
and other branding campaigns. In addition, the companies manufacturing these
products generally are greater in size and have greater financial, personnel,
distribution and other resources than we do and have greater access to
additional financing.




Based on
these key competitive factors, we believe that we can compete effectively in the
weight management industry. We, however, have no control over how successful
competitors will be in addressing these factors. By providing a well-recognized
program using the direct and electronic marketing and distribution channels, we
believe that we have a competitive advantage in our market.





Research
and Development





We
undertake research and development activities in order to monitor developments
within the dietary supplement industry and to identify or develop new,
marketable products. These activities include reviewing periodicals, scientific
research and relevant clinical studies and working with suppliers such as wild
flavors. We must review the safety and efficacy of ingredients, production
standards, labeling information, label claims and potential patent, trademark,
legal or regulatory issues. Research and development expenses in the last two
years have not been material. Although we may undertake research studies
regarding our products, we do not expect to incur significant increases in
research and development expenses in the near term. Throughout we will focus our
efforts on Skinny Water, Skinny Teas, Skinny Java and Skinny
Smoothies.





Proprietary
Rights, Brand Names and Trademarks




We regard
consumer recognition of and loyalty to all of our brand names and trademarks as
extremely important to the long-terms success of our business. We license the
trademarks to our products from Peace Mountain and Interhealth. Management
considers these licenses as material to our business. We license the trademarks
“Skinny Water,” “Skinny Tea,” “Skinny Juice,” “Skinny Shake,” and “Diet Water”
from Peace Mountain Natural Beverages. We license the trademark “Super CitriMax
Clinical Strength” from Interhealth Nutraceuticals. The terms of our trademark
licenses are discussed under the caption “Our Products.” The proprietary rights
to our products are held by the manufacturer and are licensed to us for purposes
of bottling and distribution.  Since we are not the owner of these rights,
our ability to continue using them is subject to the terms and conditions of the
license agreements we have entered into with the licensors. The termination of
our license agreements with Peace Mountain and Interhealth would likely have a
material adverse effect on our consolidated financial position and results of
operations.  We use non-disclosure agreements with employees and
distributors to protect our rights and those of our suppliers.




Government Regulation




The
production and marketing of our products are governed by the rules and
regulations of various federal, state and local agencies, including, but not
limited to the United States Food and Drug Administration (“FDA”), the Federal
Trade Commission (“FTC”), and all fifty state Attorneys General. This regulatory
regime serves to ensure that the product is safe, our claims are truthful and
substantiated and that our products meet defined quality standards. We have not
encountered any regulatory action as a result of our operations to date,
however, since we have recently commenced operations no assurance can be given
that we will not encounter regulatory action in the future. The FDA, pursuant to
the Federal Food, Drug, and Cosmetic Act (“FFDCA”), regulates the formulation,
manufacturing, packaging, labeling, distribution and sale of dietary
supplements, while the FTC regulates the advertising of these products. In
addition, all states regulate product claims through various forms of consumer
protection statutes.




The FDA
has broad authority to enforce the provisions of the FFDCA applicable to bottled
water and dietary supplements, including powers to issue a public “Warning
Letter” to a company, to publicize information about illegal products, to
request a voluntary recall of illegal products from the market, and to request
the Department of Justice to initiate civil seizure and/or injunction actions,
and civil and criminal penalty proceedings in the United States Federal courts.
The FTC exercises jurisdiction over the advertising of dietary supplements and
foods and has the authority over both “deceptive” and “unfair” advertising and
other marketing practices.





In
addition to its broad investigative powers, the FTC has the power to initiate
administrative and judicial proceedings against a company and may also seek a
temporary restraining order or preliminary injunction against a company pending
the final determination of an action The FTC’s remedies also include consumer
redress, civil and criminal penalties. Weight loss products in particular are
subject to increased regulatory scrutiny due to intensified campaigns by FDA,
FTC and states’ attorneys general. Any type of investigation or enforcement
action either by the FDA, FTC or any other federal, state or local agency would
likely have a material adverse effect on our consolidated financial position or
results of operations.




We are
subject to the food labeling regulations required by the Nutritional Labeling
Education Act of 1991 (“NLEA”). These regulations require all companies which
offer food for sale and have annual gross sales of more than $500,000 to place
uniform labels in specified formats disclosing the amounts of specified
nutrients on all food products intended for human consumption and offered for
sale. This regulation would apply to all of our products. The FFDCA contains
exemptions and modifications of labeling requirements for certain types of food
products, such as in this case foods containing insignificant amounts of
nutrients. The FFDCA also establishes the circumstances in which companies may
place nutrient content claims or health claims on labels.




12


Our
Skinny Water and other dietary supplements are subject to the Dietary Supplement
Health and Education Act of 1994 labeled (“DSHEA”). In 1994, the FFDCA was
amended by DSHEA, which establishes a new framework governing the composition
and labeling of dietary supplements. With respect to composition, DSHEA defines
“dietary supplements” as “a vitamin; a mineral; an herb or other botanical; an
amino acid; a dietary substance for use by man to supplement the diet by
increasing total dietary intake; or a concentrate, metabolite, constituent,
extract, or combination of any of the above dietary ingredients.” The provisions
of DSHEA define dietary supplements and dietary ingredients; establish a new
framework for assuring safety; outline guidelines for literature displayed where
supplements are sold; provide for use of claims and nutritional support
statements; require ingredient and nutrition labeling; and grant FDA the
authority to establish regulations concerning good manufacturing practices
(“GMPs”). We believe that our contract manufacturers meet the current
regulations of the FDA specifically with regard to bottled water including good
manufacturing practices (“GMPs”).




Government
Regulation of Dietary Supplements




It is our
intent that Skinny Water be regulated as a dietary supplement by FDA under
DSHEA. Generally, under DSHEA, dietary ingredients that were on the market
before October 15, 1994 may be used in dietary supplements without notifying the
FDA. However, a “new” dietary ingredient (i.e., a dietary ingredient that was
“not marketed in the United States before October 15, 1994”) must be the subject
of a new dietary ingredient notification submitted to the FDA, unless the
ingredient has been “present in the food supply as an article used for food”
without being “chemically altered.” A new dietary ingredient notification must
provide the FDA evidence of a “history of use or other evidence of safety”
establishing that use of the dietary ingredient “will reasonably be expected to
be safe.” We believe that the dietary ingredient presently utilized in Skinny
Water is not a new dietary ingredient. However, should the FDA disagree at any
time in the future, we may need to cease marketing our dietary supplement
products that contain such ingredient and promptly file (or have the supplier of
this ingredient file) a new dietary ingredient notification with FDA. There can
be no assurance that the FDA will accept the evidence of safety for any new
dietary ingredients that we may market now or in the future, and the FDA’s
refusal to accept such evidence could prevent the marketing of such dietary
ingredients and would have a material adverse effect on our consolidated
financial position or results of operations.





In
addition, DSHEA permits “statements of nutritional support” to be included in
labeling for dietary supplements without FDA pre-approval. Such statements may
describe how a particular dietary ingredient affects the structure, function or
general well being of the body, or the mechanism of action by which a dietary
ingredient may affect body structure, function or well-being. A dietary
supplement may not claim to diagnose, cure, mitigate, treat, or prevent a
disease unless such claim has been reviewed and approved by the FDA as a “health
claim” or “qualified health claim.”





A company
that uses a statement of nutritional support in labeling must possess evidence
substantiating that the statement is truthful and not misleading. The label and
labeling of our products do contain statements of nutritional support, however,
and we have no assurance that FDA will find the company’s substantiation
adequate to support the statements of nutritional support being made for our
Skinny products. If the statement of nutritional support appears on a product
label or labeling of a dietary supplement, there must also appear on such label
and labeling a FDA disclaimer statement, which is as follows: “This statement
has (or these statements have) not been evaluated by the Food and Drug
Administration.





This
product is not intended to diagnose, treat, cure, or prevent any disease.”
Pursuant to DSHEA, we are also required to notify the FDA about our use of the
statement(s) within 30 days of marketing the product (the “30 Day Letter”). Upon
receiving the 30 Day Letter and thereafter if FDA were to determine that a
particular statement of nutritional support is an unacceptable drug claim, an
unauthorized version of a “health claim,” or unsubstantiated, a company may be
prevented from using the claim and may face further regulatory action. There is
no assurance that FDA will not make any of the aforementioned determinations
with regard to the claims made for any of the company’s products and no
assurance that FDA will find the company’s substantiation evidence for Skinny
Water or on any other of our products, if ever requested, adequate to support
the claims being made for the company’s products.





FDA has
already stated in a Courtesy Letter dated September 22, 2005, that the use of
the term “water” in the name of our “Skinny Water” product appears to cause our
product to be a bottled water, which is a standardized, conventional food, not a
dietary supplement. A “Courtesy Letter” is the term commonly used to describe
the written letter sent by FDA in response to a 30 Day Letter - it is not a
Warning Letter. We disagree with the position taken by FDA that Skinny Water
is”bottled water,” a conventional food. In response to the Courtesy Letter, we
submitted a written response to FDA stating our position and have not received a
reply from FDA to our response.




Recently,
the FDA proposed GMPs specifically for dietary supplements. These new GMP
regulations, if finalized, would be more detailed than the GMPs that currently
apply to dietary supplements and may, among other things, require dietary
supplements to be prepared, packaged and held in compliance with certain rules,
and might require quality control provisions similar to those in the GMP
regulations for drugs. There can be no assurance that, if the FDA adopts GMP
regulations for dietary supplements, we or our suppliers will be able to comply
with the new rules without incurring substantial expense that might have a have
a material adverse effect on our consolidated financial position or results of
operations.





13


Our
advertising and sale of our dietary supplement products are subject to
regulation by the FTC under the FTCA. The Federal Trade Commission Act (“FTCA”)
prohibits unfair methods of competition and unfair or deceptive acts or
practices in or affecting commerce. The FTCA provides that the dissemination or
the causing to be disseminated of any false advertisement pertaining to drugs or
foods, which would include dietary supplements, is an unfair or deceptive act or
practice. Under the FTC’s “substantiation doctrine”, an advertiser is required
to have a “reasonable basis” for all objective product claims before the claims
are made. Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant to this FTC requirement, we are required
to have adequate substantiation for all advertising claims made for our products
at the time such claims are made.





In recent
years, the FTC has instituted numerous enforcement actions against dietary
supplement companies for failure to adequately substantiate claims made in
advertising or for the use of false or misleading advertising claims. The FTC
has specifically launched a nationwide law enforcement sweep called “Project
Waistline” against companies making false and/or unsubstantiated weight loss
claims. The initiative was created to stop deceptive advertising, provide
refunds to consumers harmed by unscrupulous weight-loss advertisers, and
encourage media outlets not to carry advertisements containing bogus weight loss
claims and to educate consumers to be on their guard against companies promising
weight loss without diet or exercise. These enforcement actions have often
resulted in consent decrees and the payment of substantial civil penalties
and/or restitution by the companies involved. Since our dietary supplement
product, Skinny Water makes weight loss claims on its label, labeling and
advertising, there can be no assurance that FTC (or FDA) will not investigate
our products. Should FTC choose to investigate, we have no assurance that the
company’s substantiation evidence for the claims made on Skinny Water or on any
other of our products will be adequate and as a result enforcement
actions/remedies could ensue.





Other
Regulatory Considerations





Our
products are subject to state regulation. Under state consumer protection laws,
state attorneys general, like the FTC can bring actions against us should they
believe that the claims being made for any of our products are not truthful, are
misleading and/or if they believe that the claims are not substantiated. States
have also obtained significant monetary penalties against companies that have
sold products with false, misleading or unsubstantiated weight loss
claims.





We may be
subject in the future to additional laws or regulations administered by federal,
state, local regulatory authorities, the repeal or amendment of laws or
regulations which we consider favorable, such as DSHEA, or more stringent
interpretations of current laws or regulations. We cannot predict the nature of
future laws, regulations, interpretations or applications, nor can we predict
what effect additional governmental regulations or administrative orders, when
and if promulgated, would have on our business in the future. Such future laws
and regulations could, however, require the reformulation of products to meet
new standards, the recall or discontinuance of product that cannot be
reformulated, the imposition of additional record keeping requirements, expanded
documentation of product efficacy, expanded or modified labeling and scientific
substantiation, including health warnings or restrictions on benefits described
for our products. Any or all of such requirements could negatively impact sales
of our products or increase our cost, resulting in a material adverse impact on
our operations, consolidated financial position or results of
operations.





Environmental
Protection





We are
operating within existing federal, state and local environmental laws and
regulations and are taking action aimed at assuring compliance therewith.
Compliance with such laws and regulations is not expected to materially affect
our capital expenditures, earnings or competitive position.





Seasonality




Typically
in the weight loss industry, revenue is strongest in the first quarter and
lowest in the fourth calendar quarter. Typically in the functional water
industry, revenue is strongest in the 2 nd and 3
rd
quarters of the year. We believe our business experiences seasonality, driven by
the predisposition of dieters to initiate a diet and the placement of our
advertising based on the price and availability of certain media. We believe the
overall impact of seasonality on revenue is difficult to predict at this
time.





Number
of Employees





As of
December 31, 2007, we had a total of four employees. Our independent
contractors provide services to us on an at-will basis. Our employees are not
subject to any collective bargaining agreement. We believe that employee
relations are good.


14


RISK
FACTORS





The
following discussion should be read together with our financial statements and
related notes appearing elsewhere in this Annual Report. This discussion
contains forward-looking statements based upon current expectations that involve
numerous risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including but not limited to those set forth under “Risk factors” and elsewhere
in this Annual Report. We undertake no obligation to update any information
contained in these forward-looking statements.




General Risks Related to Our
Business




We
have a limited operating history and our business model is highly speculative at
the present time.





We only
have a limited operating history upon which potential investors may base an
evaluation of our prospects. To date, we have only had limited revenues and our
business model is subject to a high degree of risk. For the year ended December
31, 2007, we had revenues of $752,825. There can be no assurance that we will be
able to continue to generate revenues or that we will ever be profitable.
Prospective investors may lose all or a portion of their investment. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in a highly competitive market, such as the market in
which we compete. Such risks include, but are not limited to, our ability to
obtain and retain customers and attract a significant number of new customers,
the growth of the markets we intend to pursue, our ability to implement our
growth strategy, especially the sales and marketing efforts, and the
introduction of new products by us and our competitors.





We
have a history of operating losses. If we continue to incur operating losses, we
eventually may have insufficient working capital to maintain
operations.




As of
December 31, 2007, we had an accumulated deficit of $15,997,534. For the years
ended December 31, 2007 and 2006, we incurred losses from operations of
$5,698,643 and $2,303,446 respectively. If we are not able to begin to earn an
operating profit at some point in the future, we will eventually have
insufficient working capital to maintain our operations as we presently intend
to conduct them.




We
have limited working capital and will need to raise additional capital in the
future and our independent auditors have included a “going concern” opinion in
their report.




At
December 31, 2007, our cash and cash equivalents was approximately $14,247. We
have been substantially reliant on capital raised from private placements of our
securities to fund our operations. For instance, during the 2007 fiscal year, we
raised an aggregate amount of $1,188,613 from the sale of securities to
accredited investors in private transactions pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, as amended. We believe that net
cash on hand as of the date of this report and cash anticipated from operations
and to be raised in private placements of our securities will only be sufficient
to meet our expected cash needs for working capital and capital expenditures for
a period twelve months. Accordingly, we have an immediate need for additional
cash which we must satisfy either by immediately developing a market for our
products, selling additional securities in private placements or by negotiating
for an extension of credit from third party lenders. If we are unable to obtain
additional capital, we will need to reduce costs and operations substantially.
Our independent auditors have included a “going concern” explanatory paragraph
in their report to our financial statements for the year ended December 31,
2007, citing recurring losses from operations. Our capital needs in the future
will depend upon factors such as market acceptance of our products and any other
new products we launch, the success of our independent distributors and our
production, marketing and sales costs. None of these factors can be predicted
with certainty.




If we are
unable to achieve sufficient levels of sales to break-even, we will need
substantial additional debt or equity financing in the future for which we
currently have no commitments or arrangement. We cannot assure you that any
additional financing, if required, will be available or, even if it is available
that it will be on terms acceptable to us. If we raise additional funds by
selling stock or convertible securities, the ownership of our existing
shareholders will be diluted.





Further,
if additional funds are raised though the issuance of equity or debt securities,
such additional securities may have powers, designations, preferences or rights
senior to our currently outstanding securities and, in the case of additional
equity securities, the ownership of our existing shareholders will be diluted.
Any inability to obtain required financing on sufficiently favorable terms could
have a material adverse effect on our business, results of operations and
financial condition. If we are unsuccessful in raising additional capital and
increasing revenues from operations, we will need to reduce costs and operations
substantially. Further, if expenditures required to achieve our plans are
greater than projected or if revenues are less than, or are generated more
slowly than, projected, we will need to raise a greater amount of funds than
currently expected.




15


Issuances
of our securities are subject to federal and state securities laws and certain
holders of convertible debentures issued by us may be entitled to rescind their
purchases and we may have ongoing liability to these purchasers under federal
law.





From
September 2004 to December 2004 and from June 2005 through August 2005, we
offered and sold convertible debentures to investors in various states. These
sales of convertible debentures were subject to federal and state securities
laws and by reason of our failure to file blue sky notices in connection with
the sales we elected, after consultation with legal counsel, to offer these
purchasers the opportunity to rescind their investment. In such situations, a
number of remedies may be available to regulatory authorities and the investors
who purchased securities in those offerings, including, without limitation, a
right of rescission, civil penalties, seizure of our assets, a restraining order
or injunction, and a court order to pay restitution and costs. As of the date
hereof, no state regulatory authority has commenced legal action against us.
These investors may have been entitled to return their securities to us and
receive from us the full price they paid, which we estimated to be an aggregate
amount of approximately $2.4 million, plus interest. The rescission offer was
made pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated
there under and in accordance with applicable state securities laws. We relied
on these exemptions in that the investors are accredited and we did engage in
general solicitation concerning the offering. We conducted this rescission offer
through the efforts of our management. We offered to repurchase the debentures
subject to our rescission offer for the original purchase price plus interest
from the date of purchase, at the current statutory rate per year mandated by
the state in which the investors reside. This offer expired as of October 31,
2005. Holders of an aggregate of $160,000 of debentures elected to accept this
rescission offer and we repaid these investors out of working
capital.




Our letter of credit was supported by
a demand loan and we may be required to repay this amount on the demand of the
lender.





On April
4, 2007, we closed on a secure loan arrangement with Valley Green Bank pursuant
to which we received funds in the amount of $350,000. We have applied these
funds to satisfy our obligations to Madison Bank. Interest will be charged on
the unpaid principal of this new loan arrangement until the full amount of
principal has been paid at the rate of 8.25% per annum. We were obligated to
repay this new loan in full immediately on the bank’s demand, but in no event
later than March 20, 2008. We are currently in discussions with the bank to
extend the term of the loan and to date, the bank has not demanded repayment. No
assurances, however, can be given that the bank will ultimately extend the term
of this loan for any specific duration, if at all. Interest payments are
due on a monthly basis. The loan is secured by collateral consisting of a
perfected first priority pledge of certain marketable securities held by our
Chairman and entities with which he is affiliated. We also agreed to a
confession of judgment in favor of the bank in the event we default under the
loan agreements. The loan agreements also require the consent of the bank for
certain actions, including incurring additional debt and incurring certain
liens.





We
entered into a secured financing arrangement based on our accounts receivable
and if we are unable to make the scheduled payments on this facility or maintain
compliance with other contractual covenants, we may default on this
agreement.





On
November 23, 2007, we entered into a one-year factoring agreement with United
Capital Funding of Florida (“UCF”). The agreement provides for an initial
funding limit of $300,000. On November 23, 2007 we received an initial funding
through this arrangement of $124,269 and as of the date of this report, we have
received an aggregate of $485,058 through this arrangement. Under this
arrangement, all accounts submitted for purchase must be approved by UCF. The
applicable factoring fee is 0.45% of the face amount of each purchased account
and the purchase price is 80% of the face amount. UCF will retain the balance as
a reserve, which it holds until the customer pays the factored invoice to UCF.
In the event the reserve account is less than the required reserve amount, we
will be obligated to pay UCF the shortfall. In addition to the factoring fee, we
will also be responsible for certain additional fees upon the occurrence of
certain contractually-specified events. As collateral securing the obligations,
we granted UCF a continuing first priority security interest in all accounts and
related inventory and intangibles. In addition, upon the occurrence of certain
contractually-specified events, UCF may require us to repurchase a purchased
account on demand. In connection with this arrangement, each of our Chairman and
Chief Executive Officer agreed to personally guarantee our obligations to UCF.
The agreement will automatically renew for successive one year terms until
terminated. Either party may terminate the agreement on three month’s prior
written notice. We are liable for an early termination fee in the event we fail
to provide UCF with the required written notice.   In case of an uncured
default, the following actions may be taken against us:




·
            
            All
      outstanding obligations would be immediately due and
    payable;




·
            
            Any
      future advancement of funds facility would cease;
  and





·
            
            All
      collateral, as defined in the agreement, could be seized and disposed
      of.





Fluctuations
in our quarterly revenue and results of operations may lead to reduced prices
for our stock.





Our
quarterly net revenue and results of operations can be expected to vary
significantly in the future. The business in which we compete experiences
substantial seasonality caused by the timing of customer orders and fluctuations
in the size and rate of growth of consumer demand. In other particular fiscal
quarters, our net revenues may be lower and vary significantly. As a result, we
cannot assure you that our results of operations will be consistent on a
quarterly or annual basis. If our results of operations in a quarter fall below
our expectations or those of our investors; the price of our common stock will
likely decrease.




16


Our revenues will decline and our
competitive position will be adversely affected if we are unable to introduce
successful products on a timely basis.





Our
business performance depends on the timely introduction of successful products
or enhancements of existing products. Our inability to introduce products or
enhancements, or significant delays in their release, could materially and
adversely affect the ultimate success of our products and, in turn, our
business, results of operations and financial condition. The process of
introducing products or product enhancements is extremely complex, time
consuming and expensive.





Our
business is subject to many regulations and noncompliance is
costly.




