UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(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,
2008





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


For
the transition period
from                                                    to







0-51313


Commission 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




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Securities Exchange Act.  Yes  ̈ No x




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated
filer,”  “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (check one):





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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K    (ss.229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x




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




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter (June 30, 2008): $46,273,111.







Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: On March 31, 2009 there were
219,541,579 shares outstanding of common stock of the Registrant.




DOCUMENTS
INCORPORATED BY REFERENCE




List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(e) under the Securities Act of 1933.




None


ii




SKINNY
NUTRTIONAL CORP.


INDEX
TO ANNUAL REPORT ON FORM 10-K





PAGEPart
      IItem
      1.
                Description
      of Business
                1Item
      1A.
                Risk
      Factors
                10Item
      1B.
                Unresolved
      Staff Comments
                19Item
      2.
                Description
      of Property
                19Item
      3.
                Legal
      Proceedings
                19Item
      4.
                Submission
      Of Matters To A Vote Of the Security Holders
                20Part
      IIItem
      5.
                Market
      For Common Equity, Related Stockholder Matters And Small Business Issuer
      Purchases Of Equity Securities
                20Item
      6.
                Selected
      Financial Data
                21Item
      7.
                Management's
      Discussion And Analysis Or Plan Of Operation
                21Item
      7A.
                Quantitative
      and Qualitative Disclosure About Market Risk
                30Item
      8.
                Financial
      Statements
                30Item
      9.
                Changes
      In And Disagreements With Accountants On Accounting And Financial
      Disclosure
                30Item
      9A.
                Controls
      And Procedures
                30Item
      9B.
                Other
      Matters
                31Part
      IIIItem
      10.
                Directors,
      Executive Officers, and Corporate Governance
                32Item
      11.
                Executive
      Compensation
                34Item
      12.
                Security
      Ownership Of Certain Beneficial Owners And Management And Related
      Stockholder Matters
                36Item
      13.
                Certain
      Relationships And Related Transactions
                37Item
      14.
                Principal
      Accountant Fees And Services
                38Item
      15.
                Exhibits
                38Signatures


iii




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.





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 are developing and marketing a line of
functional beverages, all branded with the name “Skinny” that are marketed and
distributed primarily to calorie and 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.”





For our
2008 fiscal year, we generated revenues of $2,179,055 and incurred a net loss of
$6,232,123, of which $2,824,252 was non-cash related. 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 our
resources to product development, marketing and sales activities regarding our
line of Skinny beverages, including the procurement of a number of purchase
orders from distributors and retailers. This trend continued in our 2008 fiscal
year.





Business
Overview





We
operate our business in the rapidly evolving beverage industries and are
currently focused on developing, distributing and marketing nutritionally
enhanced functional beverages. Enhanced functional beverages have been leading
the growth of beverage consumption in the United States.





Our
Skinny Water product, which we originally introduced in 2005, has been
reformulated to include six flavors (Acai Grape Blueberry, Raspberry
Pomegranate, Peach Mango Mandarin, Passionfruit Lemonade, Goji Fruit Punch and
Orange Cranberry Tangerine).  We expect to launch Skinny Teas and new
packaging SKUs in 2009.





Our
current business strategy is to develop Skinny Water® product
extensions and maintain our current national 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, in-store advertisements, retail-centered promotions, 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 101, Bala
Cynwyd, Pennsylvania. Our telephone number is (610) 784-2000.





General Business
Developmentsin2008





Financing
Activities





As
previously reported, we commenced a private offering  of its common
stock in December 2007 for up to a maximum of $3,200,000 of shares at an
offering price of $0.04 per share and the Company had received subscriptions of
approximately $3.1 million. In this offering, we received gross proceeds of
$3,163,000 and sold an aggregate of 79,075,000 shares of common stock to
accredited investors. After giving effect to offering expenses and commissions,
the Company received net proceeds of approximately $3.05 million. The Company
agreed to pay commissions to registered broker-dealers that procured investors
in the offering and issue such persons warrants to purchase such number of
shares as equals 10% of the total number of shares actually sold in the offering
to investors procured by them. Agent warrants shall be exercisable at the per
share price of $0.05 for a period of five years from the date of issuance. Based
on the foregoing, agents have earned an aggregate of $55,000 in commissions and
1,362,500 warrants. In connection with the offering, the Company relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder.
Based on the representations made in the transaction documents, the Company
believes that the Investors are “accredited investors”, as such term is defined
in Rule 501(a) promulgated under the Securities Act.