The
production, marketing and sale of our beverages and dietary supplement product,
including contents, labels, caps and containers, and claims made for our
products are subject to the rules and regulations of various federal,
provincial, state and local health agencies, including the U.S. Food and Drug
Administration and the Federal Trade Commission. If a regulatory authority or
any state attorney general were to find that a current or future product or
production run is not in compliance with any of these regulations or that any of
the claims made for our products are false, misleading or not adequately
substantiated, we may be fined, production may be stopped or we may be forced to
make significant changes to the products or claims made for them, thus adversely
affecting our financial conditions and operations. Similarly, any adverse
publicity associated with any noncompliance may damage our reputation and our
ability to successfully market our products. The rules and regulations of FDA,
FTC and other federal, provincial, state and local agencies are subject to
change from time to time and while we closely monitor developments in this area,
we have no way of anticipating whether changes in these rules and regulations
will impact our business adversely. Additional or revised regulatory
requirements, whether labeling, environmental, tax or otherwise, could have a
material adverse effect on our financial condition and results of
operations.





The
dietary supplement industry is highly regulated at both the state and federal
level.





The
manufacture, packaging, labeling, advertising, promotion, distribution and sale
of our products are subject to regulation by numerous governmental agencies
which regulate our products. Our products are subject to regulation by, among
other regulatory entities, the Food and Drug Administration (“FDA”) and the
Federal Trade Commission (“FTC”). Advertising and other forms of promotion and
methods of marketing of our products are subject to regulation by the FTC which
regulates these activities under the Federal Trade Commission Act
(“FTCA”).




The
manufacture, labeling and advertising of our products are also regulated by
various state and local agencies as well as those of each foreign country to
which we distribute our products. If we are unable to comply with applicable
regulations and standards in any jurisdiction, we might not be able to sell our
products in that jurisdiction, and our business could be seriously
harmed.





Our
products are regulated as a dietary supplement under the Federal Food, Drug and
Cosmetic Act (“FFDCA”), and are, therefore, not subject to pre-market approval
by the FDA. However, our products are subject to extensive regulation by the FDA
relating to adulteration and misbranding.





For
instance, we are responsible for ensuring that all dietary ingredients in a
supplement are safe, and must notify the FDA in advance of putting a product
containing a new dietary ingredient (i.e., an ingredient not present in the U.S.
food supply as an article used for food before October 15, 1994) on the
market and furnish adequate information to provide reasonable assurance of the
ingredient’s safety. Furthermore, if we make statements about the supplement’s
effects on the structure or function of the body, we must, among other things,
have adequate substantiation that the statements are truthful and not
misleading. In addition, our product labels must bear proper ingredient and
nutritional labeling and our products must be manufactured in accordance with
current good manufacturing practices or “GMPs” for foods. The FDA has published
notice of its intention to issue new GMPs specific to dietary supplements,
which, when finally adopted may be more expensive to follow than prior GMPs. A
dietary supplement product can be removed from the market if it is shown to pose
a significant or unreasonable risk of illness or injury. Moreover, if the FDA
determines that the “intended use” of any of our products is for the diagnosis,
cure, mitigation, treatment or prevention of disease, the product would meet the
definition of a drug and could not be sold as a dietary supplement until such
time that the “intended use” of the product is not for the diagnosis, cure,
mitigation, treatment or prevention of disease. Our failure to comply with
applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines and criminal
prosecutions.




Our
advertising is subject to regulation by the FTC under the FTCA, which prohibits
unfair methods of competition and unfair or deceptive acts or practices in or
affecting commerce. Further, the FTCA provides that the dissemination or the
causing to be disseminated of any false or misleading advertisement pertaining
to, among other things, drugs or foods, which includes dietary supplements, is
an unfair or deceptive act or practice. Under the FTC’s “substantiation
doctrine,” an advertiser is required to have a “reasonable basis” for all
product claims at the time the claims are first used in advertising or other
promotions. Failure to adequately substantiate claims may be considered either
as a deceptive or unfair practice. Pursuant to this FTC requirement, we are
required to have adequate substantiation for all advertising claims made about
our products. The type of substantiation will be dependent upon the product
claims made. For example, a health claim normally would require competent and
reliable scientific evidence, while a taste claim may only require competent and
reliable survey evidence.




17


In recent
years the FTC has initiated numerous investigations of dietary supplement and
weight loss products and companies. The FTC has specifically launched a
nationwide law enforcement sweep called “Project Waistline” against companies
making false and/or inadequately substantiated weight loss claims. The
initiative was created to stop deceptive advertising, provide refunds to
consumers harmed by unscrupulous weight-loss advertisers, and encourage media
outlets not to carry advertisements containing bogus weight loss claims and to
educate consumers to be on their guard against companies promising weight loss
without diet or exercise. These enforcement actions have often resulted in
consent decrees and the payment of substantial civil penalties and/or
restitution by the companies involved. If the FTC has reason to believe the law
is being violated (e.g., we do not possess adequate substantiation for product
claims), it can initiate enforcement action. The FTC has a variety of processes
and remedies available to it for enforcement, both administratively and
judicially, including compulsory process authority, cease and desist orders, and
injunctions. FTC enforcement could result in orders requiring, among other
things, limits on advertising, consumer redress, and divestiture of assets,
rescission of contracts and such other relief as may be deemed necessary.
Violation of such orders could result in substantial financial or other
penalties. Any such action by the FTC would materially adversely affect our
ability to successfully market our products.




If
we lose key personnel or fail to integrate replacement personnel successfully,
our ability to manage our business could be impaired.





Our
future success depends upon the continued service of our key management as well
as upon our ability to attract, motivate and retain highly qualified employees
with management, marketing, sales, creative and other skills. Currently, all of
our employees are at-will and we cannot assure you that we will be able to
retain them. The loss of any key employee could result in significant
disruptions to our operations, including adversely affecting the timeliness of
product releases, the successful implementation and completion of company
initiatives, the effectiveness of our disclosure controls and procedures and our
internal control over financial reporting, and the results of our operations. In
addition, hiring, training, and successfully integrating replacement sales and
other personnel could be time consuming, may cause additional disruptions to our
operations, and may be unsuccessful, which could negatively impact future
revenues. Further, our business, operating results and financial condition could
also be materially and adversely affected if we fail to attract additional
highly qualified employees. In our industry, competition for highly skilled and
creative employees is intense and costly. We expect this competition to continue
for the foreseeable future, and we may experience increased costs in order to
attract and retain skilled employees. We cannot assure you that we will be
successful in attracting and retaining skilled personnel.





Significant competition in our
industry could adversely affect our business.




Our
market is highly competitive and relatively few products achieve significant
market acceptance. Further, the market for dietary supplements is also highly
competitive and our competitors in the functional beverage segment include well
known brands such as Vitamin Water and Life Water. These current and future
competitors may also gain access to wider distribution channels than we do. As a
result, these current and future competitors may be able to:




•
              respond
      more quickly to new or emerging technologies or changes in customer
      preferences;•
              carry
      larger inventories;•
              undertake
      more extensive marketing campaigns; and•
              adopt
      more aggressive pricing
policies.




We may
not have the resources required for us to respond effectively to market or
technological changes or to compete successfully with current and future
competitors. Increased competition may also result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on our business, results of operations or financial condition. We
cannot assure you that we will be able to successfully compete against our
current or future competitors or that competitive pressures will not have a
material adverse effect on our business, results of operations and financial
condition.





We
must rely on the performance of distributors, major retailers and chains for the
success of our business and their performance may adversely affect our
operations and financial condition.





We must
engage distributors to sell our products principally to major retailers and
chains including supermarkets and grocery and convenience stores. These
relationships are typically on a purchase-order basis we do not have any
relationships with distributors that are subject to significant minimum purchase
commitments. Accordingly, we cannot assure any given level of performance by our
distributors and we do not have any assurance that these accounts will result in
recurring orders. The poor performance of our distributors, retailers or chains
or our inability to collect accounts receivable from our distributors, retailers
or chains could materially and adversely affect our results of operations and
financial condition.





In
addition, distributors and retailers of our products offer products which
compete directly with our products for retail shelf space and consumer
purchases. Accordingly, there is a risk that distributors or retailers may give
higher priority to products of our competitors. In the future, our distributors
and retailers may not continue to purchase our products or provide our products
with adequate levels of promotional support. Accordingly, there can be no
assurance that we will be able successfully to sell, market, commercialize or
distribute our products at any time in the future.




18


We
will rely heavily on independent distributors, and this could affect our ability
to efficiently and profitably distribute and market our products, maintain our
existing markets and expand our business into other geographic
markets.





Our
ability to establish a market for our unique brands and products in new
geographic distribution areas, as well as maintain and expand our existing
markets, is dependent on our ability to establish and maintain successful
relationships with reliable independent distributors strategically positioned to
serve those areas. Although we had established relationships with distributors
in a number of markets across the United States for our products, we currently
do not have any long-term, written distribution agreements with significant
minimum purchase commitments. Further, we expect that any distributor we engage
with will sell and distribute competing products, and our products may represent
a small portion of their business. To the extent that our distributors are
distracted from selling our products or do not employ sufficient efforts in
managing and selling our products, our sales and profitability will be adversely
affected. Our ability to maintain our distribution network and attract
additional distributors will depend on a number of factors, many of which are
outside our control. Some of these factors include:




•
            
            the
      level of demand for our brands and products in a particular distribution
      area,




•
            
            our
      ability to price our products at levels competitive with those offered by
      competing products, and




•
            
            our
      ability to deliver products in the quantity and at the time ordered by
      distributors.




We cannot
ensure that we will be able to meet all or any of these factors in any of our
current or prospective geographic areas of distribution. Our inability to
achieve any of these factors in a geographic distribution area will have a
material adverse effect on our relationships with our distributors in that
particular geographic area, thus limiting our ability to expand our market,
which will likely adversely effect our revenues and financial
results.




We
will incur significant time and expense in attracting additional distributors
for our products.




Our
marketing and sales strategy presently, and in the future, will rely on the
availability and performance of independent distributors. We currently do not
have any long-term, written distribution agreements with significant minimum
purchase commitments. We intend to enter into written agreements with key
distributors for varying terms and duration; however, many distribution
relationships may be based solely on purchase orders and terminable by either
party at will. We do not anticipate that in the future we will be able to
establish, long-term contractual commitments from many of our distributors. In
addition, we cannot provide any assurance as to the level of performance by our
distributors under such agreements, that these agreements will include minimum
purchase commitments by the distributors or that those agreements will not be
terminated early. Moreover, there is the possibility that we may have to incur
significant additional expenditures or agree to additional obligations to
attract and maintain key distributors in one or more of our geographic
distribution areas in order to profitably exploit our geographic markets,
including the granting of exclusive rights for a defined territory or imposition
of termination payments. There is no assurance that we will be able to establish
distribution relationships or maintain successful relationships with
distributors in our geographic distribution areas. If we are unable to establish
or maintain successful distribution relationships, our business, financial
condition, results of operations and cash flows will be adversely
affected.





We
need to effectively manage our growth and execution of our business plan. Any
failure to do so would negatively impact our profitability.




To manage
operations effectively and maintain profitability, we must continue to improve
our operational, financial and other management processes and systems. Our
success also depends largely on our ability to maintain high levels of employee
utilization, to manage our production costs and general and administrative
expense, and otherwise to execute on our business plan. We need to maintain
adequate operational controls and focus as we add new brands and products,
distribution channels, and business strategies. There are no assurances that we
will be able to effectively and efficiently manage our growth. Any inability to
do so could increase our expenses and negatively impact our profit
margin.





We
rely on our agreements with Peace Mountain and Interhealth Nutraceuticals for
our Skinny Water product.




Our
Skinny Water product is available to us through our license agreement with Peace
Mountain. Peace Mountain holds the proprietary rights to the Skinny Water brand
and grants us the exclusive right to distribute the Skinny Water product
pursuant to the terms of an exclusive license agreement. Our Skinny Water
product is an important element of our business strategy and we expect to derive
a substantial amount of business from this product. We cannot provide assurance
that we will achieve expected sales levels from this relationship. Further,
Peace Mountain may each terminate their agreements with us due to our failure to
comply with its contractual obligations. If Peace Mountain terminates the
agreement, we will not be able to successfully market Skinny Water. In the event
Peace Mountain elects to terminate its relationship with us, our business,
financial condition, results of operations and cash flows will be significantly
harmed.




19


We
have limited the liability of our directors.





The
General Corporation Law of Nevada permits provisions in the articles, by-laws or
resolutions approved by stockholders which limit liability of directors for
breach of fiduciary duty to certain specified circumstances, namely, breach of
their duties of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law; acts involving unlawful
payment of dividends or unlawful stock purchases or redemptions, or any
transaction from which a director derived an improper personal benefit. Our
Amended and Restated By-laws indemnify the Officers and Directors to the full
extent permitted by Nevada law. The By-laws (with these exceptions) eliminates
any personal liability of a Director to the stockholders for monetary damages
for breach of a Director's fiduciary duty.





Therefore,
a Director cannot be held liable for damages to the shareholders for gross
negligence or lack of due care in carrying out his fiduciary duties as a
Director. Our Articles may provide for indemnification to the full extent
permitted under law, which includes all liability, damages and costs or expenses
arising from or in connection with service for, employment by, or other
affiliation with the company to the full extent and under all circumstances
permitted by law. Indemnification is permitted under Nevada law if a director or
officer acts in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the corporation. A director or officer must be
indemnified as to any matter in which he successfully defends himself.
Indemnification is prohibited as to any matter in which the director or officer
is adjudged liable to the corporation. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, and controlling persons pursuant to the foregoing provisions or
otherwise, management has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.





Certain Factors Relating to
Our Industry




We
compete in an industry that is brand-conscious, so brand name recognition and
acceptance of our products are critical to our success.




Our
business is substantially dependent upon awareness and market acceptance of our
products and brands by our targeted consumers. In addition, our business depends
on acceptance by our independent distributors of our brands as beverage brands
that have the potential to provide incremental sales growth rather than reduce
distributors’ existing beverage sales. It is too early in the product life cycle
of our brands to determine whether our products and brands will achieve and
maintain satisfactory levels of acceptance by independent distributors and
retail consumers. We believe that the success of our brands will be
substantially dependent upon acceptance of our brand by consumers, distributors
and retailers. Accordingly, any failure of our brand to maintain or increase
acceptance or market penetration would likely have a material adverse affect on
our revenues and financial results.





Competition from traditional
non-alcoholic beverage manufacturers may adversely affect our distribution
relationships and may hinder development of our existing markets, as well as
prevent us from expanding our markets .




The
functional beverage industry is highly competitive. We compete with other
beverage companies not only for consumer acceptance but also for shelf space in
retail outlets and for marketing focus by our distributors, all of who also
distribute other beverage brands. Our products compete with all non-alcoholic
beverages, most of which are marketed by companies with greater financial
resources than what we have. Some of these competitors are placing severe
pressure on independent distributors not to carry competitive functional
beverage brands such as ours. We also compete with national beverage
producers.





Some of
our direct competitors include Vitamin Water, Life Water, Fuze and Sobe.
Increased competitor consolidations, market place competition, particularly
among branded beverage products, and competitive product and pricing pressures
could impact our earnings, market share and volume growth. If, due to such
pressure or other competitive threats, we are unable to sufficiently maintain or
develop our distribution channels, we may be unable to achieve our current
revenue and financial targets. As a means of maintaining and expanding our
distribution network, we intend to introduce product extensions and additional
brands. There can be no assurance that we will be able to do so or that other
companies will not be more successful in this regard over the long term.
Competition, particularly from companies with greater financial and marketing
resources than us, could have a material adverse affect on our existing markets,
as well as our ability to expand the market for our products.




We may face intellectual property
infringement claims and other litigation which would be costly to
resolve.




We are
not aware that any of our products infringe on the proprietary rights of third
parties. However, we cannot assure you that third parties will not assert
infringement claims against us in the future with respect to current or future
products. There has been substantial litigation in the industry regarding
copyright, trademark and other intellectual property rights. Whether brought by
or against us, these claims can be time consuming, result in costly litigation
and divert management’s attention from our day-to-day operations, which can have
a material adverse effect on our business, operating results and financial
condition. Further, similar to our competitors, we will likely become subject to
litigation. Such litigation may be costly and time consuming and may divert
management’s attention from our day-to-day operations. In addition, we cannot
assure you that such litigation will be ultimately resolved in our favor or that
an adverse outcome will not have a material adverse effect on our business,
results of operations and financial condition.




20


We may face increased competition and
downward price pressure if we are unable to protect our intellectual property
rights.





Our
business is heavily dependent upon our confidential and proprietary intellectual
property. We rely primarily on a combination of confidentiality and
non-disclosure agreements, patent, copyright, trademark and trade secret laws,
as well as other proprietary rights laws and legal methods, to protect our
proprietary rights. However, current U.S. and international laws afford us
only limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy our products or obtain and use
information that we regard as proprietary. Furthermore, the laws of some foreign
countries may not protect our proprietary rights to as great an extent as
U.S. law. Our business, results of operations and financial condition could
be adversely affected if a significant amount of unauthorized copying of our
products were to occur or if other parties develop products substantially
similar to our products. We cannot assure you that our attempts to protect our
proprietary rights will be adequate or that our competitors will not
independently develop similar or competitive products.





We
compete in an industry characterized by rapid changes in consumer preferences,
so our ability to continue developing new products to satisfy our consumers’
changing preferences will determine our long-term success.




Our
current market distribution and penetration may be limited with respect to the
population as a whole to determine whether the brand has achieved initial
consumer acceptance, and there can be no assurance that this acceptance will
ultimately be achieved. Based on industry information and our own experience, we
believe that in general alternative or New Age beverage brands and products may
be successfully marketed for five to nine years after the product is introduced
in a geographic distribution area before consumers’ taste preferences change,
although some brands or products have longer lives. In light of the limited life
for alternative or New Age beverage brands and products, a failure to introduce
new brands, products or product extensions into the marketplace as current ones
mature could prevent us from achieving long-term profitability. In addition,
customer preferences are also affected by factors other than taste, such as the
recent media focus on obesity in youth. If we do not adjust to respond to these
and other changes in customer preferences, our sales may be adversely
affected.




We
could be exposed to product liability claims for personal injury or possibly
death.




Although
we have product liability insurance in amounts we believe are adequate, we
cannot assure that the coverage will be sufficient to cover any or all product
liability claims. To the extent our product liability coverage is insufficient;
a product liability claim would likely have a material adverse affect upon our
financial condition. In addition, any product liability claim successfully
brought against us may materially damage the reputation of our products, thus
adversely affecting our ability to continue to market and sell that or other
products.




Certain Factors Related to
Our Common Stock




Because
our common stock is traded on the OTC Bulletin Board, a shareholder’s ability to
sell shares in the secondary trading market may be limited.




Our
common stock is currently listed for trading in the United States on the OTC
Bulletin Board. As a result, an investor may find it more difficult to dispose
of or to obtain accurate quotations as to the price of our securities than if
the securities were traded on the NASDAQ Stock Market or another national
exchange, like The New York Stock Exchange or American Stock
Exchange.





Because
our common stock is considered a “penny stock,” a shareholder may have
difficulty selling shares in the secondary trading market.




In
addition, our common stock is subject to certain rules and regulations relating
to “penny stock” (generally defined as any equity security that is not quoted on
the NASDAQ Stock Market and that has a price less than $5.00 per share, subject
to certain exemptions). Broker-dealers who sell penny stocks are subject to
certain “sales practice requirements” for sales in certain nonexempt
transactions (i.e., sales to persons other than established customers and
institutional “accredited investors”), including requiring delivery of a risk
disclosure document relating to the penny stock market and monthly statements
disclosing recent price information for the penny stock held in the account, and
certain other restrictions. For as long as our common stock is subject to the
rules on penny stocks, the market liquidity for such securities could be
significantly limited. This lack of liquidity may also make it more difficult
for us to raise capital in the future through sales of equity in the public or
private markets.





The
price of our common stock may be volatile, and a shareholder’s investment in our
common stock could suffer a decline in value.




There has
been significant volatility in the volume and market price of our common stock,
and this volatility may continue in the future. In addition, there is a greater
chance for market volatility for securities that trade on the OTC Bulletin Board
as opposed to a national exchange. This volatility may be caused by a variety of
factors, including the lack of readily available quotations, the absence of
consistent administrative supervision of “bid” and “ask” quotations and
generally lower trading volume. In addition, factors such as quarterly
variations in our operating results, changes in financial estimates by
securities analysts or our failure to meet our or their projected financial and
operating results, litigation involving us, general trends relating to the
beverage industry, actions by governmental agencies, national economic and stock
market considerations as well as other events and circumstances beyond our
control could have a significant impact on the future market price of our common
stock and the relative volatility of such market price. The price of our common
stock has been and could continue to be subject to wide fluctuations in response
to certain factors, including, but not limited to, the
following:


21





•
            quarter
      to quarter variations in results of operations;•
            our
      announcements of new products;•
            our
      competitors’ announcements of new products;•
            general
      conditions in the beverage industry; or•
            investor
      and customer perceptions and expectations regarding our products, plans
      and strategic position and those of our competitors and
      customers.




Additionally,
the public stock markets experience extreme price and trading volume volatility.
This volatility has significantly affected the market prices of securities of
many companies for reasons often unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock.




There
are outstanding a significant number of shares available for future sales under
Rule 144.





As of
December 31, 2007, of the 93,822,225 issued and outstanding shares of our Common
Stock, approximately 77,588,556 shares may be deemed “restricted shares” and, in
the future, may be sold in compliance with Rule 144 under the securities Act of
1933, as amended. Rule 144 provides that a person holding restricted securities
for a period of one year may sell in brokerage transactions an amount equal to
1% of our outstanding Common Stock every three months. A person who is a
“non-affiliate” of our Company and who has held restricted securities for over
two years is not subject to the aforesaid volume limitations as long as the
other conditions of the Rule are met. Possible or actual sales of our Common
Stock by certain of our present shareholders under Rule 144 may, in the future,
have a depressive effect on the price of our Common Stock in any market which
may develop for such shares. Such sales at that time may have a depressive
effect on the price of our Common Stock in the open market.





There are a significant number of
outstanding securities convertible or exercisable into shares of common stock,
the conversion or exercise of which may have a dilutive effect on the price of
our common stock.




As of
December 31, 2007, there were outstanding and immediately exercisable options to
purchase 3,208,000 shares of Common Stock and other warrants to purchase
9,814,890 shares of Common Stock. In addition, as of December 31, 2007, there
remains outstanding an aggregate principal amount of $310,000 of debentures. The
shares underlying warrants (including the warrants that are granted upon
conversion of the debentures) represent approximately 11.6% of our common stock,
and the shares underlying our currently outstanding options represent
approximately 3.4% of our common stock. The conversion or exercise of these
securities will cause dilution to our shareholders and the sale of the
underlying Common Stock (or even the potential of such exercise or sale) may
have a depressive effect on the market price of our securities. Moreover, the
terms upon which we will be able to obtain additional equity capital may be
adversely affected, since the holders of the outstanding options and warrants
can be expected to exercise them at a time when we would, in all likelihood, be
able to obtain any needed capital on terms more favorable to us than the
exercise terms provided by the outstanding options and warrants.





Our Board of Directors has the
ability to issue “blank check” Preferred Stock.





Our
Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares
of “blank check” preferred stock, with such designation rights and preferences
as may be determined from time to time by the Board of Directors. Currently,
there are no shares of preferred stock are issued and outstanding. The Board of
Directors is empowered, however, without shareholder approval, to issue shares
of preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of our common stock. In the event of such issuances, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of our company. Although we have no
present intention to issue any additional shares of our preferred stock, there
can be no assurance that we will not do so in the future.




Item
2:  Description of Property.





Effective
November 1, 2006, we have relocated our corporate offices to 3 Bala Plaza East,
Suite 117, Bala Cynwyd, Pennsylvania. This space consists of approximately 5,000
square feet of office space and we have a rent-free arrangement to utilize this
space until further notice.




Item
3:  Legal Proceedings.





Except as
described below, we are not currently a party to any lawsuit or proceeding
which, in the opinion of our management, is likely to have a material adverse
effect on us.




22


In a
complaint dated April 20, 2006, plaintiff News Broadcast Network, Inc. commenced
an action in the Supreme Court of the State of New York for the County of New
York (Index No. 601399/06) against us. The complaint claims that we failed to
pay NBN for video/audio production services it rendered in 2005 and seeks
$29,350 in compensatory damages based on causes of action for breach of
contract, for goods sold and delivered, for account stated and for unjust
enrichment. In an answer dated July 25, 2006, we denied the allegations and any
liability to plaintiff. Discovery is currently taking place. We vigorously
contest any liability to plaintiff in this action and based on the facts of
which we are currently aware; management believes that the resolution of this
claim will not have a materially adverse effect on our financial condition.
However, no assurances can be given that such belief will ultimately prove to be
accurate or that other facts adverse to our position currently not known to
management will not be uncovered, in which case the ultimate resolution of this
claim could potentially  have a material
adverse effect  on
our financial condition.





In
addition, we are subject to other claims and litigation arising in the ordinary
course of business. Our management considers that any liability from any
reasonably foreseeable disposition of such other claims and litigation,
individually or in the aggregate, would not have a material adverse effect on
our consolidated financial position, results of operations or cash
flows.




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




No
matters were submitted to a vote of security holders during the fourth quarter
ended December 31, 2007.




PART
II




Item
5:  Market for Common Equity and Related Stockholder
Matters





Following
our name change, our common stock has traded on the OTC Bulletin Board since
December 27, 2006 under the symbol SKNY.OB. Our common stock previously traded
on the OTC Bulletin Board under the symbol CEII.OB from June 21, 2006 until
December 26, 2006. Previously, our common stock traded on the OTC Pink Sheets
under the symbol CEII.PK. The table set forth below shows the high and
low bid information for the past two years.  These
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. According to
our stock transfer agent records, we had approximately 491 shareholders of our
common stock as of December 31, 2007 holding 93,822,225 common
shares.





High Bid
                      
                      
                      Low BidFiscal
      2007March
      31, 2007
                      
                      $
                      0.43
                      
                      
                      $
                      0.17June
      30, 2007
                      
                      $
                      0.28
                      
                      
                      $
                      0.15September
      30, 2007
                      
                      $
                      0.19
                      
                      
                      $
                      0.10December
      31, 2007
                      
                      $
                      0.14
                      
                      
                      $
                      0.06Fiscal
      2006March
      31, 2006
                      
                      $
                      0.65
                      
                      
                      $
                      0.34June
      30, 2006
                      
                      $
                      0.20
                      
                      
                      $
                      0.20September
      30, 2006
                      
                      $
                      0.12
                      
                      
                      $
                      0.12December
      31, 2006
                      
                      $
                      0.18
                      
                      
                      $
                      0.16





Dividends
and Dividend Policy





There are
no restrictions imposed on us that limit our ability to declare or pay
dividends on our common stock, except as limited by state corporate law. During
the year ended December 31, 2007, no cash or stock dividends  were
 declared  or  paid  and  none  are  expected
to be paid in the foreseeable future. We expect to continue to retain all
earnings generated by our future operations for the development and growth of
our business. The board of directors will determine whether or not to pay
dividends in the future in light of our earnings, financial condition, capital
requirements and other factors.





Transfer
Agent





The
transfer for our Common Stock is Interwest Transfer Agency, Salt Lake City,
UT.




23


Securities
authorized for issuance under equity compensation plans




The
following table provides information about our common stock that may be issued
upon the exercise of options and rights under all of our existing equity
compensation plans as of December 31, 2007, which consists of our Stock Option
Plan.




Plan Category
                      
                      Number of
                        Securities to be
                        Issued upon
                        Exercise of
                        Outstanding
                        Options and
                        Rights
                        (a)
                      
                      
                      Weighted Average
                        Exercise
                        Price of
                        Outstanding
                        Options
                        (b)
                      
                      
                      Number of
                        Securities
                        Remaining
                        Available for
                        Future Issuance
                        Under Equity
                        Compensation
                        Plans Excluding
                        Securities
                        Reflected in
                        Column (a)
                        (c)Equity
      Compensation Plans Approved by Stockholders
                      
                      
                      12,325,000
                      
                      
                      $
                      0.143
                      
                      
                      
                      7,675,000Equity
      Compensation Plans Not Approved by Stockholders (1)
                      
                      
                      3,059,390
                      
                      
                      $
                      0.08
                      
                      
                      
                      N/ATotal
                      
                      
                      15,384,390
                      
                      
                      
                      -
                      
                      
                      
                      7,675,000


__________________


(1)
Consists of warrants issued to third parties for services rendered and shares of
restricted stock awarded to certain of our executives.





Recent
Sales of Unregistered Securities





Except as
described elsewhere in this report, we did not issue any securities that were
not registered under the Securities Act of 1933, as amended (the “Securities
Act”) during the fiscal year ended December 31, 2007 or during the current
fiscal year, other than those disclosed in previous SEC filings.




Stock
Repurchases




During
fiscal 2007, we did not repurchase any shares of our common stock.





Item
6:   Management’s Discussion and Analysis




Overview




This
management’s discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. Please see “Item 1—Business—Forward-Looking Statements” for a
discussion of the uncertainties, risks and assumptions associated with these
statements. You should read the following discussion in conjunction with our
audited consolidated financial statements and the notes to our audited
consolidated financial statements included elsewhere in this report. Our actual
results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including but not limited to those
listed under “Item 1—Business—Risk Factors” and included in other portions of
this report.





Nature
of Operations





We were
originally incorporated in the State of Utah on June 20, 1984 as Parvin Energy,
Inc. Our name was later changed to Sahara Gold Corporation and on July 26, 1985
we changed our corporate domicile to the State of Nevada and on January 24, 1994
we changed our name to Inland Pacific Resources, Inc. On December 18, 2001, we
entered into an agreement and plan of reorganization with Creative Enterprises,
Inc. and changed our name to Creative Enterprises International, Inc. This
discussion relates solely to the operations of Creative Enterprises
International, Inc. On November 15, 2006, a majority of our common stockholders
provided written consent to change the name of the company to Skinny Nutritional
Corp. to more accurately describe our evolving operations. This change became
effective December 27, 2006. See “Our Products and Strategy” below.




We have
had limited operations to date and until 2005 our efforts were focused primarily
on the development and implementation of our business plan. Since the middle of
2005 we have engaged in significant marketing and sales activities related to
our business plan of selling functional beverages and dietary supplements. We
have generated revenues of $752,825 for fiscal 2007 and incurred a net loss of
$2,303,446 for fiscal 2006 and 5,698,643 for year ended December 31, 2007. The
net loss includes general and administrative expenses related to the costs of
start-up operations and a significant amount of marketing expenses related to
establishing our brand in the market.  In addition, the net loss includes a
significant amount of public company expenses incurred to become a reporting
company and transition the company from the pink sheets to the OTC Bulletin
Board. Since the date of the merger and reorganization, we have raised capital
through private sales of our common equity and debt securities.




24


Our
Products and Strategy





Through
the year ended December 31, 2007, we have operated our business in the rapidly
evolving functional beverage and dietary supplement industries. More recently we
have determined to focus on marketing and distributing our dietary supplement
product, “Skinny Water” and developing other functional beverages.




In July
2004, we entered into a license and distribution agreement with Jamnica, d.d.
that granted us an exclusive license to distribute Jamnica’s bottled waters in
North America. Our agreement with Jamnica was for an initial term commencing on
the date we received government approvals to distribute the products in the
sales territory and continuing for a period of one year from the date the
approvals are received. We received approval from the State of New York in April
2005 and the State of California in June 2005. The agreement would have
automatically renewed for additional one year terms provided we satisfied
certain sales volume targets. If we were unable to satisfy these targets,
Jamnica had the right to either terminate the agreement or to appoint additional
distributors in the territory. Based on the sales of Jana Water and Jana Skinny
Water through the quarter ended September 30, 2006, we did not satisfy these
targets.





On
October 10, 2006, we entered into an agreement with Jamnica, d.d. and Jana North
America, Inc. (the “Modification Agreement”), which agreement is effective as of
September 20, 2006, pursuant to which the parties confirmed the termination of
our distribution agreement with Jamnica. Under the Modification Agreement, the
parties agreed to the following arrangements: (a) our obligation to Jamnica of
$207,321 is eliminated; (b) Jamnica and Jana North American shall pay an amount
of $23,125 on our behalf in satisfaction of storage and warehousing fees; (c)
receivables due to us from select accounts shall be transferred to Jana North
America; and (d) we shall make available to Jana North America all inventory of
Jana bottled waters in our possession. In addition, the parties agreed that we
will cease use of the Jana trademarks and logos and Jamnica and Jana North
America agreed not to use any of our licensed trademarks or logos concerning our
“Skinny” product line. Pursuant to the Modification Agreement, we will also
provide additional assistance to Jamnica and Jana North America in the
transition for the marketing and distribution of the Jana bottled waters. Each
of the parties also agreed to release the other from any obligations or claims
arising from the distribution agreement.





We have
also obtained the exclusive rights from Peace Mountain Natural Beverages
Corporation to bottle and distribute a dietary supplement called Skinny Water
(R)
.. Skinny Water’s proprietary formula has an all-natural appetite suppressant
that helps people maintain and lose weight when taken in conjunction with diet
and exercise. On October 4, 2006, we entered into an amendment to our License
and Distribution Agreement with Peace Mountain Natural Beverages. Pursuant to
this amendment, we agreed to pay Peace Mountain an amount of $30,000 in two
equal monthly installments commencing on the date of the amendment in
satisfaction of allegations of non-performance by Peace Mountain. In addition,
the parties further agreed to amend and restate our royalty obligation to Peace
Mountain, pursuant to which amendment, we will have a minimum royalty obligation
to Peace Mountain based on a percentage of wholesale sales with a quarterly
minimum of $15,000. Our agreement with Peace Mountain will renew automatically
provided that we satisfy the minimum quarterly payment of $15,000 specified in
the contract.




On
February 27, 2007, we entered into a Marketing and Distribution Agreement
with Geltech Sales, LLC for the national distribution of our Skinny-branded
products. The initial term of the Agreement is three years, and it is renewable
in one-year increments. Under the Agreement, Geltech agreed to solicit orders
for our products through its distribution channels, which includes mass
merchandisers, supermarkets, convenience stores, mass drug stores, as well as
establishing distribution agreements with local, regional, and national direct
store delivery (DSD) companies.





In
consideration for Geltech’s services, we agreed to pay Geltech a commission
based on the quantity of product sold through its network and agreed to issue to
Geltech, or its designees, an aggregate of 1,500,000 common stock purchase
warrants. The warrants are exercisable for a seven year period at a price of
$0.24 per share. We had the right to redeem up to 750,000 of the warrants in the
event that Geltech does not satisfy the required performance metrics. In
addition, on February 27, 2007, we issued an additional total of 300,000
warrants to two consultants in consideration of the services rendered by such
persons in connection with the negotiation and execution of the Agreement.
October 16, 2007, we notified Geltech that we elected to terminate this
agreement with Geltech based on performance obligations; resulting in a
cancellation of 1,075,000 warrants.





We will
principally generate revenues, income and cash by introducing, marketing,
selling and distributing finished products in the beverage, health and nutrition
industries. We will sell these products through national retailers and local
distributors. We have been focused on, and will continue to increase our
existing product lines and further develop our markets. We have established
relationships with national retailers, including Target for the distribution of
Skinny Water. We have reformulated Skinny Water in response to consumer
preferences. We expect to continue our efforts to distribute Skinny Water
through the distributors and retailers. However, these distributors and
retailers were not bound by significant minimum purchase commitments and we do
not expect that this will change in the near future. Accordingly, we must rely
on recurring purchase orders for product sales and we cannot determine the
frequency or amount of orders any retailer or distributor may make.




25


Our
primary operating expenses include the following: direct operating expenses,
such as transportation, warehousing and storage, overhead, fees and royalties to
our suppliers and licensors and marketing costs. We have and will continue to
incur significant marketing expenditures to support our brands including
advertising costs, sponsorship fees and special promotional events. We have
focused on developing brand awareness and trial through sampling both in stores
and at events. Retailers and distributors may receive rebates, promotions, point
of sale materials and merchandise displays. We seek to use in-store promotions
and in-store placement of point-of-sale materials and racks, price promotions,
sponsorship and product endorsements. The intent of these marketing expenditures
is to enhance distribution and availability of our products as well as awareness
and increase consumer preference for our brand, greater distribution and
availability, awareness and promote long term growth.





Management
Changes





In
October 2006, we reorganized our executive management team. On October 4, 2006,
our board of directors elected Mr. Ken Brice as a member of our board of
directors and appointed Mr. Michael R. Reis as its interim Chief Operating
Officer and also elected him as a director. Further, on October 5, 2006, Mr.
Christopher Durkin Chief Executive Officer, President and a director, resigned
from such positions with us. In addition, on October 6, 2006, we appointed Mr.
Donald J. McDonald to serve as our new Chief Executive Officer, President and as
a member of our board of directors. Also, on October 6, 2006, Mr. James Robb
notified us that effective on such date he resigned from our board of
directors.





On June
11, 2007, Kenneth Brice, the Company’s Chief Financial Officer and a member of
its board of directors, tendered his resignation from his service with the
Company, effective as of June 30, 2007. The Company’s Chief Executive Officer,
Donald J. McDonald, will serve as its Chief Financial Officer until such time as
the Company appoints another individual to serve in such capacity.




Reorganization





On
November 15, 2006, holders of approximately 53% of our issued and outstanding
common stock consented in writing to the adoption of resolutions approving (1)
amendments to our Articles of Incorporation to (a) change our corporate name to
“Skinny Nutritional Corp.” and (b) increase the number of authorized shares of
common stock 250,000,000 shares and (2) an amendment to our Employee Stock
Option Plan to increase the number of shares of common stock available to be
issued there under to 20,000,000 shares. These actions became effective as of
December 27, 2006. Also effective as of such date, we granted an aggregate of
10,650,000 options under its Employee Stock Option Plan, including a total of
5,500,000 options granted to certain of our executive officers.





On
December 22, 2006, we began an offering to the holders of an aggregate principal
amount of $2,515,000 of convertible debentures the ability to convert such
securities at a reduced conversion rate. The convertible debentures are
scheduled to mature at various dates between December 2006 and October 2007 and
were initially convertible at the conversion rate of $0.40 into (a) an aggregate
of 6,287,500 shares of our common stock and (b) 6,287,500 common stock purchase
warrants (the ‘‘Conversion Warrants’’). We determined to offer the debenture
holders the option to convert the outstanding principal amount of their
debentures into shares of common stock only at a conversion rate of $0.10
provided that the holders agree to the following: (i) convert the outstanding
principal amount of its convertible debentures no later than January 31, 2007,
(ii) acknowledge the surrender of the right to receive the Conversion Warrants
and (iii) forfeit the unpaid interest that has accrued on such debentures, which
was approximately $337,000, in the aggregate. To the extent that any holders
decline this offer, such holders would continue to hold their convertible
debentures and could elect to either convert such debentures on the original
terms thereof or receive repayment of the principal and accrued and unpaid
interest thereon, on the stated maturity date of such debentures. During
calendar year 2007, an aggregate amount of debenture principal of $2,065,000 was
converted into 22,553,333 shares of common stock. In addition one investor was
repaid in cash for $20,000 in principal and $4,000 in interest.





Going
Concern and Management Plans





To date,
we have needed to rely upon selling equity and debt securities in private
placements to generate cash to implement our plan of operations. We have an
immediate need for cash to fund our working capital requirements and business
model objectives and we intend to either undertake private placements of our
securities, either as a self-offering or with the assistance of registered
broker-dealers, or negotiate a private sale of our securities to one or more
institutional investors. However, except as discussed below under the caption
“Liquidity and Capital Resources” we currently have no firm agreements with any
third-parties for such transactions and no assurances can be given that we will
be successful in raising sufficient capital from any of these proposed
financings.





As
described in greater detail below under the caption “Liquidity and Capital
Resources,” during the twelve months ended December 31, 2007, we have raised a
total of $1,188,613 in gross proceeds from private transactions with accredited
investors and current or former members of our executive management
team.




Based on
our current levels of expenditures and our business plan, we believe that our
existing cash and cash equivalents (including the proceeds received from our
recent private placement), will only be sufficient to fund our anticipated
levels of operations for a period of six months. Accordingly, generating sales
in that time period is important to support our business. However, we cannot
guarantee that we will generate such growth.  If we do not generate
sufficient cash flow to support our operations during that time frame, we will
need to raise additional capital and may need to do so sooner than currently
anticipated. Our independent auditors have included a “going concern”
explanatory paragraph in their report to our financial statements for the year
ended December 31, 2007, citing recurring losses and negative cash flows from
operations. We can not assure you that any financing can be obtained or, if
obtained, that it will be on reasonable terms.




26


If we
raise additional funds by selling shares of common stock or convertible
securities, the ownership of our existing shareholders will be diluted. Further,
if additional funds are raised though the issuance of equity or debt securities,
such additional securities may have powers, designations, preferences or rights
senior to our currently outstanding securities. Further, if expenditures
required to achieve our plans are greater than projected or if revenues are less
than, or are generated more slowly than, projected, we will need to raise a
greater amount of funds than currently expected. Without realization of
additional capital, it would be unlikely for us to continue as a going
concern.




Critical
Accounting Policies





The
application of the following accounting policies, which are important to our
financial position and results of operations, requires significant judgments and
estimates on the part of management. For a summary of all of our accounting
policies, including the accounting policies discussed below, see note 3 to
our audited consolidated financial statements.





Revenue
Recognition





The
Company sells products through multiple distribution channels including
resellers and distributors. Revenue is recognized when the product is shipped to
our retailers and distributors and is recognized net of discounts. At present,
there are no return privileges with our products.





Use of Estimates in the
Preparation of Financial Statements




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





Restatement
of Consolidated Financial Statements





The
Company is filing this Form 10KSB/A to restate its financial statements in order
to change its method of accounting for convertible debentures. The Company,
after consulting with its independent registered public accounting firm,
concluded that the Company should correct an error in the Company’s accounting
and disclosures for its convertible debentures and stock options and warrants.
This conclusion was reached following a thorough evaluation of the Company’s
accounting treatment of such securities in response to a comment letter from the
Staff of the Division of Corporation Finance of the Securities and Exchange
Commission (“SEC”) relating to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007.





This
Amendment is being filed to reflect restatements of (i) the Company’s
consolidated balance sheets at December 31, 2007 and December 31,
2006, and (ii) the Company’s consolidated statements of operations and
cash flows for the year ended December 31, 2007, and the notes related
thereto. The Amendment will reflect an adjustment to the beneficial conversion
feature of certain previously outstanding convertible debentures (the
“Debentures”) to give effect to the reduction of the conversion rate in
accordance with FAS 84. The effect of this adjustment, as is shown in this
Amendment is to debit debt conversion expense in an amount of $3,371,964 and to
credit additional paid in capital by $3,371,964. Due to this, the Company’s net
loss for 2007 was impacted by $3,371,964. The Company determined that the
modification of the Debentures resulted in a fair value of incremental
consideration of $3,371,964 based on the difference between the fair value of
the common stock underlying the Debentures following the reduction in the
conversion rate under FAS 84 and the fair value of the common stock underlying
the Debentures with the original conversion terms.





The
Company is also reporting in this restatement a credit to its profit and loss
statement in the amount of $69,525 in order to properly reflect on its financial
statements the stock compensation expense that the Company incurred in fiscal
2007in accordance with SFAS 123R. These changes are shown on its Statement of
Operations, as an adjustment to “General and Administrative Expense” by reducing
such line item in the net amount of $69,525. This adjustment will also flow
through the Statement of Operations as a reduction in “Net Loss from Operations”
and “Net Loss” in the amount of $69,525. This adjustment will not impact
earnings (loss) per share. In addition, on its balance sheet contained in the
Original Filing, the Company will adjust “additional paid-in capital” by a net
amount of $69,525. The net increase of $69,525 to additional paid-in capital
will flow through the balance sheet as a decrease to “Total stockholders’
deficit” and an increase to “Total Liabilities and Stockholders’
Deficit”.





None of
the foregoing adjustments to the Company’s accounting for the Debentures or the
options and warrants will affect the Company’s previously reported revenue or
cash flows nor will the modifications concerning the Debentures have a net
effect on stockholders’ equity.




27


The
restatement will also reflect a reclassification of the Company’s expense
incurred in connection with its private placement of securities in 2007. This
reclassification consists of a credit to “general and administrative” expense on
the Company’s statement of operations of $435,749 and an offsetting debit to
additional paid in capital of an equivalent amount. This event will not have a
net effect on stockholders’ equity as reported in the Original Form
10-KSB.





Management’s
Discussion and Analysis has been revised for the effects of the restatement.
Further information on the nature and impact of these adjustments is provided in
Note 2, “Restatement of Financial Statements” under Notes to Consolidated
Financial Statements included in Item 7, “Financial Statements” of this
Form 10-KSB/A.





Management
Discussion and Analysis:





Results of
Operations: Year Ended December 31,
2007 compared to Year
Ended December 31,
2006





For the
twelve months ended December 31, 2007, our revenues were $752,825 as compared to
$628,380 for the same period last year. This increase in revenues for the twelve
months ended December 31, 2007 is due primarily to the increased sales recorded
in the fourth quarter of 2007. The increased revenue for 2007
was primarily due to an increased volume of product shipment resulting from the
development of the Company’s relationship with Target Corp. and to a lesser
extent from new distributor relationships established by the Company during the
year. For 2007, Target’s initial sales amounted to $705,993, of which $539,942
of product was shipped in the fourth quarter of 2007. These sales were new sales
and offset the termination of the other arrangements that the Company had
previously established.