In
addition, as previously reported, commencing in November 2008, we conducted a
private offering in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder pursuant
to which we sought to raise an aggregate amount of $1,875,000 of shares of
common stock (the “November Offering”). On February 5, 2009, the Company
completed the November Offering. Total proceeds raised in the November Offering
were $1,867,690 and the subscribers purchased an aggregate of 31,128,167 shares
of common stock. The Company intends to use the net proceeds from the November
Offering of approximately $1,800,000 for working capital, repayment of debt and
general corporate purposes. In connection with the November Offering, the
Company’s Chief Executive Officer, Chief Financial Officer and Chairman agreed
not to exercise a total of 12,000,000 options and 2,000,000 warrants
beneficially owned by them until such time as the Company’s stockholders adopt
an amendment to its Articles of Incorporation to increase the number of the
Company’s authorized shares of common stock. The Company agreed to pay
commissions to registered broker-dealers that procured investors and issue such
persons warrants to purchase such number of shares as equals 10% of the total
number of shares actually sold in the November Offering to investors procured by
them. Agent warrants are exercisable at the per share price of $0.07 for a
period of five years from the date of issuance. We paid total commissions of
$20,959 and issued agent warrants to purchase 349,317 shares of common stock.
The securities offered have not been registered under the Securities Act and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. Based on the representations made in
the transaction documents, the Company believes that the Investors are
“accredited investors”, as such term is defined in Rule 501(a) promulgated under
the Securities Act.


2


In
addition to these transactions, the Company sold an aggregate of $175,000 of
shares of its common stock to three individual accredited investors in private
sales and issued these investors a total of 3,541,667 shares of common stock. In
connection with the offering, the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Based on the representations made in the transaction documents, the Company
believes that the Investors are “accredited investors”, as such term is defined
in Rule 501(a) promulgated under the Securities Act.





Advisory
Board





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. As described below, in December 2008, we
appointed Mr. Wilson as our Chief Executive Officer and President. 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. Subsequently, we also granted Mr. Wilson an
additional warrant to purchase 1,000,000 shares of Common Stock in April 2008,
in consideration for additional consulting services provided by Mr. Wilson to
us. These warrants are also exercisable for a period of five years at a price of
$0.05 per share. 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.





Management
Changes





On
December 1, 2008, we entered into an employment relationship with Mr. Ronald D.
Wilson, who will serve as the President and Chief Executive Officer of the
Company effective immediately. Contemporaneously with Mr. Wilson’s appointment
as the President and Chief Executive Officer of the Company, the Board elected
Mr. Wilson to serve on the Company’s Board of Directors for a period of one year
or until his successor is elected and qualified. Mr. Wilson was appointed to
replace Mr. Donald McDonald as the Company’s President and Chief Executive
Officer. Mr. McDonald will continue to serve on the Company’s Board of Directors
and as the Company’s Chief Financial Officer. Pursuant to an offer letter Mr.
Wilson entered into with the Company, the Company will pay and provide the
following compensation to Mr. Wilson: (a) base salary of $150,000 per annum; (b)
grant of 2,000,000 shares of restricted common stock; (c) grant of warrants to
purchase 2,000,000 shares of common stock which shall be immediately exercisable
on the date of grant for a period of five years at an exercise price equal to
the closing price of the Company’s common stock on the date of grant; (d)
subject to the approval of the Company’s stockholders of a new equity
compensation plan, options to purchase 2,000,000 shares of common stock,
exercisable for a period of five years and which options will vest in full on
the first anniversary of the grant date and have an exercise price equal to the
fair market value of the Company’s common stock, as determined in accordance
with the new equity compensation plan, on the date that such plan is approved by
the Company’s stockholders; (e) a car allowance of $700 per month; (f)
reimbursement of health benefits or cash equivalent in an amount not to exceed
$1,000 per month; and (g) $2,000 per month for a rental lease for housing for 1
year period.





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 “skinny”.
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. We investigate means of reducing our
product cost, with no impact on product integrity, to enable us to reduce the
impact of these expenses on our revenues.


3


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 six flavors of Skinny Water. Skinny Water,
which was introduced in 2005, has been reformulated and was launched in our
second fiscal quarter of 2007. The company intends to market additional “Skinny”
beverages in the future, when it believes that market conditions are
favorable.





Skinny
Water®





We
originally formulated Skinny Water as water containing a proprietary, natural
appetite suppressant, available in 3 flavors with a natural water appearance. We
initially introduced Skinny Water® 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.





In June
of 2008 we launched the most recent formulations of Skinny Water as an extension
to the original product line. The new products are currently available in six
flavors, each being a natural color, natural flavored, nutritionally enhanced
beverage with zero calories, zero sugar and zero sodium. Rather than focus on
appetite suppression, these new products are designed as a calorie-free
alternative to other currently available enhanced beverages. These products
contain no caffeine or ephedrine and are also preservative free. A great amount
of research and development was put into perfecting the taste.  Each
flavor is fortified with a different vitamin and antioxidant package and every
beverage contains calcium, potassium and EGCG.





Skinny
Water is currently being bottled using a hot-fill method at 2 locations, Union
Beverage in Union NJ and Cliffstar Corporation in Fontana, CA. This bicoastal
arrangement was set up to shorten shipping times to our distributors. We will be
looking for additional bottlers to attain the most efficient delivery to our
distributors.  We currently bottle our product in 12 bottle
cases.





Our
Raspberry Pomegranate Skinny Water product includes the dietary ingredient,
“SuperCitriMax,” which 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). This product also includes ChromeMate (R)  which is a patented
form of biologically active niacin-bound chromium called chromium nicotinate or polynicotinate that we also
obtain from Interhealth.





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 control appetite 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 originally
provided that it will automatically renew 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. We have spent significant
resources building the Skinny Water brand name, which we license in perpetuity
under this agreement.





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. As described below
under the caption “Legal Proceedings”, in 2008 we commenced an arbitration
proceeding with Peace Mountain to clarify certain aspects of this license
agreement under the auspices of the American Arbitration
Association.  The Company believes that this proceeding will result in
a more definitive agreement for the future and is currently in discussions with
Peace Mountain in an effort to complete a new agreement to govern their
relationship.





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®) in
bottled liquid dietary supplement products. This right was granted by
Interhealth on a non-exclusive basis. We use Super CitriMax®) in
certain of our Skinny Water products. We must purchase quantities of Super
CitriMax®) from the
manufacturer and are licensed to use InterHealth’s trademarks and logos in
marketing products containing Super CitriMax®). Our
agreement with Interhealth will continue unless terminated by either
party.


4


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 enhanced waters, Teas, Shakes and Javas. We
are also researching the new, all natural sweetener derived from Stevia as an
additional zero calorie sweetener to use in our products.





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 retail accounts and distributor
relationships. 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 1,625 stores nationally. 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. To date, we have contracted with 32 DSDs in 19
states in the U.S. Currently we have been authorized to sell Skinny products in
all ACME Markets, Giant of Carlisle, select Shop Rite stores and select Walgreen
stores.  Skinny products are now sold in over 2,000
stores.





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. To date, we have contracted with
32 DSDs in 19 states in the U.S., of which 12 are in the Anheuser Busch
network.  We work with the DSD to obtain corporate authorization from
chain stores in a particular market. It often takes more than one DSD to deliver
to all the stores within a chain. The company must coordinate promotions and
advertising between the chain stores and the DSD. The company also negotiates
any slotting fees that are required for product placement.





We also
distribute our products directly to select national retail accounts based on
purchase order relationships. DSDs will distribute to grocery, convenience,
health clubs, retail drug, and health food establishments. We will contract with
independent trucking companies to transport the product from contract packers to
distributors. Distributors will then sell and deliver our products directly to
retail outlets, and such distributors or sub-distributors stock the retailers’
shelves with the products. Distributors are responsible for merchandising the
product at store level. We are responsible for managing our network of
distributors and the hiring of sales managers, who are responsible for their
respective specific channel of sales distribution.





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 supplies 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 nutraceutical ingredients from reliable
outside suppliers, 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.





Contract Packing
Arrangements





We do not
directly manufacture our products but instead outsource the manufacturing
process to third party bottlers and contract packers (also sometimes referred to
herein as co-packers). Our bottle products are hot filled, we purchase certain
raw materials such as concentrates, flavors, supplements, bottles, labels,
trays, caps and other ingredients. These raw materials are delivered to our
third party co-packers. We currently use two independent contract packers known
as co-packers to prepare, bottle and package our bottle products. Once the
product is manufactured, we purchase and store the finished product at that
location or in nearby third party warehouses.


5





The
co-packers assemble our products and charge 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. Skinny Water is
currently being bottled at 2 locations, Union Beverage in Union NJ and Cliffstar
Corporation in Fontana, CA. This bi-coastal arrangement was set up to shorten
shipping times to our distributors. We will be sourcing additional bottlers in
different areas of the country to attain the most efficient delivery to our
distributors.  We currently bottle our product in 12 bottle
cases. Other than minimum case volume requirements per production run for
most co-packers, we do not typically have annual minimum production commitments
with our co-packers. Our co-packers may terminate their arrangements with us at
any time, in which case we could experience disruptions in our ability to
deliver products to our customers.





We will
review our contract packing needs in light of regulatory compliance and
logistical requirements and may add or change co-packers based on those needs.
We experienced increases in co-packing fees for 2008 primarily related to a
change from cold-fill packing to hot-fill packing, which is a more costly
manufacturing process. While we expect increases in our costs of raw materials
to continue in 2009, we believe we may see some stabilization or decreases in
our co-packing fees as a result of expected volume increases.





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.  Other ingredients, such as our vitamin packages,
antioxidant packages and flavorings come from third party
suppliers.  Although, these supply arrangements are subject to
interruption based on, for example, market conditions, our suppliers have given
us assurances that our supply will not be interrupted. We are in the process of
negotiating a supply contract with an additional vendor in order to assist us in
forecasting and hedging our needs for the future.





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 arrangements have 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-packers, 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.