Cost of
goods sold was $532,812 for the year ended December 31, 2007 as compared to
$576,882 incurred during the same period last year. In addition, we decided to
focus on new products during the fourth quarter of the 2007 fiscal year.
Marketing and advertising costs were $721,442 for the year ended December 31,
2007 as compared to $ 394,949 for the same period last year, or an increase of
83%. This increase is attributable to product design and increased advertising
expenses.





General
and administrative costs (which include salaries, rent, office overhead, and
public company expenses) were $1,715,218 for the twelve months ended December
31, 2007 as compared to $1,894,768 over the same period in 2006. The decrease
was attributed to better management of overhead costs and expenses.





Interest
expense was $120,514 for the year ended December 31, 2007 as compared to $32,932
for the same period last year. Debt conversion expense was $3,371,964 for the
year ended December 31, 2007 as compared to $0 for the same period last
year.





Net loss
for the twelve month period was $5,698,643 as compared to $2,303,446 for the
same period last year.




Liquidity
and Capital Resources





Satisfaction
of Cash Requirements and Financing Activities





We have
historically primarily been funded through the issuance of common stock, debt
securities and external borrowings. During the calendar year 2007 the company’s
primary means of raising capital was through the sale of common stock through
private placements made pursuant to Rule 506 of Regulation D under the
Securities Act of 1933. There were three private offerings made during the year.
The first offering had an offering period starting on December 8, 2006 and was
completed February 2007 with 10,000,000 shares being offered and an aggregate
offering amount of $750,000. The offering raised $482,625 dollars during
calendar year 2007 with 6,435,004 shares of common stock being issued. The
second offering had an offering period of March 19, 2007 to September 6, 2007;
with 13,333,333 shares being offered and an aggregate offering amount of
$1,000,000 dollars. The offering raised $502,238 dollars with 6,696,509 shares
being issued. The third offering had an offering period starting September 7,
2007 and ending November 7, 2007; with 13,333,333 shares being offered for an
aggregate offering amount of $1,000,000 dollars. The offering raised $203,750
with 2,716,666 shares being issued. There were 2,759,390 warrants issued to
“Selling Agents” for the private placements of common stock during calendar year
2007. Selling agents received $106,954 dollars in commissions for private
placement of common shares leaving the company with $1,081,659 dollars in net
proceeds from private placements. Common shares totaling 9,809,332 shares were
also issued to shareholders from prior subscriptions in the form of reset shares
required by the covenants established in the pervious subscription
agreements.





The
securities sold in the above private placements have not been registered under
the Securities Act of 1933, as amended, and were offered and sold in reliance
upon the exemption from registration set forth in Section 4(2) thereof and
Regulation D, promulgated under the Securities Act. We believe that the
investors and the selling agent are ‘‘accredited investors’’, as such term is
defined in Rule 501(a) promulgated under the Securities Act.





There
were two holders of notes payable that converted their debt into common shares.
On March 23, 2007; principal of $100,000 dollars and $4,274 dollars worth of
interest were converted into 2,011,020 shares of common stock. The second
conversion took place in two transactions; the first occurred on January 17,
2007 in which fifty-percent of the debt consisting of $ 12,500 dollars in
principal and $1,171 dollars in interest were converted into 273,425 shares of
common stock. The second transaction occurred during April 12, 2007 in which
$12,500 dollars in principal was converted into 250,000 in common shares of
stock. Interest of $6,670 was converted to 95,275 common shares on 1/17/07.
There were other transactions the converted debt to 14,995 shares of common
stock.




28


In
addition, holders of an aggregate principal amount of $2,070,000 of convertible
debentures converted such amount into shares of common stock as follows. In the
first quarter, holders of principal of $1,755,000 converted such amount into
17,550,000 shares of common stock. Also in the first quarter one debt holder
converted $20,000 in debt to 40,000 shares of common stock. In the second
quarter two debt holders converted their debt into 400,000 common shares
reducing the principal balance by $40,000 dollars. During the fourth quarter an
additional conversion of $188,333 in principal and $37,667 in interest were
converted into 3,013,333 shares of common stock at a conversion rate of $.075 a
share. During December 2007, in a fourth conversion 1,600,000 shares of common
stock were issued upon conversion of $66,667 in principal and $13,333 in
interest at a conversion rate of $.05 per share. One investor was paid $20,000
dollars in principal and $4,000 dollars in interest to retire his debenture. In
addition, we issued an aggregate of 765,000 common stock purchase warrants upon
the conversion of outstanding debentures in 2007. Of these warrants, 225,000
warrants are exercisable at $0.20 per shares and the remainders are exercisable
at $0.50 per share. All warrants expire three years from the date of
issuance.




The
securities sold in the above transactions were not registered under the
Securities Act of 1933, as amended, and were offered and sold in reliance upon
the exemption from registration set forth in Section 3(a)(9)
thereof.




We
believe that net cash on hand as of the date of this Annual Report is only
sufficient to meet our expected cash needs for working capital and capital
expenditures for a period of six months. Accordingly, we have an immediate need
for additional capital. To raise additional funds, we intend to either undertake
private placements of our securities, either as a self-offering or with the
assistance of registered broker-dealers, or negotiate a private sale of our
securities to one or more institutional investors. We currently have no firm
agreements with any third-parties for additional transactions and no assurances
can be given that we will be successful in raising sufficient capital from any
of these proposed financings. Further, we cannot be assured that any additional
financing will be available or, even if it is available that it will be on terms
acceptable to us. Any inability to obtain required financing on sufficiently
favorable terms could have a material adverse effect on our business, results of
operations and financial condition. If we are unsuccessful in raising additional
capital and increasing revenues from operations, we will need to reduce costs
and operations substantially. Further, if expenditures required to achieve our
plans are greater than projected or if revenues are less than, or are generated
more slowly than, projected, we will need to raise a greater amount of funds
than currently expected. Without realization of additional capital, it would be
unlikely for us to continue as a going concern.





We have
developed operating plans (forecasts) that project profitability based on known
assumptions of units sold, retail and wholesale pricing, cost of goods sold,
operating expenses as well as the investment in advertising and marketing. These
operating plans are adjusted monthly based on actual results for the current
period and projected into the future and include statement of operations,
balance sheets and sources and uses of cash. If we are able to meet our
operating targets, however, we believe that we will be able to satisfy our
working capital requirements. No assurances can be given that our operating
plans are accurate nor can any assurances be provided that we will attain any
such targets that we may develop.





Other
Transactions Impacting our Capital Resources





On
October 4, 2006, we entered into an agreement with Mr. James Robb, at the time a
member of our board of directors, modifying the convertible note issued to Mr.
Robb in June 2006. Pursuant to this agreement, we agreed to modify the repayment
terms of the note by paying Mr. Robb an amount of $10,000 upon the initial
closing of the October financing and the balance of the principal and accrued
and unpaid interest within 60 days thereafter. The principal amount due to Mr.
Robb is $50,000, which includes the assignment of a $25,000 convertible note to
Mr. Robb in a private transaction, which note we originally issued to Mr.
Christopher Durkin, our former Chief Executive Officer and a former director.
Following a further modification of the repayment obligation, this note was paid
in full on March 13, 2007.





On
October 4, 2006, we entered into a Separation Agreement with Mr. Christopher
Durkin, who was our President, Chief Executive Officer and a director. Pursuant
to this agreement, Mr. Durkin agreed to resign from all positions with us
effective upon his receipt of payment of $32,500 as payment of accrued but
unpaid compensation and expenses. Mr. Durkin also agreed to provide us with a
general release of claims in the separation agreement. We made the cash payment
to Mr. Durkin on October 5, 2006 and his resignation is effective as of such
date. In addition, and as additional severance compensation, we agreed to issue
Mr. Durkin 300,000 shares of Common Stock.





In August
2005 we commenced an offering to sell an additional $3.4 million of convertible
debentures to additional accredited investors under Rule 506, promulgated under
the Securities Act of 1933. The convertible debentures subject to this offering
are identical to the debentures we sold in a private placement that we commenced
in January 2005. Up to approximately $2.4 million of this amount, plus interest,
was subject to a rescission offer to certain investors that previously purchased
convertible debentures from the periods September 2004 to December 2004 and from
June 2005 through August 2005. In the rescission offer, we offered to repurchase
these debentures for the original purchase price plus interest from the date of
purchase at the current statutory rate per year mandated by the state in which
the investor resides. This offer expired as of October 31, 2005. Holders of an
aggregate of $160,000 of debentures elected to accept this rescission offer,
with the balance confirming their prior investment. The full amount of the
debentures rescinded was repaid on October 7, 2005 out of working
capital.




29


In
December 2004, we entered into an exclusive five year agreement with Big Geyser,
Inc., to distribute our products in the New York City market. However, as
described above, we terminated this agreement in January 2006. We do not believe
that the termination of our agreement with Big Geyser will have a material
adverse impact on our operations. However, Big Geyser disputed our ability to
terminate the agreement for cause and commenced an arbitration proceeding
against us with the American Arbitration Association seeking damages. We agreed
to a settlement of this matter and it was paid in full in accordance with its
terms in February 2007.




We
were the co-defendant along with our Chairman in a civil suit filed in
Miami-Dade County Circuit Court under the caption Swan v. Salaman and Creative
Enterprises International, Inc. This case was settled in August
2007.





On or
about May 8, 2006 a default judgment was entered against us in the Supreme Court
of the State of New York for the County of New York (Index No. 600618/06) in the
amount of $43,835.06 in an action brought against it by Evins Communications,
Ltd. (“Evins”) purportedly commenced in February 2006 (and with respect to which
complaint we do not believe it was served). The basis for such action is not
known to the company. That judgment was later domesticated in Pennsylvania on or
about August 3, 2006 On May 7, 2007 an order to show cause was signed by Justice
York in the State Supreme Court ordering Evins to show cause why the default
should not be vacated. On May 29, 2007, the court decided not to vacate the
default, but scheduled further hearings on this issue. This case was settled in
September 2007.





In
December 2007, the Board of Directors authorized the issuance of 125,000 shares
to a consultant in consideration for investor relation services provided to the
company.




Break Even and Profitability





As
discussed in the overview to this analysis, we are developing a new product line
based on our Skinny brand which we began selling in the first quarter of 2007 in
addition to our current retail business for Skinny water. We have developed a
financial plan that shows that if our assumptions for the cost of marketing and
distribution are correct, we will be at breakeven in the third quarter of
calendar 2008 if we generate meaningful sales of our products. However, our
expectations may not be correct, our expenses may increase, our business
arrangements may not result in the level of sales that we anticipate and we
cannot offer any assurance that we will be able to achieve sufficient sales to
realize this target during next year.





Product Research and
Development





We intend
to expand our line of products, as described in the “Overview” section of this
Management’s Discussion and Analysis, at such time as management believes that
market conditions are appropriate. Management will base this determination on
the rate of market acceptance of the products we currently offer. We do not
engage in material product research and development activities. New products are
formulated based on our license arrangements with our suppliers and
licensors.





Marketing/Advertising





In 2007,
the company focused its marketing efforts in the development of new Skinny Water
flavors, new bottle labels, and outer shrink wrap packaging to merchandise
Skinny Water in 6 packs at the Target Stores around the country. The company’s
primary marketing and advertising budget was spent executing an aggressive
public relations campaign in coordination with a PR firm the company has
retained. The company was able to built its brand and build product awareness
through articles and mentions of Skinny Water in various print, radio, TV, and
internet media channels. The company attended several trade shows including
where it presented Skinny Water to beer wholesalers at their national trade show
as well as the national trade shows for all convenience and drug store
retailers.





Further,
the company developed print ads that ran in national and local publications and
further developed its online presence at its website www.skinnywater.com. In
2008, the company is focusing on in store merchandising and marketing support
materials for all of its distributors, and establishing sampling teams in
multiple locations at targeted events.




Additional
product development was started in late 2007 in the area of developing new
flavors, new functional formulas, and the development of Skinny Teas, Energy,
Sport, Antioxidant, and Vitamin Categories as part of the Skinny line of
functional beverages.





In
connection with our recent marketing campaign, we have invested over $721,442 of
our working capital during the 2007. These programs have included developing
marketing strategies and collateral material, conducting advertising initiatives
and investing in initial store placements. We expect to incur significant
marketing and advertising expenditures during 2008 to bring our new line of
products to market. We believe that marketing and advertising are critical to
our success.





Purchase or sale of plant or
significant equipment





As of the
date of this Report, we do not have any plans to purchase plant or significant
equipment.




30


Expected changes in the number of
employees





As of
December 31, 2007 we have 4 employees including, our executive officers. We
expect to hire an additional 10 employees in 2008.





Off-Balance
Sheet Arrangements





We have
not created, and are not party to, any special-purpose or off-balance sheet
entities for the purpose of raising capital, incurring debt or operating parts
of our business that are not consolidated into our financial statements and do
not have any arrangements or relationships with entities that are not
consolidated into our financial statements that are reasonably likely to
materially affect our liquidity or the availability of our capital
resources.





We have
entered into various agreements by which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification
provisions are included in contracts arising in the normal course of business
under which we customarily agree to hold the indemnified party harmless against
losses arising from a breach of the contract terms. Payments by us under such
indemnification clauses are generally conditioned on the other party making a
claim. Such claims are generally subject to challenge by us and to dispute
resolution procedures specified in the particular contract. Further, our
obligations under these arrangements may be limited in terms of time and/or
amount and, in some instances, we may have recourse against third parties for
certain payments made by us. It is not possible to predict the maximum potential
amount of future payments under these indemnification agreements due to the
conditional nature of our obligations and the unique facts of each particular
agreement. Historically, we have not made any payments under these agreements
that have been material individually or in the aggregate. As of December 31,
2007, we were not aware of any obligations under such indemnification agreements
that would require material payments.





Recent
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute.




Accordingly,
this Statement does not require any new fair value measurements. However, for
some entities, the application of this Statement will change current practice.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including financial
statements for an interim period within that fiscal year. The adoption of this
Statement is not expected to have a material impact on the Company’s financial
statements.




Item
7:  Financial Statements.




Our
audited financial statements for the fiscal year ended December 31, 2007 follows
Item 14 of this Annual Report on Form 10-KSB.




Item
8:  Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.




None





Item
8A: Controls and Procedures




Disclosure
Controls





As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including the
chief executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.




Based
upon the evaluation of our disclosure controls and procedures, and in light of
the material weakness described below under “Management’s Report on Internal
Control over Financial Reporting (as revised),” our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures were not effective, as of the end of the period covered by this
Annual Report, in ensuring that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.




31


Management’s Report on Internal
Control over Financial Reporting (as revised)




The
Company’s management is responsible for establishing and maintaining adequate
internal controls over financial reporting and disclosure controls and
procedures. Internal controls over financial reporting are designed to provide
reasonable assurance that the books and records reflect the transactions of the
Company and that established policies and procedures are carefully
followed.




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our Annual Report on Form 10-KSB for the year ended
December 31, 2007, filed with the SEC on April 14, 2008, management
concluded that our internal control over financial reporting was effective as of
December 31, 2007.





Subsequently,
management identified the following material weakness in internal control over
financial reporting, which existed as of December 31, 2007. In response to
a comment letter from the Securities and Exchange Commission relating to the
Company’s Annual Report on Form 10-KSB for the year ended December 31,
2007, management determined that its controls over the accounting for (i) the
modification of the terms of the conversion rate of certain convertible
debentures and (ii) for its employee stock options and common stock purchase
warrants were ineffective.





This
material weakness is attributed to inadequate training and technical expertise
of its accounting personnel with respect to the application of Statement of
Financial Accounting Standards Nos. 84 and 123(R), and related accounting
guidance, as well as insufficient documentation of policies and procedures.
 As a result of this material weakness, the Company’s management concluded
that an amendment of the Company’s consolidated financial results for 2007 and
2006 was appropriate. Management has revised its earlier assessment and has now
concluded that our internal control over financial reporting was not effective
as of December 31, 2007.





This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting. The
Company’s internal control over financial reporting was not subject to
attestation by the company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
company to provide only management’s report in this annual report.





Changes
in Internal Control over Financial Reporting





As
described in above, the Company’s management reevaluated the effectiveness of
the Company’s internal control over financial reporting and identified certain
material weaknesses in internal control over financial reporting as of
December 31, 2007. The Company has subsequently taken the following
measures, described herein, to remediate the weakness in its internal
controls:




●
              Engaged
      a full-time controller with requisite experience to perform month-end
      reviews and closing processes as well as provide additional oversight and
      supervision within the accounting
department;
 
 ●
              With
      the assistance of outside consultants, implemented the necessary training
      and education to ensure that all relevant employees involved in accounting
      for convertible securities as well as stock options and warrants
      understand and apply the appropriate accounting treatment in accordance
      with the requirements of FAS 84 and 123(R) and related accounting
      guidance;
 
 ●
              With
      the assistance of outside consultants, established written policies and
      procedures along with control matrices to ensure that account
      reconciliation and amounts recorded, as well as the review of these areas,
      are substantiated by detailed and contemporaneous documentary support and
      that reconciling items are investigated, resolved and recorded in a timely
      manner; and
 
 ●
              Separated
      the functions of our Chief Executive and Chief Financial Officers by
      appointing a new Chief Executive Officer which enabled our former CEO/CFO
      to serve solely as our Chief Financial Officer, which provides for
      improved separation of responsibilities and oversight with respect to our
      internal accounting function.




As a
result of these efforts, the previously identified material weaknesses in
internal control over financial reporting have been remediated. We are
continuing to actively assess and evaluate our most critical business and
accounting processes to identify further enhancements and improvement
opportunities.





Other
than the remedial actions described above, management believes that no change in
internal control over financial reporting occurred during 2007 that materially
affected, or is reasonable likely to materially affect, such internal control
over financial reporting.




32


Inherent
Limitations on Effectiveness of Controls




We do not
expect that disclosure controls or internal controls over financial reporting
will prevent all errors or all instances of fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. 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 its company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.




Item
8B.  Other Information




The
disclosure of the Company's current private placement contained in Item 1 of
this report is incorporated by reference herein.




PART
III




Item
9 Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.





The
following table summarizes the name, age and title of each of our current
directors and executive officers. Directors are elected annually by our
stockholders and hold office until their successors are elected and qualified,
or until their earlier resignation or removal. Our Board of Directors currently
consists of three members. On June 11, 2007, Kenneth Brice, the Company's
former Chief Financial Officer and a member of its board of directors, tendered
his resignation from his service with the Company, effective as of June 30,
2007. The Company's Chief Executive Officer, Donald J. McDonald, will
serve as its Chief Financial Officer until such time as the Company
appoints another individual to serve in such capacity. There are no family
relationships among our current executive officers and directors. Officers are
elected by and serve at the discretion of the Board of Directors.





Our
directors and officers are currently as follows:





Name
              
              Age
              
              PositionDonald
      J. McDonald
              
              55
              
              Chief
      Executive Officer, President and DirectorMichael
      Salaman
              
              46
              
              Chairman
      of the BoardMichael
      Reis
              
              63
              
              Interim
      Chief Operating Officer and
Director




Business
Experience





Donald J. McDonald. Donald J.
McDonald has over 25 years of experience as a senior executive and 19 years
experience in the cable television, broadcast and video production industries
with expertise in financial management, sales, marketing and corporate
governance. Since April 2002, Mr. McDonald has served as the President of Summit
Corporate Group, Inc., providing executive management and corporate advisory
services to a number of companies. Prior to that, from March 1999 to March 2002,
Mr. McDonald was the President of Directrix, Inc., a publicly-traded company
providing media production and distribution services. Prior to that, Mr.
McDonald was in an executive capacity for a number of companies including
National Media Corp., LSI Communications, Inc. and Spice Direct Entertainment
Co. Mr. McDonald graduated with a B.S. from Villanova University in
1974.





Michael Salaman.
    Michael Salaman has served as our Chairman since January
2002 and was our Chief Executive Officer from that date until March 8, 2006. Mr.
Salaman has over 20 years experience in the area of new product development and
mass marketing. Mr. Salaman began his business career as Vice President of
Business Development for National Media Corp., an infomercial marketing Company
in the United States from 1985-1993. From 1995-2001, Mr. Salaman started an
Internet company called American Interactive Media, Inc., a developer of set-top
boxes and ISP services. In 2002, Mr. Salaman founded Creative as a marketing and
distribution company.





Michael Reis. Since April
2003, Mr. Reis operates a consulting practice through M.R. Reis Co., pursuant to
which he provides business and accounting consulting services. Prior to that,
Mr. Reis was the Chief Financial Officer of Weaver Nut Co., a position he held
from June 2001 through April 2003. Prior to that, Mr. Reis began his career as
an accountant with Deloitte & Touche and thereafter held executive positions
with a number of companies including serving as the Chief Financial Officer of
Public Gas Co., the Chief Financial Officer of Waste Masters, Inc., the
President of Pollution Control Industries and a Senior Vice President of ENSI.
Mr. Reis graduated from Bloomfield College & Seminary in 1973 with a B.A. in
Accounting and Mathematics.




33


Except as
described below, none of our directors, officers, promoters or control persons,
if any, during the past five years was, to the best of our
knowledge:





•
   A general partner or executive officer of a business that had a
bankruptcy petition filed by or against it either at the time of the bankruptcy
or within the two years before the bankruptcy;





•
   Convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);





•
   Subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his or her involvement in any type of business, securities or banking
activities





•
   Found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or vacated.




Meetings
of Directors; Committees of the Board; Audit Committee Financial
Expert





Our Board
of Directors currently consists of three individuals. One of our current
directors is independent as defined in the Marketplace Rules of The NASDAQ Stock
Market.




During
the fiscal year ended December 31, 2007, our board of directors held three
meetings and acted by unanimous written consent on 16 occasions.




Due to
the fact that our Board currently consists of three persons, none of whom are
independent, we have not formally constituted any Board committees, including an
audit committee. None of our current directors qualifies as an “audit committee
financial expert” as defined in Item 401 under Regulation S-B of the Securities
Act of 1933. In connection with our transition to being a reporting company we
are actively seeking to expand our Board membership to include a majority of
independent directors, including at least one person that satisfies the
definition of “financial expert.”




The board
did not adopt any modifications to the procedures by which security holders may
recommend nominees to its board of directors.