Currently,
we purchase our proprietary flavor concentrates from a third party flavor house,
Wild Flavors. In connection with the development of new products and flavors,
independent suppliers bear a large portion of the expense for product
development, thereby enabling us to develop new products and flavors at
relatively low cost. We anticipate that for future flavors and additional
products, we may purchase flavor concentrate from other flavor houses with the
intention of developing other sources of flavor concentrate for each of our
products. If we have to replace a flavor supplier, we could experience
disruptions in our ability to deliver products to our customers, which could
have a material adverse effect on our results of operations.




The
prices of raw materials continued to increase in 2008. These increased costs,
together with increased costs primarily of energy, gas and freight resulted in
increases in certain product costs which exerted pressure on our gross margins
in 2008. We are still subject to freight surcharges in addition to these
agreements, but anticipate a stabilization or reduction of these costs in 2009
due to lower fuel prices.




Quality
Control





Our
products are made from high quality ingredients and natural flavors. We seek to
ensure that all of our products satisfy our quality standards. Contract packers
are selected and monitored in an effort to assure adherence to our production
procedures and quality standards. Samples of our products from each production
run undertaken by each of our contract packers are analyzed and categorized in a
reference library.




For every
run of product, our contract packer undertakes extensive on-line testing of
product quality and packaging. This includes testing levels of sweetness, taste,
product integrity, packaging and various regulatory cross checks. For each
product, the contract packer must transmit all quality control test results to
us for reference following each production run.




Testing
includes microbiological checks and other tests to ensure the production
facilities meet the standards and specifications of our quality assurance
program. Water quality is monitored during production and at scheduled testing
times to ensure compliance with beverage industry standards. The water used to
produce our products is filtered and is also treated to reduce alkalinity.
Flavors are pre-tested before shipment to contract packers from the flavor
manufacturer. We are committed to an on-going program of product improvement
with a view toward ensuring the high quality of our product through a program
for stringent contract packer selection, training and
communication.


6


Competition





The
market for functional beverages is 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.





We
believe that the principal competitive factors in the functional beverage and
weight loss market are:





●
            brand
      recognition and trustworthiness;


●
            functionality
      of product formulations;


●
            distribution;


●
            shelf
      space;


●
            sponsorships;


●
            product
      quality and taste;


●
            pricing;


●
            new
      flavors and product development
initiatives;


●
            attractive
      packaging; and


●
            the
      ability to attract and retain customers through promotion and
      advertising.





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 whom also distribute other beverage brands. Our products compete with all
non-alcoholic beverages, most of which are marketed by companies with
substantially greater financial resources than ours. We also compete with
regional beverage producers and “private label” soft drink suppliers.
Significant competitors for Skinny Water in the functional beverage category are
product lines such as Vitamin Water, Fuze, Enviga, SoBe, Life Water, Function
and Celsius.  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
enhanced beverage industry. We, however, have no control over how successful
competitors will be in addressing these factors. By focusing our marketing and
promotion of Skinny Water as a zero calorie, sugar, sodium and preservative-free
alternative, 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 and functional beverage industry and to identify
or develop new, marketable products. These activities include reviewing
periodicals, scientific research and relevant clinical studies and working with
our suppliers. 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
Shakes.





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 “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 have spent significant
resources building the Skinny Water brand name, which we license in perpetuity,
subject to our agreement with Peace Mountain. We use non-disclosure agreements
with employees and distributors to protect our rights and those of our
suppliers.


7


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 with 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.





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.


8


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.





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 we market a dietary
supplement product, 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.


9


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 functional water industry, revenue is strongest in the 2nd and
3rd
quarters of the year. Although our business experiences fluctuations in sales
due to seasonality, we have added distributors in more temperate climates, such
as California and Arizona, in an effort to mitigate some of the seasonality in
our revenues. We believe the overall impact of seasonality on revenue is
difficult to predict at this time.





Number
of Employees





As of
December 31, 2008, we had a total of fifteen 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.




Item
1A. 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, 2008, we had revenues of $2,179,055 as compared to revenues of $752,825 for
the year ended December 31, 2007. There can be no assurance that we will be able
to continue to generate revenues or that we will  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, 2008, we had an accumulated deficit of $22,229,657, of which
$14,234,212 is directly related to the development of Skinny Nutritional
products. For the years ended December 31, 2008 and December 31, 2007, we
incurred losses from operations of $6,232,123 and $5,698,643, 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, 2008, our cash and cash equivalents was approximately $236,009. We
have been substantially reliant on capital raised from private placements of our
securities to fund our operations. During the 2008 fiscal year, we raised an
aggregate amount of $5,205,690 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 will only be
sufficient to meet our expected cash needs for working capital and capital
expenditures for a period of less than twelve months, without raising additional
capital from the sale of our securities. This will depend, however, on our
ability to execute on our 2009 operating plan and to manage our costs in light
of developing economic conditions and the performance of our
business.





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, 2008, 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.


10


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.