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




Section
16(a) of the Securities Exchange Act of 1933, as amended, requires our directors
and executive officers, and persons who own more than 10% of our outstanding
Common Stock (collectively, “Reporting Persons”) to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our Common Stock. Reporting Persons are also required by SEC
regulations to furnish us with copies of all such ownership reports they file.
Based solely on our review of the copies of such reports received or written
communications from certain Reporting Persons, we believe that, during the 2006
fiscal year, all Reporting Persons complied with all Section 16(a) filing
requirements.




Code
of Ethics




Due to
the fact that we are currently seeking to expand our board of directors to
include independent directors on our board members, we have not currently
adopted a Code of Ethics. We intend to adopt a Code of Ethics, as defined by
Rule 406 of Regulation S-B, promptly upon the election of additional independent
members to our board of directors.




Board
of Advisors





On March
20, 2008, the Company established an advisory board to provide advice on matters
relating to the Company’s products. The Company will seek to appoint up to five
individuals to its advisory board. On March 20, 2008, the Company appointed the
following individuals to its advisory board: Pat Croce, Ron Wilson and Michael
Zuckerman.





The
Company also entered into a consulting agreement with Mr. Croce, pursuant to
which the Company agreed to issue Croce an aggregate of 2,000,000 shares of its
common stock in consideration of his agreement to serve on the Company’s
Advisory Board and for providing the marketing services for the Company’s
products. In addition to serving on the Advisory Board, Croce agreed to endorse
and advertise the Company’s products through a newly formed company. In
additional consideration for his agreement to provide the endorsement and
marketing services, the Company agreed to pay a royalty with respect to the sale
of its products that he endorses for the duration of his endorsement services.
The Company issued each of the other initial members of its advisory board
warrants to purchase 1,500,000 shares of Common Stock, exercisable for a period
of five years at a price of $0.05.




34


Item
10.  Executive Compensation




Summary
of Cash and Certain Other Compensation





The
following table sets forth information concerning the total compensation that we
have paid or that has accrued on behalf of each person who served as our
Chairman and Chief Executive Officer during the fiscal year ended December 31,
2007.





Summary
Compensation Table




Name and Principal
                        Position
                      
                      Year
                      
                      Salary
                        ($)
                      
                      
                      Bonus
                        ($)
                      
                      
                      Stock
                        Awards
                        ($)
                      
                      
                      Option
                        Awards
                        ($)
                      
                      
                      All Other
                        Compensation
                        ($)
                      
                      
                      Total ($)(a)
                      
                      (b)
                      
                      (c)
                      
                      
                      (d)
                      
                      
                      (e)
                      
                      
                      (f)
                      
                      
                      (i)
                      
                      
                      (j)Donald
      J. McDonald
                        Chief
      Executive Officer, Chief Financial Officer and President
    (1)
                      
                      2007
                      
                      $
                      98,333
                      
                      
                      $
                      0
                      
                      
                      
                      0
                      
                      
                      
                      136,931
                      
                      
                      
                      0
                      
                      
                      
                      235,2642006
                      
                      $
                      20,000
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      75,000
                      
                      
                      
                      0
                      
                      
                      $
                      95,000Michael
      Salaman,
                        Chairman
                      
                      2007
                      
                      $
                      100,000
                      
                      
                      $
                      0
                      
                      
                      
                      0
                      
                      
                      
                      202,500
                      
                      
                      
                      
                      
                      
                      
                      302,5002006
                      
                      
                      28,605
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      5,000
                      
                      
                      
                      33,065


____________


(1) Mr.
McDonald became our Chief Executive Officer and President on October 6, 2006 and
assumed the position of Chief Financial Officer as of June 30, 2007 following
the resignation of Mr. Kenneth Brice as Chief Financial Officer.




Director
Compensation





We do not pay any fees or other compensation to our directors for service
as a director or attendance at board meetings. We have not adopted any
retirement, pension, profit sharing, or other similar programs.





Employment
Agreements





We have
not entered into written employment agreements with any of our executive
officers. During the first 10 months for 2007 our Chairman and CEO were
compensated at a rate of $7,500 per month. On November 28, 2007, the Board of
Directors of the Company approved increases in the monthly compensation rates,
effective as of November 2007, payable to each of its Chairman, Chief Executive
Officer. The Chairman will receive compensation of $12,500 per month and a $700
dollar monthly automobile allowance; the CEO will receive compensation of
$11,667 dollars per month and a $700 monthly automobile allowance.





We also
agreed to negotiate employment agreements with both executives to reflect these
arrangements. We anticipate that these agreements will include a discretionary
bonus opportunity, a monthly automobile allowance, reimbursement for health and
life insurance policies, and certain additional benefits, including a severance
benefit of an amount to be determined which would be operative upon the
occurrence of a change in control of the Company and in the event that either of
the executives are terminated from their employment without cause. The Company
has not yet entered into employment agreements with these
individuals.




Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth certain information concerning outstanding equity
awards held by our Named Executive Officers as of the year ended December 31,
2007.


35





Option Awards
                                  
                                  Stock AwardsName
                                  
                                  Number
                                    of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Exercisable
                                  
                                  
                                  Number
                                    of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Unexercisable
                                  
                                  Equity Incentive
                                    Plan Awards:
                                    Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Unearned
                                    Options
                                    (#)
                                  
                                  Option
                                    Exercise
                                    Price
                                    ($)
                                  
                                  Option
                                    Expiration
                                    Date
                                  
                                  Number of
                                    Shares or
                                    Units of
                                    Stock That
                                    Have Not
                                    Vested
                                    (#)
                                  
                                  Market
                                    Value of
                                    Shares or
                                    Units of
                                    Stock That
                                    Have Not
                                    Vested
                                    ($)
                                  
                                  Equity
                                    Incentive Plan
                                    Awards:
                                    Number of
                                    Unearned
                                    Shares, Units
                                    or Other
                                    Rights That
                                    Have Not
                                    Vested
                                    (#)
                                  
                                  Equity
                                    Incentive
                                    PlanAwards:
                                    Market or
                                    Payout Value
                                    of Unearned
                                    Shares, Units
                                    or Other
                                    Rights That
                                    Have Not
                                    Vested
                                    ($)(a)
                                  
                                  (b)
                                  
                                  
                                  (c)
                                  
                                  (d)
                                  
                                  (e)
                                  
                                  (f)
                                  
                                  (g)
                                  
                                  (h)
                                  
                                  (i)
                                  
                                  (j)Donald
      J. McDonald
                                  
                                  
                                  855,625
                                  
                                  
                                  
                                  1,644,375
                                  
                                  
                                  
                                  
                                  .17
                                  
                                  10/6/11
                                  
                                  __
                                  
                                  __
                                  
                                  __
                                  
                                  __625,000
                                  
                                  
                                  
                                  1,875,000
                                  
                                  
                                  
                                  
                                  .08
                                  
                                  11/28/12
                                  
                                  __
                                  
                                  __
                                  
                                  __
                                  
                                  __Michael
      Salaman
                                  
                                  
                                  600,000
                                  
                                  
                                  
                                  2,400,000
                                  
                                  
                                  
                                  
                                  .25
                                  
                                  1/12/12
                                  
                                  __
                                  
                                  __
                                  
                                  __
                                  
                                  __750,000
                                  
                                  
                                  
                                  2,250,000
                                  
                                  
                                  
                                  
                                  .08
                                  
                                  11/28/12
                                  
                                  __
                                  
                                  __
                                  
                                  __
                                  
                                  __




Stock
Option Plan





Our Board
of Directors initially adopted our Employee Stock Option Plan (the “Plan”) on
November 16, 1998 and it was approved by our stockholders on December 21, 2001.
The Plan will terminate ten years from the date of its adoption by the Board,
unless sooner terminated. Our Board of Directors, on October 6, 2006,
unanimously approved and recommended for shareholder approval the amendment of
the Plan to increase the number of shares authorized for issuance there under
from 1,000,000 shares to 20,000,000 shares. The requisite vote of our
shareholders was obtained on November 15, 2006. Under our stock option plan, we
may grant incentive (“ISOs”) and non-statutory (“Non-ISOs”) options to
employees, non employee members of the Board of Directors and consultants and
other independent advisors who provide services to us. The maximum shares of
common stock which may be issued over the term of the plan shall not exceed
20,000,000 shares. As of December 31, 2007 , 12,325,000 options were issued and
outstanding.





Administration: The Plan is
administered by a committee delegated by the Board of Directors, or by the Board
of Directors itself (the “Committee”). Subject to the provisions of the Plan,
the Committee has discretion to determine the employee, consultant or director
to receive an award, the form of award and any acceleration or extension of an
award. Further, the Committee has complete authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, to determine
the terms and provisions of the respective award agreements (which need not be
identical), and to make all other determinations necessary or advisable for the
administration of the Plan.





Eligibility: Awards may be
granted to any of our employees or consultants or to non-employee members of the
Board of Directors or of any board of directors (or similar governing authority)
of any of our affiliates.




Types of Awards: Awards under
the Plan include incentive stock options and non-statutory stock options. Each
award will be evidenced by an instrument in such form as the Committee may
prescribe, setting forth applicable terms such as the exercise price and term of
any option or applicable forfeiture conditions or performance requirements for
any restricted stock grant. Except as noted below, all relevant terms of any
award will be set by the Committee in its discretion. Incentive stock options
may be granted only to eligible employees of the Company or any parent or
subsidiary corporation and must have an exercise price of not less than one
hundred percent (100%) of the fair market value of the Common Stock on the
date of grant (one hundred ten percent (110%) for incentive stock options
granted to any ten-percent (10%) shareholder). In addition, the term of an
incentive stock option may not exceed ten (10) years. Non-statutory stock
options must have an exercise price of not less than one hundred percent
(100%) of the fair market value of the Common Stock on the date of grant
and the term of any Non-statutory Stock Option may not exceed ten
(10) years. In the case of an incentive stock option, the amount of the
aggregate fair market value of Common Stock (determined at the time of grant)
with respect to which incentive stock options are exercisable for the first time
by an employee during any calendar year (under all such plans of his or her
employer corporation and its parent and subsidiary corporations) may not exceed
$100,000.





Effect of Significant Corporate
Events: In the event of a change in control, the Board shall have the
discretion to provide for any or all of the following: (i) the
acceleration, in whole or in part, of outstanding Stock Options, (ii) the
assumption of outstanding Stock Options, or substitution thereof, by the
acquiring entity and (iii) the termination of all Stock Options that
remaining outstanding at the time of the change of control. In the event of any
change in the outstanding shares of Common Stock through merger, consolidation,
sale of all or substantially all our property, or organization, an appropriate
and proportionate adjustment will be made in (i) the maximum numbers and
kinds of shares subject to the Plan, (ii) the numbers and kinds of shares
or other securities subject to the then outstanding awards, and (iii) the
exercise price for each share subject to then outstanding Stock Options. Should
any change be made to the common stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding common stock as a class, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
that can be issued under the Plan, and (ii) the number and/or class of
securities and the exercise price in effect under each outstanding
option.





Amendments to the Plan: The
Board of Directors may amend or modify the Plan at any time subject to the
rights of holders of outstanding awards on the date of amendment or
modification; provided, however, that the Board may not, without the consent of
the participant, reduce the number of shares subject to the award, change the
price of outstanding awards or adversely effect the provisions relating to an
award’s vesting and exercise rights.


36


Item
11.  Security Ownership




The
following table sets forth the beneficial ownership of our Common Stock as of
December 31, 2007, by (i) each director and each executive officer, (ii) and all
directors and executive officers as a group, and (iii) persons (including any
“group” as that term is used in Section 13(d)(3) of the Securities Exchange Act
of l934), known by us to be the beneficial owner of more than five percent of
its common stock. Shares of Common Stock subject to options exercisable within
60 days from the date of this table are deemed to be outstanding and
beneficially owned for purposes of computing the percentage ownership of such
person but are not treated as outstanding for purposes of computing the
percentage ownership of others. As of December 31, 2007, there were 93,822,225
shares issued and outstanding.





Shares of Common Stock
                                        Beneficially OwnedName and Address of Owner
                                      
                                      Number
                                      
                                      
                                      Percent (%)Officers
      and DirectorsMichael
      Salaman (1)
                                        c/o
      Skinny Nutritional Corp.
                                        3
      Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
                                      
                                      
                                      10,862,657
                                      
                                      
                                      
                                      11.3
                                      %Donald
      McDonald (2)c/o
      Skinny Nutritional Corporation3
      Bala Plaza East Suite # 117 Bala Cynwyd PA 19004
                                      
                                      
                                      2,250,000
                                      
                                      
                                      
                                      2.3
                                      %Michael
      Reis
                                        c/o Skinny Nutritional
      Corp.
                                        3
      Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
                                      
                                      
                                      521,125
                                      
                                      
                                      
                                      *All
      Directors and Officers as a Group (3 Persons)
                                      
                                      
                                      13,633,782
                                      
                                      
                                      
                                      13.6Other
      Beneficial OwnersCharles
      Hallinan
                                        P.O.
      Box 915, Bala Cynwyd, PA 19004
                                      
                                      
                                      5,011,015
                                      
                                      
                                      
                                      5.3
                                      %Yehuda
      Dachs
                                        P.O.
      Box 495, Lakewood, NJ 08701
                                      
                                      
                                      7,619,974
                                      
                                      
                                      
                                      7.9
                                      %


_____________________


*
            Denotes
      ownership percentage of less than 1%.(1)
            Based
      on information set forth in a Schedule 13D filed with the SEC on October
      16, 2006. Includes vested options to purchase 1,950,000 shares of common
      stock. Excludes unvested options to purchase 4,050,000 shares of common
      stock. Excludes 2,075,000 shares of restricted common stock granted on
      March 24, 2008.(2)
            Includes
      options to purchase 2,250,000 shares of Common Stock and excludes
      2,750,000   unvested options Excludes 2,075,000 shares of restricted
      common stock granted on March 24,
2008.




Item
12:  Certain Relationships and Related Transactions.




For
information concerning employment agreements with, and compensation of, our
executive officers and directors, see the disclosure in the section of this
Annual Report on Form 10-KSB captioned “Executive Compensation.”





We had
obtained a $500,000 letter of credit with Wachovia Bank to secure our purchase
orders with Agrokor, a former supplier. This letter of credit was secured by
personal assets of our Chairman and bore interest at a rate of 7.5% per annum.
We borrowed $314,000 against this letter of credit in placing our initial order
with Agrokor for 1,200,000 bottles of product. The letter of credit was
originally supported by a $500,000 demand note (line of credit) issued to
Wachovia through Madison Bank. On June 1, 2005, our obligations were transferred
to Madison Bank. The interest on the demand note is one percent above the prime
rate and the outstanding balance is due on the bank’s demand. On January 4,
2007, we entered into a Forbearance Agreement with Madison Bank concerning the
repayment of this obligation. Pursuant to the Forbearance Agreement, we and the
Bank agreed to the following repayment schedule for the outstanding balance due:
(a) an initial amount of $17,000 was paid upon execution of the Agreement; (b)
monthly installments of $5,000 will be payable by the first day of each month
through May 2007; and (c) a final payment of the remaining outstanding balance
due will be due on or before May 31, 2007. Interest will continue to accrue on
the note at the rate of 1% above the Wall Street Journal Prime Rate. In
addition, in order to secure the repayment of the note and our obligations under
the Agreement, our Chairman pledged certain shares of common stock of other
publicly traded companies held by him, we granted the Bank a first priority
security interest in its accounts and other assets and our Chairman and certain
of his affiliates provided personal guarantees for the loan amount. In the event
the aggregate market value of the pledged securities is less than $350,000, then
the Bank may exercise its rights to accelerate repayment of the note and
otherwise take such actions as is permitted under the Agreement to protect its
security interest in the collateral.




37


On April
4, 2007, the Company closed on a secure loan arrangement with Valley Green Bank
pursuant to which it will receive funds in the amount of $350,000. The Company
has applied this amount to satisfy its obligations to Madison Bank. Interest
will be charged on the unpaid principal of this new loan arrangement until the
full amount of principal has been paid at the rate of 8.25% per annum. The
Company was obligated to repay this new loan in full immediately on the bank’s
demand, but in no event later than March 20, 2008. Since that date we have been
in discussions with the bank to extend the term of the loan. No assurances,
however, can be given that the bank will extend the loan. Interest payments are
due on a monthly basis. Pursuant to this arrangement with Valley Green Bank, the
loan is secured by collateral consisting of a perfected first priority pledge of
certain marketable securities held by the Company’s Chairman and entities with
which he is affiliated. The Company also agreed to a confession of judgment in
favor of the bank in the event it defaults under the loan agreements. The loan
agreements also require the consent of the bank for certain actions, including
incurring additional debt and incurring certain liens.




On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”). The agreement provides for an initial
funding limit of $300,000. As of December 31, 2007, we had received $485,058 of
funding through this arrangement. All accounts submitted for purchase must be
approved by UCF. The applicable factoring fee is 0.45% of the face amount of
each purchased account and the purchase price is 80% of the face amount. UCF
will retain the balance as a reserve, which it holds until the customer pays the
factored invoice to UCF. In the event the reserve account is less than the
required reserve amount, we will be obligated to pay UCF the shortfall. In
addition to the factoring fee, we will also be responsible for certain
additional fees upon the occurrence of certain contractually-specified events.
As collateral securing the obligations, we granted UCF a continuing first
priority security interest in all accounts and related inventory and
intangibles. Upon the occurrence of certain contractually-specified events, UCF
may require us to repurchase a purchased account on demand. In connection with
this arrangement, each of our Chairman and Chief Executive Officer agreed to
personally guarantee our obligations to UCF. The agreement will automatically
renew for successive one year terms until terminated. Either party may terminate
the agreement on three month’s prior written notice. We are liable for an early
termination fee in the event we fail to provide them with the required written
notice.




Item
13.  Exhibits





The
exhibits designated with an asterisk (*) are filed herewith. Certain portions of
exhibits marked with the symbol (#) have been granted confidential treatment by
the Securities and Exchange Commission. Such portions have been omitted and
filed separately with the Commission. Certain portions of exhibits marked with
the symbol (##) have been omitted and are subject to our request for
confidential treatment by the Securities and Exchange Commission. Such portions
have been omitted and filed separately with the Commission. All other exhibits
have been previously filed with the Commission and, pursuant to 17 C.F.R.
Sec.230.411, are incorporated by reference to the document referenced in
brackets following the descriptions of such exhibits.





Exhibit
      No.
              
              Description3.1
              
              Certificate
      of Incorporation, as amended (filed as Exhibit 3.1 to Registration
      Statement on Form SB-2 filed with the Commission on September 18,
      2002)3.1.1
              
              Certificate
      of Amendment to Articles of Incorporation (filed as Exhibit 3.1 to Current
      Report on Form 8-K filed on December 28, 2006).3.2
              
              Amended
      By-laws (filed as Exhibit 3.2 to Current Report on Form 8-K filed on
      November 13, 2006).4.1
              
              Specimen
      of Common Stock Certificate (filed as Exhibit 4.1 to Registration
      Statement on Form SB-2 filed with the Commission on September 18,
      2002).4.2
              
              Form
      of Warrants Issued March 30, 2004 (filed as Exhibit 4.2 to Registration
      Statement on Form 10-SB filed with the Commission on May 13,
      2005).4.3
              
              Form
      of Convertible Debentures issued during 2005 fiscal year (filed as Exhibit
      4.3 to Registration Statement on Form 10-SB filed with the Commission on
      October 19, 2005).4.4
              
              Form
      of Warrant granted upon conversion of Convertible Debentures (filed as
      Exhibit 4.4 to Registration Statement on Form 10-SB filed with the
      Commission on October 19,
2005).




38





4.5
              
              Form
      of Warrant issued in Private Sales of Securities (filed as Exhibit 4.5 to
      Registration Statement on Form 10-SB/A filed with the Commission on
      February 8, 2006).4.6
              
              Form
      of Convertible Note issued to our Chairman and certain other individuals
      as of March 20, 2006 (filed as Exhibit 4.6 to Registration Statement on
      Form 10-SB/A filed with the Commission on March 23,
  2006).4.7
              
              Form
      of Convertible Note issued June 5, 2006 (filed as Exhibit 4.1 to Current
      Report on Form 8-K dated June 9, 2006.4.8
              
              Note
      Modification Agreement between the Company and James Robb (filed as
      Exhibit 4.1 to Quarterly Report on Form 10-QSB for the quarter ended
      September 30, 2006).4.9
              
              Form
      of Convertible Note issued in October 2006 (filed as Exhibit 4.9 to Annual
      Report on Form 10-KSB for the year ended December 31,
  2006.4.10
              
              Form
      of Warrant issued in February 2007 pursuant to Distribution Agreement
      (filed as Exhibit 4.10 to Annual Report on Form 10-KSB for the year ended
      December 31, 2006.4.11
              
              Secured
      Note payable to Valley Green Bank (filed as Exhibit 4.11 to Quarterly
      Report on Form 10-QSB for the quarter ended March 31,
    2007).




10.1
              
              Agreement
      and Plan of Reorganization with Inland Pacific Resources, Inc. (filed as
      Exhibit 10.2 to Registration Statement on Form SB-2/A filed with the
      Commission on January 29, 2003).10.2#
              
              Agreement
      with Jamnica, d.d., as amended, dated July 21, 2004 (filed as Exhibit 10.2
      to Registration Statement on Form 10-SB/A filed with the Commission on
      February 8, 2006).10.3#
              
              Agreement
      with Peace Mountain Natural Beverages Corporation, dated August 1, 2004
      (filed as Exhibit 10.3 to Registration Statement on Form 10-SB/A filed
      with the Commission on February 8, 2006).10.4#
              
              Agreement
      with Interhealth Nutraceuticals, Inc., dated June 9, 2004 (filed as
      Exhibit 10.4 to Registration Statement on Form 10-SB/A filed with the
      Commission on February 8, 2006).10.5#
              
              Agreement
      with Big Geyser, Inc., dated December 14, 2004 (filed as Exhibit 10.5 to
      Registration Statement on Form 10-SB/A filed with the Commission on
      February 8, 2006).10.6
      (1)
              
              Amended
      Stock Option Plan and Form of Option Award (filed as Exhibit B to
      definitive Information Statement dated December 5,
  2006).10.7
              
              Demand
      Note held by Madison Bank (filed as Exhibit 10.7 to Registration Statement
      on Form 10-SB/A filed with the Commission on December 16,
      2005).10.8
              
              Lease
      Agreement dated September 12, 2005 between the Company and Rose Hill
      Property Assoc., Inc. (filed as Exhibit 10.8 to Registration Statement on
      Form 10-SB filed with the Commission on October 19,
  2005).10.9#
              
              Agreement
      with Exclusive Beverage Distributors dated March 20, 2006 (filed as
      Exhibit 10.9 to our Annual Report on Form 10-KSB for the year ended
      December 31, 2005).10.10
              
              Separation
      Agreement between the Company and Christopher Durkin (filed as Exhibit
      10.1 to Current Report on Form 8-K filed October 11,
  2006).10.11##
              
              Amendment
      Agreement between the Company and Peace Mountain Natural Beverages Corp.
      (filed as an Exhibit to Annual Report on Form 10-KSB for
      the year ended December 31, 2006).10.12
              
              Termination
      Agreement between the Registrant, Jamnica, d.d. and Jana North America,
      Inc. (filed as an Exhibit to Annual Report on Form
      10-KSB for the year ended December 31, 2006).10.13
              
              Forbearance
      Agreement between the Company and Madison Bank (filed as Exhibit 10.1 to
      Current Report on Form 8-K filed on January 10, 2007).10.14##
              
              Distribution
      Agreement with Geltech LLC dated February 27, 2007. (filed as an
      Exhibit to Annual Report on Form 10-KSB for the year
      ended December 31,
2006).