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. Since that date the bank has extended 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. The maturity of this loan had been extended to March
20, 2009 and we are currently negotiating the repayment terms of the outstanding
balance due on this loan with the bank.  The current balance on the
loan is $162,500. No assurances, however, can be given that the bank will
continue to extend the term of this loan for any specific duration, if at
all.





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 initially provided for an
initial funding limit of $300,000 and subsequently our borrowing limit was
increased to $750,000. 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
no balance outstanding under 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.  We are currently
negotiating with the lender for more favorable terms.  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.


11


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 bottles, 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.


12


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 Glaceau Vitamin Water® and SoBe
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, drugstores and convenience stores. We also have
distribution arrangements with retail accounts, including Target, to distribute
our products through their venues. 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. Further,
these arrangements are terminable at any time by these retailers or
us.





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.


13





A
decision by any of these retailers, or any other large retail accounts we may
obtain, to decrease the amount purchased from us or to cease carrying our
products could have a material adverse effect on our reputation, financial
condition and consolidated results of operations. In addition, we may not be
able to establish additional distribution arrangements with other national
retailers. In addition, if we become more dependent on national retail chains,
these retailers may assert pressure on us to reduce our pricing to them or seek
significant product discounts. In general, our margins are lower on our sales to
these customers because of these pressures. Any increase in our costs for these
retailers to carry our product, reduction in price, or demand for product
discounts could have a material adverse effect on our profit margin. Finally,
our “direct to retail” distribution arrangements may have an adverse impact on
our existing relationships with our independent regional distributors, who may
view our “direct to retail” accounts as competitive with their business, making
it more difficult for us to maintain and expand our relationships with
independent distributors.





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, these agreements typically may be
terminated at any time generally with a termination fee. Therefore, we may not
be able to maintain our current distribution relationships or establish and
maintain successful relationships with distributors in new geographic
distribution areas. Moreover, there is the additional possibility that we may
have to incur additional expenditures to attract and maintain key distributors
in one or more of our geographic distribution areas in order to profitably
exploit our geographic markets.





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.


14


Because
our distributors are not required to place minimum orders with us, we need to
carefully manage our inventory levels, and it is difficult to predict the timing
and amount of our sales.





Our
independent distributors are not required to place minimum monthly or annual
orders for our products. In order to reduce inventory costs, independent
distributors typically order products from us on a recurring basis in
quantities based on the demand for the products in a particular
distribution area. Accordingly, there is no assurance as to the timing or
quantity of purchases by any of our independent distributors or that any of our
distributors will continue to purchase products from us in the same frequencies
and volumes as they may have done in the past. In order to be able to deliver
our products on a timely basis, we need to maintain adequate inventory levels of
the desired products. However, we cannot predict the number of cases sold by any
of our distributors. If we fail to meet our shipping schedules, we could damage
our relationships with distributors and/or retailers, increase our shipping
costs or cause sales opportunities to be delayed or lost, which would
unfavorably impact our future sales and adversely affect our operating results.
In addition, if the inventory of our products held by our distributors and/or
retailers is too high, they will not place orders for additional products, which
would also unfavorably impact our future sales and adversely affect our
operating results.





We
rely on third-party bottles, which could result in inefficiencies in our
management of our marketing and distribution efforts.





We do not
directly manufacture our products, but instead outsource such manufacturing to
bottlers and other contract packers. As a consequence, we
depend on third parties to produce our beverage products and deliver them to
distributors. Our ability to attract and maintain effective relationships with
these parties for the production and delivery of our products in a particular
geographic distribution area is important to the achievement of successful
operations within each distribution area. Competition for bottlers’ business is
intense and this could make it more difficult for us to obtain new or
replacement bottlers, or to locate back-up bottlers, in our various distribution
areas, and could also affect the economic terms of our agreements with them. Our
bottlers may terminate their arrangements with us at any time, in which case we
could experience disruptions in our ability to deliver products to our
customers. We may not be able to maintain our relationships with current
contract bottlers or establish satisfactory relationships with new or
replacement parties. The failure to establish and maintain effective
relationships with bottlers for a distribution area could increase our
manufacturing costs and thereby materially reduce profits realized from the sale
of our products in that area. In addition, a disruption or delay in production
of any of such products could significantly affect our revenues from such
products as alternative co-packing facilities in the United States with adequate
capacity may not be available for such products either at commercially
reasonable rates, and/or within a reasonably short time period, if at all. 
Consequently, a disruption in production of such products could adversely affect
our revenues.




In
addition, to the extent demand for our products exceeds available inventory and
the capacities produced by contract packing arrangements, or orders are not
submitted on a timely basis, we will be unable to fulfill distributor orders on
demand. Conversely, we may produce more product than warranted by the actual
demand for it, resulting in higher storage costs and the potential risk of
inventory spoilage. Our failure to accurately predict and manage our contract
packaging requirements may impair relationships with our independent
distributors and key accounts, which, in turn, would likely have a material
adverse effect on our ability to maintain profitable relationships with those
distributors and key accounts.





Our
failure to accurately estimate demand for our products could adversely affect
our business and financial results.




We may
not correctly estimate demand for our products.  Our ability to estimate
demand for our products is imprecise, particularly with new products, and may be
less precise during periods of rapid growth, particularly in new markets. 
If we materially underestimate demand for our products or are unable to secure
sufficient ingredients or raw materials including, but not limited to, bottles,
labels, flavors, supplements, certain sweeteners, or packing arrangements, we
might not be able to satisfy demand on a short-term basis.  Moreover,
industry-wide shortages of certain juice concentrates, supplements and
sweeteners have been and could, from time to time in the future, be
experienced.  Such shortages could interfere with and/or delay production
of certain of our products and could have a material adverse effect on our
business and financial results.  We generally do not use hedging agreements
or alternative instruments to manage this risk.




We
rely upon our ongoing relationships with our key flavor suppliers.  If we
are unable to source our flavors on acceptable terms from our key suppliers, we
could suffer disruptions in our business.




Generally,
flavor suppliers hold the proprietary rights to their flavors. 
Consequently, we do not have the list of ingredients or formulae for our flavors
and certain of our concentrates readily available to us and we may be unable to
obtain these flavors or concentrates from alternative suppliers on short notice.
Industry-wide shortages of certain juice concentrates, supplements and
sweeteners have been, and could, from time to time in the future, be
experienced.  Such shortages could interfere with and/or delay production
of certain of our products.  If we have to replace a flavor supplier, we
could experience temporary disruptions in our ability to deliver products to our
customers which could have a material adverse effect on our results of
operations.




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.


15


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. Under the
Company’s current agreement with Peace Mountain, we have a minimum royalty
obligation based on a percentage of wholesale sales with a quarterly minimum of
$15,000. Our rights to the trademarks are in perpetuity as long as we satisfy
the quarterly minimum payment of $15,000. We have spent significant resources
building the Skinny Water brand which we license in perpetuity under our
agreement wit Peace Mountain. Our licensors may 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 and our business, financial condition, results of operations and
cash flows will be significantly harmed.





Disruption
of our supply chain could have an adverse effect on our business, financial
condition and results of operations.




Our
ability and that of our suppliers, business partners (including packagers),
contract manufacturers, independent distributors and retailers to make, move and
sell products is critical to our success. Damage or disruption to our or their
manufacturing or distribution capabilities due to weather, natural disaster,
fire or explosion, terrorism, pandemics such as avian flu, strikes or other
reasons, could impair our ability to manufacture or sell our products. Failure
to take adequate steps to mitigate the likelihood or potential impact of such
events, or to effectively manage such events if they occur, could adversely
affect our business, financial condition and results of operations, as well as
require additional resources to restore our supply chain.





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.


16


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.





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.





The
global economic crisis may adversely impact our business and results of
operations.





The
beverage industry can be affected by macro economic factors, including changes
in national, regional, and local economic conditions, employment levels and
consumer spending patterns. The recent disruptions in the overall economy and
financial markets as a result of the global economic crisis have adversely
impacted the U.S. market. This has reduced consumer confidence in the economy
and could negatively affect consumers’ willingness to purchase our products as
they reduce their discretionary spending. Moreover, current economic conditions
may adversely affect the ability of our distributors to obtain the credit
necessary to fund their working capital needs, which could negatively impact
their ability or desire to continue to purchase products from us in the same
frequencies and volumes as they have done in the past. We also may be unable to
access credit markets on favorable terms or at all. There can be no assurances
that government responses to the disruptions in the financial markets will
restore consumer confidence, stabilize the markets or increase liquidity and the
availability of credit. If the current economic conditions persist or
deteriorate, sales of our products could be adversely affected, the credit
status of our customers could be impacted, collectibility of accounts receivable
may be compromised and we may face obsolescence issues with our inventory, any
of which could have a material adverse impact on our operating results and
financial condition.


17


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:





•
            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, 2008, of the 195,503,3137 issued and outstanding shares of our
Common Stock, approximately 96,444,684 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.


18


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, 2008, there were outstanding and immediately exercisable options to
purchase 7,530,000 shares of Common Stock and other warrants to purchase
15,713,723 shares of Common Stock. The shares underlying warrants (including the
warrants that are granted upon conversion of the debentures) represent
approximately 8% of our common stock, and the shares underlying our currently
outstanding options represent approximately 4% of our common stock. The 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
1B. Unresolved Staff Comments




We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.