39





10.15##
              
              Letter
      Agreement with Pasqual Croce (filed as Exhibit 10.15 to Annual
      Report on Form 10-KSB for the year ended December 31,
      2007).21
              
              Subsidiaries
      of Small Business Issuer (filed as Exhibit 21 to Annual Report on Form
      10-KSB for the year ended December 31, 2006).31.1*
              
              Certification
      of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
      15(d) -14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2*
              
              Certification
      of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)
      and 15(d) -14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2*
              
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


____________


(1)
   Indicates a management plan or contract.




Item
14.  Principal Accountant Fees and Services.




We have
selected Connolly, Grady & Cha, PC, as our independent accountants for the
current fiscal year. The audit services to be provided by Connolly, Grady &
Cha consist of examination of financial statements, services relative to filings
with the Securities and Exchange Commission, and consultation in regard to
various accounting matters. The financial statements included with this Annual
Report have been audited by Connolly, Grady & Cha. The following table
presents fees for professional audit services rendered by Connolly, Grady &
Cha for each of the two fiscal years set forth below, and fees billed for other
services performed for the years ended December 31, 2007 and 2006. Fees for
professional services by our independent auditors for the fiscal years 2007 and
2006 in each of the following categories are as follows:




Year Ended
                        December 31, 2007
                      
                      
                      Year Ended
                        December 31, 2006Audit
      Fees (1)
                      
                      $
                      25,000
                      
                      
                      $
                      25,000Audit-Related
      Fees (2)
                      
                      
                      0
                      
                      
                      
                      0Tax
      Fees (3)
                      
                      
                      10,000
                      
                      
                      
                      10,000All
      Other Fees (4)
                      
                      
                      0
                      
                      
                      
                      0Total
                      
                      $
                      35,000
                      
                      
                      $
                      35,000


______________


(1)
            Audit
      services consist of audit work performed in the preparation of financial
      statements for the fiscal year and for the review of financial statements
      included in Quarterly Reports on Form 10-Q during the fiscal year, as well
      as work that generally only the independent auditor can reasonably be
      expected to provide, including consents for registration statement flings
      and responding to SEC comment letters on annual and quarterly
      filings.




(2)
            Audit-related
      services consist of assurance and related services that are traditionally
      performed by the independent auditor, including due diligence related to
      mergers and acquisitions, agreed upon procedures report and accounting and
      regulatory consultations.




(3)
            Tax
      services consist of all services performed by the independent auditor’s
      tax personnel, except those services specifically related to the audit of
      the financial statements, and includes fees in the areas of tax
      compliance, tax planning, and tax
advice.




(4)
            Other
      services consist of those service not captured in the other
      categories.




We have
determined that the services provided by our independent auditors and the fees
paid to them for such services has not compromised the independence of our
independent auditors.




As our
Board of Directors currently consists solely of three individuals, only one of
whom is independent, the engagement of our independent accountants and auditors
is approved by our Board of Directors acting as the audit committee.
Accordingly, our entire Board, he has responsibility for appointing, setting
compensation and overseeing the work of the independent auditor.





Pursuant
to Section 10A(i) (2) of the Securities Exchange Act of 1934, we are
responsible for listing the non-audit services approved by our Board (acting as
the Audit Committee) to be performed by our independent registered public
accounting firm. During the fourth quarter of fiscal 2005, we did not
pre-approve the performance of any non-audit services by our independent
registered public accounting firm.




40


Skinny Nutritional
Corp
 and
Subsidiary
 December 31,
2007
 
 Contents
 
 PageIndependent
      Auditor's Report
                      F-1Financial
      StatementsConsolidated
      Balance Sheet, December 31, 2007
                      F-2Consolidated
      Statements of Operations
                      F-4For
      the Years Ended December 31, 2007, 2006 and 2005Consolidated
      Statements of Stockholders' Equity (Deficit)
                      F-5For
      the Year Ended December 31, 2007 and 2006Consolidated
      Statements of Cash Flows
                      F-7For
      the Years Ended December 31, 2007 and 2006 and 2005Notes
      to Consolidated Financial Statements
                      F-9
  41
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 Skinny
Nutritional Corp and Subsidiary
 3 Bala
Plaza – Suite 101
 Bala
Cynwyd, PA 19004
  We have
audited the accompanying consolidated balance sheets of Skinny Nutritional Corp
(a Nevada Corporation) and Subsidiary as of December 31, 2007 and 2006 and the
related consolidated statements of operations, stockholders’ equity (deficit)
and cash flows for each of the years in the three year period ended December 31,
2007.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated 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 audit 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
 
 In our
report dated April 14, 2008, we expressed a qualified opinion because the
Company had not valued their stock options and warrants as described by
generally accepted accounting principles and as described in the following
paragraph, the Company subsequently identified a misstatement in its annual
consolidated financial statement.  Accordingly, management has revised
its financial reporting as of December 31, 2007.
 
 In its
revised assessment as of December 31, 2007, management has concluded that the
controls in place relating to the method of accounting for stock options and
warrants and for convertible debt conversions was not operating effectively to
provide reasonable assurance that the provisions of FASB Interpretation No. 123R
“Share Based Payments” and FASB 84 “Induced Conversions of Convertible Debt” was
accounted for correctly.  As a result, on March 30, 2009, the Company
approved the restatement of the Company’s previously issued consolidated
financial statements for the years ended December 31, 2007 and
2006.  The restatement is described in note 2 to the consolidated
financial statements.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Skinny Nutritional Corp and
Subsidiary as of December 31, 2007 and 2006 and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 2007 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 3 to the financial
statements, the Company has incurred losses since inception and has not yet been
successful in establishing profitable operations.  Further, the
Company has current liabilities in excess of current assets.  These
factors raise substantial doubt about the ability of the Company to continue as
a going concern.  Management’s plans in regards to these matters are
also described in Note 3.  The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
 
 /s/ Connolly, Grady &
Cha, P.C.
 
 Certified
Public Accountants
 Philadelphia,
Pennsylvania
 
 April 14,
2008
 (except
for note 2, as to which the date is March 30, 2009)
 F-1
  Skinny Nutritional Corp and
Subsidiary
 
 Consolidated Balance
Sheet
 
 December 31,
2007
  ASSETS
  December31,2007
                            
                            
                            2006CURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            14,247
                            
                            
                            $
                            118,683Cash
      - escrow, restricted
                            
                            
                            3,697
                            
                            
                            
                            56,485Accounts
      receivable
                            
                            
                            401,487
                            
                            
                            
                            3,406Inventory
                            
                            
                            86,575Prepaid
      expenses
                            
                            
                            3,180
                            
                            
                            
                            46,460Total
      current assets
                            
                            
                            509,186
                            
                            
                            
                            225,034FIXED
      ASSETSFixed
      assets
                            
                            
                            0
                            
                            
                            
                            9,973Accumulated
      depreciation
                            
                            
                            0
                            
                            
                            
                            (3,699
                            )Total
      fixed assets
                            
                            
                            0
                            
                            
                            
                            6,274OTHER
      ASSETSSecurity
      deposits
                            
                            
                            0
                            
                            
                            
                            0TOTAL
      ASSETS
                            
                            $
                            509,186
                            
                            
                            $
                            231,308
  F-2
  Skinny Nutritional Corp and
Subsidiary
 Consolidated Balance
Sheet
 
 LIABILITIES AND
STOCKHOLDERS’ DEFICIT
  December 31,2007
                                      
                                      2006CURRENT LIABILITIESCurrent
      maturities of long term debt
                                      
                                      $
                                      220,936
                                      
                                      
                                      $
                                      $300,283Line
      of credit
                                      
                                      
                                      340,000
                                      
                                      
                                      
                                      314,533Accounts
      payable
                                      
                                      
                                      642,297
                                      
                                      
                                      
                                      296,596Accrued
      expenses
                                      
                                      
                                      57,500
                                      
                                      
                                      
                                      30,000Accrued Interest Payable
                                      
                                      
                                      85,271
                                      
                                      
                                      
                                      118,906Revolving Line of Credit
                                      
                                      
                                      317,561Current
      portion of convertible notes
                                      
                                      
                                      310,000
                                      
                                      
                                      
                                      2,515,000Settlements
      payable
                                      
                                      
                                      104,350
                                      
                                      
                                      
                                      180,000Total
      current liabilities
                                      
                                      
                                      2,077,915
                                      
                                      
                                      
                                      3,755,318LONG TERM LIABILITIESLong-term
      debt, net of current portionConvertible
      notes payable, net of current portionTotal
      long term liabilitiesSTOCKHOLDERS’ DEFICITPreferred
      stock, $.001 par value, 1,000,000 sharesauthorized,
      none issued and outstandingCommon
      stock, $.001 par value, 250,000,000 sharesauthorized,
      93,822,225 shares issued and outstandingat
      December 31, 2007 and 41,473,328 issued andoutstanding
      at December 31, 2006
                                      
                                      
                                      93,822
                                      
                                      
                                      
                                      41,473Additional
      paid-in capital
                                      
                                      
                                      14,334,983
                                      
                                      
                                      
                                      6,733,408(Deficit)
      accumulated during the development stage
                                      
                                      
                                      (15,997,534
                                      )
                                      
                                      
                                      (10,298,891
                                      )Total
      stockholders’ deficit
                                      
                                      
                                      (1,568,729
                                      )
                                      
                                      
                                      (3,524,010
                                      )TOTAL
      LIABILITIES ANDSTOCKHOLDERS’
      DEFICIT
                                      
                                      $
                                      509,186
                                      
                                      
                                      $
                                      231,308
 
 See
accompanying notes and accountant’s report.
  F-3
  Skinny Nutritional Corp and
Subsidiary
 Consolidated Statements of
Operations
 
 For
      the Years Ended December 31,2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005Revenue
      - net
                                      
                                      $
                                      752,825
                                      
                                      
                                      $
                                      628,380
                                      
                                      
                                      $
                                      514,146Cost
      of goods sold
                                      
                                      
                                      532,812
                                      
                                      
                                      
                                      576,882
                                      
                                      
                                      
                                      456,270Gross
      profit
                                      
                                      
                                      220,013
                                      
                                      
                                      
                                      51,498
                                      
                                      
                                      
                                      57,876ExpensesMarketing
      and advertising
                                      
                                      
                                      721,442
                                      
                                      
                                      
                                      394,949
                                      
                                      
                                      
                                      1,307,186General
      and administrative
                                      
                                      
                                      1,715,218
                                      
                                      
                                      
                                      1,894,768
                                      
                                      
                                      
                                      1,950,320Total
      expenses
                                      
                                      
                                      2,436,660
                                      
                                      
                                      
                                      2,289,717
                                      
                                      
                                      
                                      3,257,506Net
      (loss) from operations
                                      
                                      
                                      (2,216,647
                                      )
                                      
                                      
                                      (2,238,219
                                      )
                                      
                                      
                                      (3,199,630
                                      )Other
      income (expense)Loss
      from disposition of fixed assets
                                      
                                      
                                      (9,690
                                      )
                                      
                                      
                                      (114,887
                                      )Other
      Income
                                      
                                      
                                      20,172Interest
      expense
                                      
                                      
                                      (120,514
                                      )
                                      
                                      
                                      (32,932
                                      )
                                      
                                      
                                      (230,216
                                      )Debt
      conversion expense
                                      
                                      
                                      (3,371,964
                                      )
                                      
                                      
                                      82,592Total
      other expenses
                                      
                                      
                                      (3,481,996
                                      )
                                      
                                      
                                      (65,227
                                      )
                                      
                                      
                                      (230,216
                                      )Income
      TaxesCurrent
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-Deferred
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-Total
      income taxes
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-
                                      
                                      
                                      
                                      -0-Net
      (Loss)
                                      
                                      
                                      (5,698,643
                                      )
                                      
                                      $
                                      (2,303,446
                                      )
                                      
                                      $
                                      (3,429,846
                                      )(Loss)
      per common share
                                      
                                      $
                                      (.07
                                      )
                                      
                                      $
                                      (.10
                                      )
                                      
                                      $
                                      (.26
                                      )
  See
accompanying notes and accountant’s report.
  F-4
  Skinny Nutritional Corp and
Subsidiary
 Statement of Stockholders’
Equity (Deficit)
 For The Years Ended December
31, 2007 and 2006
  Additional
                                                      
                                                      
                                                      StockCommon Stock
                                                      
                                                      
                                                      Paid-In
                                                      
                                                      
                                                      Subscription
                                                      
                                                      
                                                      AccumulatedShares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Capital
                                                      
                                                      
                                                      Receivable
                                                      
                                                      
                                                      DeficitBalance,
      December 31, 2005
                                                      
                                                      
                                                      15,115,000
                                                      
                                                      
                                                      $
                                                      15,115
                                                      
                                                      
                                                      $
                                                      4,754,303
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      
                                                      $
                                                      (7,995,445
                                                      )Conversion
      of convertible debt intocommon
      shares at $.40 per share
                                                      
                                                      
                                                      302,500
                                                      
                                                      
                                                      
                                                      303
                                                      
                                                      
                                                      
                                                      120,697Issuance
      of common stockfor
      cash at $.40 per share
                                                      
                                                      
                                                      687,500
                                                      
                                                      
                                                      
                                                      687
                                                      
                                                      
                                                      
                                                      274,313Issuance
      of common stockfor
      cash at $.05 per share
                                                      
                                                      
                                                      8,000,000
                                                      
                                                      
                                                      
                                                      8,000
                                                      
                                                      
                                                      
                                                      392,000Issuance
      of common stockfor
      cash at $.075 per share
                                                      
                                                      
                                                      3,558,467
                                                      
                                                      
                                                      
                                                      3,558
                                                      
                                                      
                                                      
                                                      263,345Issuance
      of common stock forservices
      at $.01 per share
                                                      
                                                      
                                                      900,000
                                                      
                                                      
                                                      
                                                      900
                                                      
                                                      
                                                      
                                                      8,100Conversion
      of loans intocommon
      shares at $.05per
      share
                                                      
                                                      
                                                      12,840,000
                                                      
                                                      
                                                      
                                                      12,840
                                                      
                                                      
                                                      
                                                      629,160Interest
      shares on aboveconversion
      at $.144 per share
                                                      
                                                      
                                                      69,861
                                                      
                                                      
                                                      
                                                      70
                                                      
                                                      
                                                      
                                                      9,990Warrants
      issued in exchangefor
      services
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      85,200Options
      issued in exchangefor
      services
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      196,300Net
      Loss for year endedDecember
      31, 2006
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,303,446
                                                      )Balance,
      December 31, 2006
                                                      
                                                      
                                                      41,473,328
                                                      
                                                      
                                                      
                                                      41,473
                                                      
                                                      
                                                      
                                                      6,733,408
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      (10,298,891
                                                      )
 
 (Continued)
  F-5
  Skinny Nutritional Corp and
Subsidiary
 Statement of Stockholders’
Equity (Deficit)
 For The Years Ended December
31, 2007 and 2006
  Common Stock
                                                          
                                                          
                                                          Additional
                                                            Paid-In
                                                          
                                                          
                                                          Stock
                                                            Subscription
                                                          
                                                          
                                                          AccumulatedShares
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Capital
                                                          
                                                          
                                                          Receivable
                                                          
                                                          
                                                          DeficitBalance,
      December 31, 2006
                                                          
                                                          
                                                          41,473,328
                                                          
                                                          
                                                          
                                                          41,473
                                                          
                                                          
                                                          $
                                                          6,733,408
                                                          
                                                          
                                                          $
                                                          
                                                          
                                                          
                                                          $
                                                          (10,298,891
                                                          )Issuance
      of Common Stock for CashAt
      .075 Cents per Share less $355,602 in costs for issuing the
      stock
                                                          
                                                          
                                                          15,848,179
                                                          
                                                          
                                                          
                                                          15,849
                                                          
                                                          
                                                          
                                                          816,162Conversion
      of convertible debt intoCommon
      shares at $.50 per share
                                                          
                                                          
                                                          40,000
                                                          
                                                          
                                                          
                                                          40
                                                          
                                                          
                                                          
                                                          19,960Conversion
      of convertible debt intoCommon
      shares at $.10 per share plus debt conversion costs of
      $3,042,525
                                                          
                                                          
                                                          17,950,000
                                                          
                                                          
                                                          
                                                          17,950
                                                          
                                                          
                                                          
                                                          4,819,575Conversion
      of convertible debt intoCommon
      shares at $.075 per share plus debt conversion costs of
      $227,939
                                                          
                                                          
                                                          3,013,333
                                                          
                                                          
                                                          
                                                          3,013
                                                          
                                                          
                                                          
                                                          450,926Conversion
      of convertible debt intoCommon
      shares at $.05 per share plus debt conversion costs of
      $101,500
                                                          
                                                          
                                                          1,600,000
                                                          
                                                          
                                                          
                                                          1,600
                                                          
                                                          
                                                          
                                                          179,900Issuance
      of Common StockFor
      Note and Interest
                                                          
                                                          
                                                          2,629,720
                                                          
                                                          
                                                          
                                                          2,630
                                                          
                                                          
                                                          
                                                          133,314Issuance
      of Common StockIn
      Exchange of Services @.075
                                                          
                                                          
                                                          1,458,333
                                                          
                                                          
                                                          
                                                          1,458
                                                          
                                                          
                                                          
                                                          107,920Issuance
      of Common StockPer
      Reset Agreement
                                                          
                                                          
                                                          9,809,332
                                                          
                                                          
                                                          
                                                          9,809
                                                          
                                                          
                                                          
                                                          (9,809
                                                          )Options
      Issued on Exchange ofServices
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          232,550Capitalize
      Inventory Balances
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          18,604Warrants
      Issued for Services
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          832,473Net
      loss for the year endedDecember
      31, 2007
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (5,698,643
                                                          )Balance,
      December 31, 2007
                                                          
                                                          
                                                          93,822,225
                                                          
                                                          
                                                          
                                                          93,822
                                                          
                                                          
                                                          
                                                          14,334,983
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          (15,997,534
                                                          )
  See
accompanying notes and accountant's report.
  F-6
  Skinny Nutritional Corp and
Subsidiary
 Statements of Cash
Flows
 
 Increase
(Decrease) in Cash and Cash Equivalents
 
 For the Years Ended December
      31,2007
                      
                      
                      2006
                      
                      
                      2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                      
                      $
                      (5,698,643
                      )
                      
                      $
                      (2,303,446
                      )
                      
                      $
                      (3,429,846
                      )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
                      
                      
                      
                      
                      
                      
                      2,740
                      
                      
                      
                      13,904Loss
      from disposition of fixed assets
                      
                      
                      6,274
                      
                      
                      
                      114,887Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      9,000Stock
      issued for service
                      
                      
                      109,378Warrants
      issued for services
                      
                      
                      832,473
                      
                      
                      
                      85,200Stock
      options issued for services
                      
                      
                      232,550
                      
                      
                      
                      196,300Debt
      conversion costs
                      
                      
                      3,371,964Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
                      
                      
                      (398,081
                      )
                      
                      
                      68,471
                      
                      
                      
                      (71,877
                      )Inventories
                      
                      
                      (67,971
                      )
                      
                      
                      193,082
                      
                      
                      
                      (193,082
                      )Prepaid
      expenses
                      
                      
                      43,280
                      
                      
                      
                      51,418
                      
                      
                      
                      (97,878
                      )Other
      assets
                      
                      
                      
                      
                      
                      
                      11,790
                      
                      
                      
                      (11,790
                      )Increase
      (decrease) in:Accounts
      payable
                      
                      
                      345,701
                      
                      
                      
                      (219,659
                      )
                      
                      
                      342,588Accrued
      expenses
                      
                      
                      27,500
                      
                      
                      
                      30,000Accrued
      interest
                      
                      
                      (33,635
                      )
                      
                      
                      (85,598
                      )
                      
                      
                      202,134Settlements
      payable
                      
                      
                      (75,650
                      )
                      
                      
                      180,000Net
      cash used in operating activities
                      
                      
                      (1,304,860
                      )
                      
                      
                      (1,665,815
                      )
                      
                      
                      (3,245,847
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of fixed assets
                      
                      
                      
                      
                      
                      
                      (3,507
                      )
                      
                      
                      (121,342
                      )Net
      cash used in investing activities
                      
                      
                      
                      
                      
                      
                      (3,507
                      )
                      
                      
                      (121,342
                      )
 
 (Continued)
  F-7
  Skinny Nutritional Corp and
Subsidiary
 Statements of Cash
Flows
 
 Increase
(Decrease) in Cash and Cash Equivalents
 
 For the Years Ended December
      31,2007
                              
                              
                              2006
                              
                              
                              2005CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      (payments) from stockholders loans (net)
                              
                              $
                              
                              
                              
                              $
                              
                              
                              
                              $
                              25,324Contributed
      capital
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              906,670Proceeds
      (payments) from convertible debenture,net
      of conversions
                              
                              
                              (83,999
                              )
                              
                              
                              (241,000
                              )
                              
                              
                              2,636,000Proceeds
      (payments) from advances
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (507,750
                              )Issuance
      of Common Stock for Note and Interest
                              
                              
                              135,944Proceeds
      from notes payable
                              
                              
                              220,936Payment
      from long-term debt
                              
                              
                              (300,283
                              )
                              
                              
                              173,747
                              
                              
                              
                              64,036Proceeds
      from Line of Credit
                              
                              
                              25,467
                              
                              
                              
                              
                              
                              
                              
                              314,533Proceeds
      from Revolving Line of Credit
                              
                              
                              317,560Issuance
      of common stock
                              
                              
                              832,011
                              
                              
                              
                              1,834,963
                              
                              
                              
                              1,830Net
      cash provided in financing activities
                              
                              
                              1,147,636
                              
                              
                              
                              1,767,710
                              
                              
                              
                              3,440,643NET
      INCREASE (DECREASE) IN CASH
                              
                              
                              (157,224
                              )
                              
                              
                              98,388
                              
                              
                              
                              73,454Cash
      and cash equivalents, beginning of period
                              
                              
                              175,168
                              
                              
                              
                              76,780
                              
                              
                              
                              3,326CASH
      AND CASH EQUIVALENTS,END
      OF PERIOD
                              
                              $
                              17,944
                              
                              
                              $
                              175,168
                              
                              
                              $
                              76,780SUPPLEMENTAL
      DISCLOSUREINVESTING
      AND FINANCING ACTIVITIESCash
      paid during the year for interest
                              
                              $
                              20,035
                              
                              
                              $
                              32,932
                              
                              
                              $
                              174,756
  See
accompanying notes and accountant's report.
  F-8
 
 Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 1.
              ORGANIZATION
      AND OPERATIONS
  Skinny
      Nutritional Corp (the “Company”), formerly Creative Enterprises
      International, Inc., Inland Pacific Resources, Inc., Sahara Gold
      Corporation and Parvin Energy, Inc., was organized June 20, 1984 as a Utah
      corporation. On July 26, 1985, the Company changed its domicile to a
      Nevada corporation.
  The
      Company has one wholly owned subsidiary, Creative Enterprises, Inc. formed
      in fiscal 2001. Creative Enterprises, Inc. owns Creative Partners
      International, LLC formed in fiscal
2001.
 