Item
2:  Description of Property





During
the 2008 fiscal year our corporate offices were located at 3 Bala Plaza East,
Suite 117, Bala Cynwyd, Pennsylvania. On January 9, 2009, we entered into a
sublease with Hallinan Capital Corp. for approximately 1,978 square feet of
office space located at Three Bala Plaza East, Suite 101, Bala Cynwyd, PA 19004.
The premises will serve as the Company’s new corporate headquarters. The
sublease expires two years following the commencement date and will terminate on
such expiration date provided that either party gives six months notice of its
intention to terminate the lease to the other party. In the event that neither
party provides such notice, the sublease will continue on a month to month
basis, with either party having the right to terminate at any time upon the
provision of six months written notice. The sublease will, however, terminate
without regard to such notice provisions upon the expiration or termination of
the lease under which the premises have been sublet to the Company. The sublease
calls for monthly payments of $5,192.25 from the commencement date and through
October 2009. Thereafter, the rent due under the sublease will be increased by
$1,978 per annum.





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.





On March
24, 2008, the Company requested arbitration with Peace Mountain Corporation to
clarify certain aspects of the licensing agreement. The arbitration will be
administered by the American Arbitration Association in Providence, R.I. The
items in question are the timing of payments to Peace Mountain, the approval
process for the use of trademarks, the approval process for formulas and the
protection of trademark rights in foreign countries. The Company feels that this
arbitration will result in a more definitive agreement for the future. The
Company is currently in discussions with Peace Mountain to complete this
agreement.





On or
about June 30, 2008, the Company filed an arbitration claim with the Financial
Industry Regulatory Authority (“FINRA”) against ROGO Capital, LLC (“ROGO”),
FINRA Case No. 08-02163, alleging breach of contract and fraud claims concerning
ROGO’s alleged misrepresentations made in connection with the Company’s
retention of ROGO to serve as its placement agent and ROGO’s alleged
non-performance under the placement agreement.  ROGO disputes these
claims and in response, on or about September 4, 2008, ROGO filed a counterclaim
in the FINRA arbitration against the Company alleging breach of the placement
agreement and claiming damages of approximately $241,000.  The Company
disputes ROGO’s allegations and is vigorously defending the
counterclaim.  The parties are now engaged in
discovery.  The FINRA arbitration hearing on the dispute is scheduled
to begin on July 13, 2009.


19





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, 2008.





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 496 shareholders of our
common stock as of December 31, 2008 holding 195,503,317 common
shares.





High Bid
                  
                  
                  Low BidFiscal
      2008March
      31, 2008
                  
                  $
                  0.15
                  
                  
                  $
                  0.03June
      30, 2008
                  
                  $
                  0.51
                  
                  
                  $
                  0.10September
      30, 2008
                  
                  $
                  0.39
                  
                  
                  $
                  0.15December
      31, 2008
                  
                  $
                  0.19
                  
                  
                  $
                  0.06Fiscal
      2007March
      31, 2007
                  
                  $
                  0.43
                  
                  
                  $
                  0.17June
      30, 2007
                  
                  $
                  0.28
                  
                  
                  $
                  0.15September
      30, 2007
                  
                  $
                  0.19
                  
                  
                  $
                  0.10December
      31, 2007
                  
                  $
                  0.14
                  
                  
                  $
                  0.06





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, 2008, 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.


20


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, 2008, 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
                  
                  19,437,500
                  
                  $
                  0.218
                  
                  562,5000Equity
      Compensation Plans Not Approved by Stockholders (1)
                  
                  15,715,723
                  
                  $
                  0.07
                  
                  N/ATotal
                  
                  35,153,223
                  
                  
                  -
                  
                  562,500





(1)
Consists of warrants issued to third parties for services rendered.





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 during the fiscal year ended
December 31, 2008 or during the current fiscal year, other than those
disclosed in previous SEC filings.




Stock
Repurchases




During
fiscal 2008, we did not repurchase any shares of our common stock.





Item
6.   Selected Financial Data





We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.





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




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 1A—Risk Factors” and included in other portions of this
report.





Overview





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. and 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. This discussion
relates solely to the operations of Skinny Nutritional Corp.





21





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
$5,698,643 for the year ended December 31, 2007. For our 2008 fiscal year, we
generated revenues of $2,179,055 and incurred a net loss of $6,232,123, of which
$2,824,252 was non-cash related. 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.





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 a
majority of our resources to product development, marketing and sales activities
regarding our line of Skinny products, including the procurement of a number of
purchase orders from distributors. This trend continued in our 2008 fiscal
year.





Our
Current Products





We
operate our business in the rapidly evolving beverage industries and are
currently focused on developing, distributing and marketing nutritionally
enhanced functional beverages. Enhanced functional beverages have been leading
the growth of beverage consumption in the United States. Through the year ended
December 31, 2008, we have operated our business in the rapidly evolving
functional beverage industry, principally through marketing and distributing our
“Skinny Water” line of functional beverages.





Our
Skinny Water product line, which we originally introduced in 2005, has been
reformulated to include six flavors (Acai Grape Blueberry, Raspberry
Pomegranate, Peach Mango Mandarin, Passionfruit Lemonade, Goji Fruit Punch and
Orange Cranberry Tangerine).  We expect to launch Skinny Teas and new
product extensions with zero calories, sugar and sodium and with no
preservatives.