 On
      November 15, 2006, holders of approximately 53% of the Company’s issued
      and outstanding Common Stock consented in writing to the adoption of
      resolutions approving (1) amendments to the Company’s Articles of
      Incorporation to (a) change the Company’s corporate name to “Skinny
      Nutritional Corp.” and (b) increase the number of authorized shares of
      common stock 250,000,000 shares and (2) an amendment to the Company’s
      Employee Stock Option Plan to increase the number of options in the plan
      to 20,000,000.
 
 The
      Company had secured an exclusive North American license and distributor
      agreement with Jamnica, d.d. for Jana water and has obtained the exclusive
      licensing rights to Skinny Water. The term of the agreement with Jamnica
      was for an initial term of one year from the date the Company receives
      certain government approvals; this agreement automatically renews
      thereafter subject to the Company’s achievement of revenue targets. During
      the quarter ended December 31, 2006, the Company ended its agreement with
      Jamnica by returning the unsold inventory and settling with Jamnica for
      receivables owed the Company and certain accounts
  payable.
 
 The
      Company has obtained the exclusive licensing rights to Skinny Water from
      Peace Mountain Natural Beverages Corp., along with certain associated
      trademarks. The term of the agreement with Peace Mountain is for three
      years and self renews unless terminated. The Company has an agreement with
      Interhealth Nutraceuticals, on a non-exclusive basis to sell, market,
      distribute and package Super Citrimax, the active ingredient in Skinny
      Water. The term of this agreement is in perpetuity unless terminated by
      either party.
  2.           RESTATEMENT
OF FINANCIAL STATEMENTS
 
 The
Company is filing this Form 10KSB/A to restate its financial statements in order
to change its method of accounting for convertible debentures. The Company,
after consulting with its independent registered public accounting firm,
concluded that the Company should correct an error in the Company’s accounting
and disclosures for its convertible debentures and options and warrants. This
conclusion was reached following a thorough evaluation of the Company’s
accounting treatment of such securities in response to a comment letter from the
Staff of the Division of Corporation Finance of the Securities and Exchange
Commission (“SEC”) relating to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007.
 
 This
Amendment is being filed to reflect restatements of (i) the Company’s
consolidated balance sheets at December 31, 2007 and December 31,
2006, and (ii) the Company’s consolidated statements of operations and cash
flows for the year ended December 31, 2007, and the notes related thereto.
The Amendment will reflect an adjustment to the beneficial conversion feature of
certain previously outstanding convertible debentures (the “Debentures”) to give
effect to the reduction of the conversion rate in accordance with FAS 84. The
effect of this adjustment, as is shown in this Amendment is to debit debt
conversion expense in an amount of $3,371,964 and to credit additional paid in
capital by $3,371,964. Due to this, the Company’s net loss for 2007 was impacted
by $3,371,964. The Company determined that the modification of the Debentures
resulted in a fair value of incremental consideration of $3,371,964 based on the
difference between the fair value of the common stock underlying the Debentures
following the reduction in the conversion rate under FAS 84 and the fair value
of the common stock underlying the Debentures with the original conversion
terms.
 
 The
Company is also reporting in this restatement a credit to its profit and loss
statement in the amount of $69,525 in order to properly reflect on its financial
statements the stock compensation expense that the Company incurred in fiscal
2007in accordance with SFAS 123R. These changes are shown on its Statement of
Operations, as an adjustment to “General and Administrative Expense” by reducing
such line item in the net amount of $69,525. This adjustment will also flow
through the Statement of Operations as a reduction in “Net Loss from Operations”
and “Net Loss” in the amount of $69,525. This adjustment will not impact
earnings (loss) per share. In addition, on its balance sheet contained in the
Original Filing, the Company will adjust “additional paid-in capital” by a net
amount of $69,525. The net increase of $69,525 to additional paid-in capital
will flow through the balance sheet as a decrease to “Total stockholders’
deficit” and an increase to “Total Liabilities and Stockholders’
Deficit”.
 
 None of
the foregoing adjustments to the Company’s accounting for the Debentures or the
options and warrants will affect the Company’s previously reported revenue or
cash flows nor will the modifications concerning the Debentures have a net
effect on stockholders’ equity. The restatement will also reflect a
reclassification of the Company’s expense incurred in connection with its
private placement of securities in 2007. This reclassification consists of a
credit to “general and administrative” expense on the Company’s statement of
operations of $435,749
  F-9
 
 Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 2.           RESTATEMENT
OF FINANCIAL STATEMENTS (Continued)
 
 and an
offsetting debit to additional paid in capital of an equivalent amount. This
event will not have a net effect on stockholders’ equity as reported in the
Original Form 10-KSB.
 
 Management’s
Discussion and Analysis has been revised for the effects of the restatement. The
following is a summary of the significant effects of the restatements on the
Company’s consolidated balance sheets as of December 31, 2007 and 2006 and its
consolidated statements of operations and cash flows for the fiscal year ended
December 31, 2007:
  December
      31, 2007As previously
                            reported (1)(2)
                          
                          
                          Adjustment
                          
                          
                          As restatedConsolidated
      Balance Sheet DataCash
      and cash equivalents
                          
                          $
                          15,043
                          
                          
                          $
                          (796
                          )
                          
                          $
                          14,247Prepaid
      Expense
                          
                          
                          23,795
                          
                          
                          
                          (20,615
                          )
                          
                          
                          3,180Total
      Current Assets
                          
                          
                          530,597
                          
                          
                          
                          (21,411
                          )
                          
                          
                          509,186Total
      Assets
                          
                          
                          530,597
                          
                          
                          
                          (21,411
                          )
                          
                          
                          509,186Accounts
      Payable
                          
                          
                          610,256
                          
                          
                          
                          32,041
                          
                          
                          
                          642,297Settlements
      payable
                          
                          
                          120,000
                          
                          
                          
                          (15,650
                          )
                          
                          
                          104,350Total
      Current Liabilities
                          
                          
                          2,060,815
                          
                          
                          
                          17,100
                          
                          
                          
                          2,077,915Common
      Stock
                          
                          
                          94,972
                          
                          
                          
                          (1,150
                          )
                          
                          
                          93,822Additional
      Paid in Capital
                          
                          
                          11,502,446
                          
                          
                          
                          2,832,537
                          
                          
                          
                          14,334,983(Deficit)
      accumulated during the development stage
                          
                          
                          (13,127,636
                          )
                          
                          
                          (2,869,898
                          )
                          
                          
                          (15,997,534
                          )Total
      stockholders' deficit
                          
                          
                          (1,530,218
                          )
                          
                          
                          (38,511
                          )
                          
                          
                          (1,568,729
                          )Total
      Liabilities and Stockholders' deficit
                          
                          
                          530,597
                          
                          
                          
                          (21,411
                          )
                          
                          
                          509,186Consolidated
      Statement of OperationsCost
      of Goods Sold
                          
                          $
                          530,312
                          
                          
                          $
                          2,500
                          
                          
                          $
                          532,812Gross
      Profit
                          
                          
                          222,513
                          
                          
                          
                          (2,500
                          )
                          
                          
                          220,013General
      and Administrative
                          
                          
                          2,220,492
                          
                          
                          
                          (505,274
                          )
                          
                          
                          1,715,218Total
      Expenses
                          
                          
                          2,941,934
                          
                          
                          
                          (737,824
                          )
                          
                          
                          2,436,660Net
      (Loss) from operations
                          
                          
                          (2,719,421
                          )
                          
                          
                          735,324
                          
                          
                          
                          (2,216,647
                          )Interest
      Expense
                          
                          
                          119,806
                          
                          
                          
                          708
                          
                          
                          
                          120,514Debt
      conversion expense
                          
                          
                          -
                          
                          
                          
                          3,371,964
                          
                          
                          
                          3,371,964Total
      other expenses
                          
                          
                          109,324
                          
                          
                          
                          (3,823,870
                          )
                          
                          
                          (3,714,546
                          )Net
      (Loss)
                          
                          
                          (2,828,745
                          )
                          
                          
                          (2,869,898
                          )
                          
                          
                          (5,698,643
                          )(Loss)
      per common share
                          
                          
                          (0.03
                          )
                          
                          
                          (0.04
                          )
                          
                          
                          (0.07
                          )Consolidated
      Statement of Cash FlowsCash
      flows from operating activitiesNet
      Loss
                          
                          $
                          (2,828,745
                          )
                          
                          $
                          (2,869,898
                          )
                          
                          $
                          (5,698,643
                          )Warrants
      issued for service
                          
                          
                          768,505
                          
                          
                          $
                          63,968
                          
                          
                          
                          832,473Stock
      options issued for services
                          
                          
                          366,043
                          
                          
                          $
                          (133,493
                          )
                          
                          
                          232,550Debt
      conversion costs
                          
                          
                          -
                          
                          
                          $
                          3,371,964
                          
                          
                          
                          3,371,964Prepaid
      Expenses
                          
                          
                          22,665
                          
                          
                          $
                          20,615
                          
                          
                          
                          43,280Accounts
      payable
                          
                          
                          313,660
                          
                          
                          $
                          32,041
                          
                          
                          
                          345,701Accrued
      interest
                          
                          
                          (34,343
                          )
                          
                          $
                          708
                          
                          
                          
                          (33,635
                          )Settlements
      payable
                          
                          
                          (60,000
                          )
                          
                          $
                          (15,650
                          )
                          
                          
                          (75,650
                          )Net
      cash used in operating activities
                          
                          
                          (1,511,435
                          )
                          
                          $
                          206,575
                          
                          
                          
                          (1,304,860
                          )Cash
      flows from financing activitiesProceeds
      (payments from convertible debenture), net
                          
                          
                          (20,000
                          )
                          
                          $
                          (63,999
                          )
                          
                          
                          (83,999
                          )Issuance
      of common stock
                          
                          
                          1,188,063
                          
                          
                          $
                          (356,052
                          )
                          
                          
                          832,011Net
      cash provided in financing activities
                          
                          
                          1,355,007
                          
                          
                          $
                          (207,371
                          )
                          
                          
                          1,147,636Net
      Increase (Decrease) in Cash
                          
                          
                          (156,428
                          )
                          
                          $
                          (796
                          )
                          
                          
                          (157,224
                          )Cash
      and cash equivalents, end of period
                          
                          
                          18,740
                          
                          
                          $
                          (796
                          )
                          
                          
                          17,944
 (1)
Amounts reflect correction of prior year's amounts related to debt conversion
costs as noted below.
  F-10
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 2.           RESTATEMENT
OF FINANCIAL STATEMENTS (Continued)
 
 (2) In
accordance with the Financial Accounting Standards Board, Statement No. 84,
“Induced Conversion of Convertible Debt” (an amendment of APB Opinion No. 26).
The related discussion of the Company’s results of operations has been corrected
to reflect the Company’s accounting for convertible debentures converted into
common stock. The Company originally expensed the convertible debenture at
original cost without taking into consideration any additional debt conversion
expense attributed to the difference between the original conversion price and
the modified conversion price. Upon reviewing FASB No. 84, the Company adjusted
its consolidated financial statement of prior years to properly apply the
provisions of FASB No. 84. In addition, the Company also restated its financial
statements to properly reflect the valuation of stock options and warrants in
accordance with FAS 123(R). The company originally accounted for the stock
options and warrants based fair market value method. The company also reflected
changes that were deemed immaterial for comparative purposes.
 
 3.
              GOING
      CONCERN
  The
      accompanying financial statements have been prepared in conformity with
      generally accepted accounting principles, which contemplate continuation
      of the Company as a going concern. However, the Company has incurred
      losses since its inception and has not yet been successful in establishing
      profitable operations. Further, the Company has current liabilities in
      excess of current assets. These factors raise substantial doubt about the
      ability of the Company to continue as a going concern. In this regard,
      management is proposing to raise any necessary additional funds through
      sales of its common stock or through loans from shareholders. There is no
      assurance that the Company will be successful in raising additional
      capital or achieving profitable operations. The financial statements do
      not include any adjustments that might result from the outcome of these
      uncertainties.
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 Accounting
Method
 
 The
      Company’s financial statements are prepared on the accrual method of
      accounting.
 
 Basis of
  Consolidation
 
 The
      consolidated financial statements include the accounts of Skinny
      Nutritional Corp. (formerly Creative Enterprises International, Inc. and
      Creative Enterprises, Inc. All inter-company accounts and transactions
      have been eliminated in
consolidation.
 
 Revenue
  Recognition
 
 The
      Company sells products through multiple distribution channels including
      resellers and distributors. Revenue is recognized when the product is
      shipped to our retailers and distributors and is recognized net of
      discounts. At present, there are no return privileges with our
      products.
 
 Cash and Cash
Equivalents
 
 For
      purposes of reporting the statement of cash flows, the Company includes
      all cash accounts, which are not subject to withdrawal restrictions or
      penalties, and all highly liquid debt instruments purchased with a
      maturity of three months or less as cash and cash equivalents. The
      carrying amount of financial instruments included in cash and cash
      equivalents approximate fair value because of the short maturities for the
      instruments held.
 
  F-11
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Cash –
Restricted
 
 At
      December 31, 2007, the Company had $3,697 in restricted escrow cash all of
      which cleared in January, 2008.
 
 Depreciation
 
 Property
      and equipment are recorded at cost and depreciated over the estimated
      useful lives of the related assets, which range from five to seven years.
      Depreciation is computed on the straight line method for financial
      reporting and income tax purposes.
 
 Accounts
  Receivable
 
 The
      Company considers accounts receivable to be fully collectable;
      accordingly, no allowance for doubtful accounts is required. If amounts
      become uncollectible, they will be charged to operations when that
      determination is made. Bad debt write-offs of $ 0 and $35,507.19 recorded
      for the years ended December 31, 2007and 2006
  respectfully.
 
 Inventories
 
 Inventory
      consists of finished goods and is stated at the lower of cost or market
      determined by the first-in, first-out
method.
 
 Loss Per
Share
 
 Basic
      net loss per share is computed by dividing net loss available for common
      stock by the weighted average number of common shares outstanding during
      the period.
 
 Stock Based
  Compensation
 
 The
      Company measures compensation cost to employees from our equity incentive
      plan in accordance with Statement of Financial Accounting Standards No.
      123 (R) (“SFAS 123 (R)”). FAS 123(R) requires an issuer to measure the
      cost of employee services received in exchange for an award of equity
      instruments based on the grant date fair value of the award and eliminated
      the exception to account for such awards using the intrinsic method
      previously allowable under APB No. 25. SFAS 123 (R) requires equity
      compensation issued to employees to be expensed over the requisite service
      period (usually the vesting period). equity
      compensation issued to employees to be expensed over the requisite service
      period (usually the vesting
period).
  F-12
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
  4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 
 The
      Company measures compensation cost issued to non employees in accordance
      with Emerging Issues Task Force 96 18, “Accounting for Equity Instruments
      That Are Issued to Other Employees for Acquiring, or in Conjunction with
      Selling, Goods or Services”, and Emerging Issues Task Force 00 18,
      Accounting Recognition for Certain Transactions Involving Equity
      Instruments Granted to Other Than
Employees.
 
 Use of Estimates in the Preparation of Financial
      Statements
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 5.
              RECENT
      ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including financial statements for an interim period within that fiscal year.
The adoption of this Statement is not expected to have a material impact on the
Company’s financial statements.
  F-13
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 6.    
RELATED PARTY TRANSACTIONS
 
 In March
and April 2006, the Company received an aggregate amount of $642,000 in loans
made by its Chairman and former Chief Executive Officer and four additional
accredited investors. The amount of the loan from our Chairman was $242,000. In
connection with the Company’s private placement in October 2006, the holders of
these convertible debentures converted the entire principal amount and accrued
but unpaid interest into an aggregate of 12,909,860 shares of the Company’s
Common Stock at a conversion rate of $0.05 applicable to the principal
outstanding.
 
 On
October 4, 2006, the Company restructured a loan from a former director in the
amount of $50,000. The principle amount of the note was paid in full on March
16, 2007.
 
 As of
December 31, 2007, we compensate our Chairman at a rate of $12,500 per month and
our Chief Executive Officer at the rate of $11,667 per month based on a
consulting arrangement. We have not entered into a written agreement with these
persons. The Chief Executive Officer and Chairman receive an automobile
allowance of $700 dollars.
 
 7.    
PENDING CLAIMS
 
 On
January 19, 2006, the Company received a demand for arbitration filed by our New
York distributor. The Company has settled this demand with this distributor and
has reflected the $40,000 settlement in the attached financial statements. The
settlement is payable in 1 payment of $10,000 and 6 equal installments of $5,000
starting August 10, 2006. This settlement was paid in full in February 2007, as
agreed.
 
 The
Company was the co-defendant, along with its Chairman, in a civil suit filed in
Miami-Dade County Circuit Court under the caption Swan v. Salaman and Creative
Enterprises International, Inc. Plaintiff claims that we breached an oral
agreement of employment and is seeking compensatory damages. This case was
settled in August 2007.
 
 In
addition, we may be subject to other claims and litigation arising in the
ordinary course of business. Management considers that any liability from any
reasonably foreseeable disposition of such other claims and litigation,
individually or in the aggregate, would not have a material adverse effect on
our consolidated financial position, results of operations or cash
flows.
  F-14
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 8.    
CONVERTIBLE DEBENTURES
 
 The
Company raised an aggregate amount of $3,201,200 ($2,693,450 was raised during
fiscal year 2005, $507,750 was raised during fiscal year 2004) from the sale of
our convertible debentures to accredited investors in a private placement
pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as
amended. Each $40,000 debenture was convertible into a conversion unit
consisting of 100,000 shares of the Company’s common stock and 100,000 common
stock purchase warrants. Both the common stock and the warrants are issued only
upon the conversion of the convertible debenture into the appropriate number of
common shares. Accordingly, APB 14 does not apply. The conversion price was
$0.40 per share. Each debenture will mature two years from the date of issuance
unless previously converted. Interest is earned on each debenture at the rate of
10% per annum. Interest shall be paid in full at the maturity date or such
earlier date on which the principal is paid to the holder or on which the
debenture is converted or exchanged pursuant to its terms. The accrued but
unpaid interest on each debenture shall be payable in cash or in interest
shares, at the option of the Company, so long as there is an effective
registration statement providing for the resale of the interest shares. The
Company may, at its option, prepay some or all of the debentures upon not less
than thirty (30) days nor more than sixty (60) days prior written notice at a
prepayment price equal to the principal amount of the debentures to be prepaid,
together with accrued and unpaid interest thereon through the date of
prepayment.
 
 On
December 22, 2006, the Company determined to offer the holders of the
outstanding convertible debentures the ability to convert such securities at a
reduced conversion rate. The convertible debentures were scheduled to mature at
various dates between December 2006 and October 2007 and are currently
convertible at the conversion rate of $0.40 into (a) an aggregate of 6,287,500
shares of the Registrant’s common stock and (b) 6,287,500 common stock purchase
warrants (the “Conversion Warrants”). The Company offered the debenture holders
the option to convert the outstanding principal amount of their debentures into
shares of the Company’s common stock only at a conversion rate of $0.10 provided
that the holders agree to the following: (i) convert the outstanding principal
amount of its convertible debentures no later than January 31, 2007, (ii)
surrender of the right to receive the Conversion Warrants and (iii) forfeit the
unpaid interest that has accrued on such debentures, which was approximately
$337,000, in the aggregate.
 
 In
addition, holders of an aggregate principal amount of $2,070,000 of convertible
debentures converted such amount into shares of common stock as follows. In the
first quarter, holders of principal of $1,755,000 converted such amount into
17,550,000 shares of common stock. Also in the first quarter one debt holder
converted $20,000 in debt to 40,000 shares of common stock. In the second
quarter two debt holders converted their debt into 400,000 common shares
reducing the principal balance by $40,000 dollars. During the fourth quarter an
additional conversion of $188,333 in principal and $37,667 in interest were
converted into 3,013,333 shares of common stock at a conversion rate of $.075 a
share . During December 2007, in a fourth conversion 1,600,000 shares of common
stock were issued upon conversion of $66,667 in principal and $13,333 in
interest at a conversion rate of $.05 per share. One investor was paid $20,000
dollars in principal and $4,000 dollars in interest to retire his debenture. In
addition, we issued an aggregate of 765,000 common stock purchase warrants upon
the conversion of outstanding debentures in 2007. Of these warrants, 225,000
warrants are exercisable at $0.20 per shares and the remainders are exercisable
at $0.50 per share. All warrants expire three years from the date of
issuance.
  F-15
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 8.    
CONVERTIBLE DEBENTURES (Continued)
 
 The
holders that declined this offer continue to hold their convertible debentures
and could elect to either convert such debentures on the original terms thereof
or receive repayment of the principal, and accrued and unpaid interest thereon,
on the stated maturity date of such debentures. Should the remaining investors
not convert their remaining debentures, the Company will have to pay the holders
as follows upon maturity:
 
 Year 1
   $310,000
 
 9.    
SALE OF EQUITY SECURITIES
 
 We have
historically primarily been funded through the issuance of common stock, debt
securities and external borrowings. During the calendar year 2007 the company’s
primary means of raising capital was through the sale of common stock through
private placements made pursuant to Rule 506 of Regulation D under the
Securities Act of 1933. There were three private offerings made during the year.
The first offering commenced in December 2006 and expired in March 2007, with
10,000,000 shares being offered and an aggregate offering amount of $750,000.
The offering raised $482,625 during calendar year 2007 with 6,435,004 shares of
common stock being issued. The second offering commenced in March 2007 and
expired in September 2007; with 13,333,333 shares being offered for an aggregate
offering amount of $1,000,000 dollars. We received proceeds of $502,238 with
6,696,509 shares being issued. The third offering commenced in September 2007
and ended in November 2007; with 13,333,333 shares being offered for an
aggregate amount of $1,000,000 dollars. We received proceeds of $203,750 in this
offering with 2,716,666 shares being issued. There were 2,759,390 warrants
issued to “Selling Agents” for the private placements of common stock during
calendar year 2007. Selling agents received $106,954 dollars in commissions for
private placement of common shares leaving the company with $1,081,659 in net
proceeds from private placements. A total of 9,809,332 shares of common stock
were also issued to shareholders from prior subscriptions in the form of reset
shares required by the convents established in the pervious subscription
agreements.
  F-16
  Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 10.    
LINE OF CREDIT
 
 On April
4, 2007, we closed on a secure loan arrangement with Valley Green Bank pursuant
to which we received funds in the amount of $350,000. We have applied these
funds to satisfy our obligations to Madison Bank. Interest will be charged on
the unpaid principal of this new loan arrangement until the full amount of
principal has been paid at the rate of 8.25% per annum. We were obligated to
repay this new loan in full immediately on the bank’s demand, but in no event
later than March 20, 2008. Since that date we have been in discussions with the
bank to extend the term of the loan. Interest payments are due on a monthly
basis. The loan is secured by collateral consisting of a perfected first
priority pledge of certain marketable securities held by our Chairman and
entities with which he is affiliated. We also agreed to a confession of judgment
in favor of the bank in the event we default under the loan agreements. The loan
agreements also require the consent of the bank for certain actions, including
incurring additional debt and incurring certain liens. At December 31, 2007, the
outstanding loan balance was $340,000.
 
 11.   LONG-TERM
DEBT
 
 Long-term
debt consisted of the following at December 31, 2007 and 2006.
 
 2007
                                  
                                  
                                  2006Notes
      payable to an individual unsecured,payable
      on demand, including interestat
      12% due September 1, 2008
                                  
                                  $
                                  205,936
                                  
                                  
                                  $
                                  145,283Notes
      payable to accredited investor,convertible
      into shares of theCompany’s
      stock at $.05 per shareinterest
      at 10% annum convertedJanuary
      2007
                                  
                                  $
                                  
                                  
                                  
                                  $
                                  125,000Note
      payable, convertible into theCompany’s
      stock unsecured,interest
      at 10% per year, due 2/07
                                  
                                  $
                                  15,000
                                  
                                  
                                  $
                                  30,000Subtotal
                                  
                                  $
                                  220,936
                                  
                                  
                                  $
                                  300,283Less
      current
                                  
                                  
                                  220,936
                                  
                                  
                                  
                                  300,283Total
                                  
                                  $
                                  0
                                  
                                  
                                  $
                                  0
  F-17
 
 Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 12.  
LONG-TERM DEBT (Continued)
 
 Skinny
      Nutritional Corp, Inc. and Subsidiary paid interest of $20,035 and $27,551
      for the years ended December 31, 2007 and 2006,
    respectively.
 
 13.  
LICENSING AND AGREEMENTS
 
 On
October 4, 2006, the Company entered into an amendment to its License and
Distribution Agreement with Peace Mountain Natural Beverages Corporation.
Pursuant to this amendment, the Company agreed to pay Peace Mountain an amount
of $30,000 in two equal monthly installments commencing on the date of the
amendment in satisfaction of allegations of non-performance by Peace Mountain.
In addition, the parties further agreed to amend and restate the Company's
royalty obligation to Peace Mountain, pursuant to which amendment, the Company
will have a minimum royalty obligation to Peace Mountain based on a percentage
of wholesale sales with a quarterly minimum of $15,000.
 
 On
October 10, 2006, the Company entered into an agreement with Jamnica, d.d. and
Jana North America, Inc., which agreement is effective as of September 20, 2006,
pursuant to which the parties confirmed the termination of the distribution
agreement dated July 21, 2004, between the Company and Jamnica. In the new
agreement, the parties agreed to the following arrangements: (a) in
consideration for the agreement by the Company to the terms of the agreement,
the Company's obligation to Jamnica, in an amount of $207,321, is eliminated;
(b) Jamnica and Jana North American shall pay an amount of $23,125 on the
Company's behalf in satisfaction of storage and warehousing fees; (c)
receivables due to the Company from select accounts shall be transferred to Jana
North America; and (d) the Company shall make available to Jana North America
all inventory of Jana bottled waters in the Company's possession. In addition,
the parties agreed that the Company will cease use of the Jana trademarks and
logos and Jamnica and Jana North America agreed not to use any of the Company's
licensed trademarks or logos concerning the Company's ‘‘Skinny’’ product line.
Pursuant to the agreement, the Company will also provide additional assistance
to Jamnica and Jana North America in the transition for the marketing and
distribution of the Jana bottled waters.
 Each of
the parties also agreed to release the other from any obligations or claims
arising from the distribution agreement.
 
 14.  
CASH DEPOSITED IN FINANCIAL INSTITUTIONS
 
 The
Company maintains its cash in bank deposit accounts and financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The bank accounts at times exceed federally insured
limits. The Company has not experienced any losses on such
accounts.
 
 15.  
INCOME TAXES
 
 The
      Company accounts for income taxes in accordance with Statement of
      Financial Accounting Standards (“SFAS”) No 109 Accounting for Income
      Taxes”. SFAS 109 requires the Company to provide a net deferred tax
      asset/liability equal to the expected future tax benefit/expense of
      temporary reporting differences between book and tax accounting methods
      and any available operating loss or tax credit carry forwards. At December
      31, 2007, the Company has available unused operating loss carry forwards
      of approximately $9,911,484   which may be applied against future
      taxable income and which expires in various years through
      2020.
  F-18
 
 The
      amount of and ultimate realization of the benefits from the operating loss
      carry forwards for income tax purposes is dependent, in part, upon the tax
      laws in effect, the future earnings of the Company, and other future
      events, the effects of which cannot be determined because of the
      uncertainty surrounding the realization of the loss carry forwards the
      Company has established a valuation allowance equal to the tax effect of
      the loss carry forwards and, therefore, no deferred tax asset has been
      recognized for the loss carry
forwards
 
 16.  
STOCKHOLDERS' EQUITY
  
 At
      December 31, 2007, the Company had 250,000,000 shares of common stock
      authorized par value $.001. Shares outstanding at December 31, 2007 were
      93,822,225.
 
 17.  
STOCK OPTIONS
 
 Under
      the Company's stock option plan the Company may grant incentive and non
      statutory options to employees, non employee members of the Board and
      consultants and other independent advisors who provide services to the
      Corporation.
 
 The
      maximum shares of common stock which may be issued over the term of the
      plan shall not exceed 20,000,000 shares, as amended on October 6, 2006.
      Awards under this plan are made by the Board of Directors or a committee
      of the Board.
 
 Under
      the plan options that are granted at the market price of the stock on the
      day of the grant. Options granted 10% or more stockholders are granted at
      110% of the fair market price on the day of the grant. Each option
      exercisable at such time or times, during such period and for such numbers
      of shares shall be determined by the Plan Administrator. However, no
      option shall have a term in excess of 10 years from the date of the
      grant.
 
 On
      January 18, 2002, the Company granted stock options exercisable for
      450,000 shares of its common stock. These options were issued without cash
      consideration. All the options were exercisable immediately at .50 per
      share. 300,000 options were later returned to the Company and cancelled.
      The remaining 150,000 options expired in December
  2007.
  On
      October 12, 2006, the Company granted 10,500,000 stock options to
      employees and officers of the Company under the 2006 Plan. The options
      granted have a 5 year contractual life. 1,300,000 of the options were
      granted for prior services and vested immediately. The remaining 9,200,000
      options were issued for future services and will vest 25% on each
      anniversary date of the grant until fully vested. As of December 31, 2007,
      7,500,000 options were returned to the Company and
    cancelled.
 
 On
      January 12, 2007, the Board approved the grant of an additional 3,000,000
      options to the Company’s Chairman under the same terms as the October 6,
      2006 grant where 20% of the options vest immediately and 20 % on each
      anniversary date for the next 4 years. The exercise price of these options
      is .25 cents a share.
  On
      November 28, 2007, the Company granted 6,325,000 stock options to
      employees and officers of the Company under the 2006 Plan. The options
      granted have a 5 year contractual life. 1,581,250 of the options were
      granted for prior services and vested immediately. The remaining 4,743,750
      options were issued for future services and will vest 25% on each
      anniversary date of the grant until fully vested
  .
 
 Each
      stock option award is estimated as of the date of grant using a
      Black-Scholes option valuation model that uses the assumptions noted in
      the table below. To address the lack of historical volatility data for the
      Company, expected volatility is based on the volatilities of peer
      companies. The risk-free rate for the expected term of the option is based
      on the U.S. Treasury yield curve in effect at the time of
      grant.
 
 As
      of December 31, 2007, there were 12,325,000 options issued and outstanding
      under the plan.
  
 Expected volatility
              137.12% to 141.05%Expected dividends
              0%Expected terms
              5 yearsRisk-free rate
              3.5% to 4.76%
 
  F-19
 
 Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 17.  
STOCK OPTIONS (Continued)
 
 A
      summary of option activity as of December 31,
  2007.
 
 Weighted-Weighted-Average
                  
                  
                  Average
                    RemainingOptions
                  
                  Shares
                  
                  
                  Exercise Price
                  
                  
                  Contractual TermOutstanding at
      January 1, 2006
                  
                  
                  150,000
                  
                  
                  $
                  0.50
                  
                  
                  
                  8Granted
                  
                  
                  10,500,000
                  
                  
                  
                  0.17ExercisedForfeited
      or expired
                  
                  
                  (7,650,000
                  )
                  
                  
                  (0.18
                  )Outstanding
      at January 1, 2007
                  
                  
                  3,000,000
                  
                  
                  $
                  0.17
                  
                  
                  
                  7Granted
                  
                  
                  9,325,000
                  
                  
                  
                  .14
                  
                  
                  
                  10ExercisedForfeited
      or expiredOutstanding
      at December 31, 2007
                  
                  
                  12,325,000
                  
                  
                  
                  0.14
                  
                  
                  
                  10
 
 A summary
of the status of the Company’s non-vested shares as of December 31, 2006 and
changes during the period then ended is presented below:
 
 Weighted-AverageGrant
      DateNon-vested shares
                                                                  
                                                                  Shares
                                                                  
                                                                  
                                                                  Fair ValueNon-vested
      at January 1, 2006
                                                                  
                                                                  
                                                                  150,000
                                                                  
                                                                  
                                                                  
                                                                  0.50Granted
                                                                  
                                                                  
                                                                  10,500,000
                                                                  
                                                                  
                                                                  
                                                                  0.17Vested
                                                                  
                                                                  
                                                                  600,000Forfeited
                                                                  
                                                                  
                                                                  (7,650,000
                                                                  )
                                                                  
                                                                  
                                                                  (0.18
                                                                  )Non-vested
      at January 1, 2007
                                                                  
                                                                  
                                                                  2,400,000
                                                                  
                                                                  
                                                                  
                                                                  0.17Granted
                                                                  
                                                                  
                                                                  9,325,000
                                                                  
                                                                  
                                                                  
                                                                  0.13Vested
                                                                  
                                                                  
                                                                  (2,781,250
                                                                  )
                                                                  
                                                                  
                                                                  0.14ForfeitedNon-vested
      at January 1, 2008
                                                                  
                                                                  
                                                                  8,943,750
                                                                  
                                                                  
                                                                  
                                                                  0.13
  F-20
 
 Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 17.  
STOCK OPTIONS (Continued)
 
 There was
$1,153,950 of unrecognized compensation cost related to the non-vested stock
granted under the plan as of December 31, 2007. The unrecognized compensation
cost is expected to be recognized using the straight-line method over the
requisite service period (October 12, 2006 through November 28,
2012).
 
 In
January 2007, 150,000 stock options issued in January 2002 expired. On March 26,
2007, 4,000,000 options expired from terminated employees.
 
 18.
  STOCK PURCHASE WARRANTS
 
 In March
2004, the company granted 1,000,000 warrants to purchase its common stock for a
purchase price of $.20 cents per share to an investor in connection with an
investment in the company. The warrants grant the holder the right to purchase
common stock from the date of the grant to March 2012. Subsequently these
warrants were surrendered and reissued to five new investors. In February 2005,
and additional 100,000 warrants were granted to a distributor for a purchase
price of $.40 cents as an incentive to enter into an exclusive marketing
agreement for New York. The warrants can be exercised at the purchase price of
$.40 cents any time from the date of the grant through February 2010.During
November and December 2005 the company granted 512,500 warrants to investors who
purchased common shares through a private placement of common stock. These
warrants are exercisable for a period of five years with an exercise price of
..75 cents.
 
 During
the last quarter of 2005 and the first two quarters of 2006 the company granted
1,978,000 warrants to holders of convertible debt who converted their debentures
into common shares. These warrants are exercisable for a period of three years
with an exercise price of .75 cents.
 
 In the
months of January and February 2006 the company granted 750,000 warrants to
investors in a private placement of common shares. These warrants are
exercisable for a period of five years with an exercise price of .75 cents. In
October 2006, the company approved a grant of warrants to purchase 600,000
shares of common stock to a law firm in consideration of services rendered.
These warrants are exercisable for a period of five years at an exercise price
of .05 cents per share.
 
 In
February 2007, the company granted 1,800,000 warrants to Geltech Sales LLC with
an exercisable period of seven years with an exercise price of .24 cents. On
October 16, 2007, we notified Geltech that we elected to terminate this
agreement with Geltech based on performance obligations; resulting in a
cancellation of 1,075,000 warrants.
 
 During
November 2006, the company granted 200,000 warrants to consultants for services
rendered. These warrants have an exercisable period of five years at an exercise
price of .10 cents. In addition the company granted 125,000 warrants to
consultants for services rendered during January 2007. These warrants have an
exercisable period of five years at an exercise price of .40 cents.
 
 During
the 2007 calendar year 2,959,390 warrants were issued to “Selling Agents” for
private placement of common shares. These warrants have an exercisable period of
five years with an exercise prices ranging between .06 cents to .11 cents per
share. During the third and forth quarter of 2007 the company granted 690,000
warrants to investors who purchased convertible debt which was then converted
into common shares these warrants have a three year exercise period with an
exercise price of .50 cents.
 
 In
November 2007, the Company issued 100,000 warrants to a sales representative for
services rendered. These warrants are exercisable for a period of seven years
with an exercise price of .08 cents per share.
 
 The
issuance of these securities was exempt from registration under the Securities
Act of 1933, as amended, under Section 4(2) thereof inasmuch as the securities
were issued without any form of general solicitation or general advertising and
the acquirers were provided with access to material information concerning the
company.
  F-21
 
 A summary
of the status of the Company’s outstanding stock warrants as of December 31,
2007 is as follows:
 
 Shares
                  
                  
                  Weighted-Average
                    Exercise PriceOutstanding
      at January 1, 2005
                  
                  
                  1,000,000
                  
                  
                  
                  0.20Granted
                  
                  
                  1,950,500
                  
                  
                  $
                  0.73ExercisedForfeitedOutstanding
      at January 1, 2006
                  
                  
                  2,950,500
                  
                  
                  
                  0.55Granted
                  
                  
                  2,190,000
                  
                  
                  
                  0.50ExercisedForfeitedOutstanding
      at January 1, 2007
                  
                  
                  5,140,500
                  
                  
                  
                  0.53Granted
                  
                  
                  5,749,390
                  
                  
                  
                  0.19ExercisedForfeited
                  
                  
                  (1,075,000
                  )
                  
                  
                  (0.24
                  )Outstanding
      atDecember
      31, 2007
                  
                  
                  9,814,890
                  
                  
                  
                  0.36Exercisable
      atDecember
      31, 2007
                  
                  
                  9,814,890
                  
                  
                  
                  0.36
 
 19.  
LOSS PER SHARE
 
 Loss
      per share is based on the weighted average number of common shares.
      Dilutive loss per share was not presented, as the Company as of December
      31, 2007 and 2006 issued 12,325,000 options and 9,814,890 warrants which
      would have an antidilutive effect on
earnings.
  December
      31,2007
                      
                      
                      2006Loss
      from continuing operations availableto
      common stockholders
                      
                      $
                      (5,698,6434
                      )
                      
                      $
                      (2,303,446
                      )Weighted
      average of common shares outstandingused
      in earnings per share during the period
                      
                      
                      82,706,893
                      
                      
                      
                      22,634,500Loss
      per common shares
                      
                      $
                      (.07
                      )
                      
                      $
                      (.10
                      )
  F-22
 
 Skinny Nutritional Corp and
Subsidiary
 Notes to Consolidated
Financial Statements
 December 31,
2007
 
 20.   DISCLOSURE
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
 
 For cash
the carrying amount is assumed to be a reasonable estimate of fair
value.
 For
accrued interest, amounts are assumed to be a reasonable estimate of fair
value.
 Based on
current borrowing rates, the fair value of convertible notes, notes payable and
line of credit approximates their carrying value.
 
 21.   SUBSEQUENT
EVENTS
 
 In
December 2007, the Company commenced a private offering of up to $2,000,000 of
shares of Common Stock at a per share price of $0.04. The shares are being
offered to accredited investors only. The shares being offered will not be
registered under the Securities Act of 1933, as amended (the “Act”) and will be
offered in reliance upon the exemption from registration set forth in Section
4(2) and Regulation D, promulgated under the Act. Such shares may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Company intends to engage
registered broker-dealers to serve as selling agents (the “Selling Agents”), for
the sale of the Units and pay commissions and other compensation to the Selling
Agents who procure purchasers of the Units. We will pay and issue to each
Selling Agent a warrant (the “Agent Warrants”) to purchase such number of Shares
as equals 10% of the total number of Shares actually sold in the Offering to
Purchasers procured by each Selling Agent. Agent Warrants shall be exercisable
at the per share price of $0.09 for a period of five years from the date of
issuance. The Company intends to use the proceeds from the offering for working
capital and payment of accrued compensation.
 
 There can
be no assurance that the Company will complete the offering on the anticipated
terms, or at all. The Company’s ability to complete the offering will depend,
among other things, on market conditions. In addition, the Company's ability to
complete this offering and its business are subject to risks described in the
Company's filings with the Securities and Exchange Commission. This disclosure
does not constitute an offer to sell or the solicitation of an offer to buy any
the Company’s securities, nor there any sale of these securities by the Company
in any state or jurisdiction in which the offer, solicitation or sale would be
unlawful. The disclosure is being issued pursuant to and in accordance with Rule
135c of the Act.
 
 During
the 2008 fiscal year, the Company converted additional convertible debt
securities into equity as follows. On January 25, 2008, the Company issued
900,000 shares of common stock and 112,500 common stock purchase warrants upon
the conversion of an aggregate amount of $45,000 (inclusive of accrued interest
of $15,000) of outstanding convertible debentures. The warrants issued upon
conversion of these debentures are exercisable for a period of three years at an
exercise price of $0.50 per share. On March 3, 2008, the Company issued 300,000
shares of common stock upon the conversion of an aggregate amount of $15,000 of
outstanding convertible debentures. On March 20, 2008, the Company issued
1,125,000 shares of common stock and 112,500 common stock purchase warrants upon
the conversion of an aggregate amount of $45,000 (inclusive of accrued interest
of $7,500) of outstanding convertible debentures. The warrants issued upon
conversion of these debentures are exercisable for a period of three years at an
exercise price of $0.50 per share. These securities have not been registered
under the Securities Act of 1933, as amended, and are being issued in reliance
upon the exemption for registration set forth in Section 3(a)(9)
thereof.
 
 The
Company authorized an issuance of 2,000,000 restricted shares of common stock to
Michael Salaman in consideration for his agreement to personally guarantee the
Company’s loan facility from Valley Green Bank. This issuance was initially
approved by our board of directors in November 2007.
 
 On March
20, 2008, the Company announced that it had established an advisory board to
provide advice on matters relating to the Company’s products. The Company will
seek to appoint up to five individuals to its advisory board. On such date, the
Company appointed the following individuals to its advisory board: Pat Croce,
Ron Wilson and Michael Zuckerman. The Company also entered into a consulting
agreement with Mr. Croce, pursuant to which the Company agreed to issue warrants
to purchase 3,000,000 shares of stock at $.05 in consideration of his agreement
to serve on the Company’s Advisory Board and for providing the marketing
services for the Company’s products. In addition to serving on the Advisory
Board, Croce agreed through an affiliated entity, to endorse and advertise the
Company’s products. In additional consideration for his   agreement to
provide the endorsement and marketing services, the Company agreed to pay a
royalty with respect to the sale of its products that he endorses for the
duration of his endorsement services. The Company issued each of the other
initial members of its advisory board warrants to purchase 1,500,000 shares of
Common Stock, exercisable for a period of five years at a price of $0.05. The
securities sold in or issued in connection with the financing have not been
registered under the Securities Act of 1933, as amended, and were offered and
sold in reliance upon the exemption from registration set forth in Section 4(2)
thereof. We believe that the investors and the selling agent are “accredited
investors”; as such term is defined in Rule 501(a) promulgated under the
Securities Act.
  F-23
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, Skinny Nutritional
Corp., Inc. has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
  Date:
      March 31, 2009
                  
                  SKINNY
      NUTRITIONAL CORP.By:
                  /s/ Ronald WilsonRonald
      Wilson
                    President
      and Chief Executive
Officer
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
  Name
                  
                  Title
                  
                  Date/s/ Ronald Wilson
                  
                  Chief
      Executive Officer, President and Director
                  
                  March
      31, 2009Ronald
      Wilson/s/ Donald J. McDonald
                  
                  Chief
      Financial Officer and Director
                  
                  March
      31, 2009Donald
      J. McDonald/s/ Michael Salaman
                  
                  Chairman
      of the Board of Directors
                  
                  March
      31, 2009Michael
      Salaman/s/ Michael Reis
                  
                  Director
                  
                  March
      31, 2009Michael
      Reis
  42