Skinny
Water is formulated with a proprietary blend of vitamins, minerals and
antioxidants. 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. Skinny Water is ephedrine-free
and contains no caffeine or sugar. Skinny Water’s Raspberry Pomegranate flavor
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 without stimulating the nervous system when
used in conjunction with diet and exercise. Skinny Water also includes
ChromeMate® which is a patented form of biologically active niacin-bound
chromium called chromium nicotinate or polynicotinate that we also obtain from
Interhealth.





Our
current business strategy is to develop and maintain our current national
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 and retail-centered promotions
and advertisements as well as building a national sales and distribution network
to take our products into retail and direct store delivery (DSD) distribution
channels.




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 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.





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.


22





Background
of our Product Development Activities





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 was eliminated; (b) Jamnica and Jana North American paid an amount of
$23,125 on our behalf in satisfaction of storage and warehousing fees; (c)
receivables due to us from select accounts were transferred to Jana North
America; and (d) we made 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 also provided
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
obtained the exclusive worldwide rights from Peace Mountain Natural Beverages
Corporation to bottle and distribute a dietary supplement called Skinny Water®.
Skinny Water is a line of six flavored enhanced waters, with the Raspberry
Pomegranate including an all-natural appetite suppressant that helps people
control their appetite 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 June
7, 2004 we entered into an agreement with Interhealth Nutraceuticals
Incorporated and obtained the right to sell, market, distribute and package
Super CitriMax® in bottled liquid dietary supplement products. This right was
granted by Interhealth on a non-exclusive basis. We use ChromeMate and Super
CitriMax® in our Skinny Water products. Further, we must purchase quantities of
ChromeMate and Super CitriMax® from the manufacturer and are licensed to use
InterHealth’s trademarks and logos in marketing products containing ChromeMate
and Super CitriMax®. 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 new Skinny Water flavors, Teas and
Shakes.





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.
Subsequently, as of June 30 2007, Mr. McDonald became our Chief Financial
Officer in addition to his other positions with us following the resignation of
Kenneth Brice, the Company’s Chief Financial Officer at that time.





On
December 1, 2008, we entered into an employment relationship with Mr. Ronald D.
Wilson, who will serve as the President and Chief Executive Officer of the
Company effective immediately. Contemporaneously with Mr. Wilson’s appointment
as the President and Chief Executive Officer of the Company, the Board elected
Mr. Wilson to serve on the Company’s Board of Directors for a period of one year
or until his successor is elected and qualified. Mr. Wilson was appointed to
replace Mr. Donald McDonald as the Company’s President and Chief Executive
Officer. Mr. McDonald continues to serve on the Company’s Board of Directors and
as the Company’s Chief Financial Officer.




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 our Employee Stock Option Plan, including a total of
5,500,000 options granted to certain of our executive officers.




23




Advisory
Board





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. As described below, in December 2008, we
appointed Mr. Wilson as our Chief Executive Officer and President. 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. Subsequently, we also granted Mr. Wilson an
additional warrant to purchase 1,000,000 shares of Common Stock in April 2008,
in consideration for additional consulting services provided by Mr. Wilson to
us. These warrants are also exercisable for a period of five years at a price of
$0.05 per share. 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.





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, 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 proposed
financings.




At
December 31, 2008, our cash and cash equivalents was approximately $236,009. We
have been substantially reliant on capital raised from private placements of our
securities to fund our operations. During the 2008 fiscal year, we raised an
aggregate amount of $5,205,690 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. See the discussion below under the
caption “Liquidity and Capital Resources” for additional information regarding
these transactions.





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 less than twelve months and that without
raising additional capital, the Company will be limited in it’s projected
growth. This will depend, however, on our ability to execute on our 2009
operating plan and to manage our costs in light of developing economic
conditions and the performance of our business. 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, 2008, 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.





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.




Restatement
of Prior Year Results





The
Company recently filed an amendment to its Annual Report on Form 10-KSB for the
year ended December 31, 2007to restate its financial statements in order to
change its method of accounting for convertible debentures, options and
warrants. 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. The results of
operations reported in this Management’s Discussion and Analysis gives effect to
this restatement. Further information on the nature and impact of these
adjustments is provided in Note 4, “Restatement of Financial Statements” under
Notes to Consolidated Financial Statements included in Item 8, “Financial
Statements” of this Annual Report on Form 10-K.




24




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. Management believes that
adequate provision has been made for cash discounts, returns and spoilage based
on our historical experience.





Inventories – Inventories are
stated at the lower of cost to purchase and/or manufacture the inventory or the
current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand,
production availability and/or our ability to sell the
product(s) concerned.  Demand for our products can fluctuate
significantly. Factors that could affect demand for our products include
unanticipated changes in consumer preferences, general market and economic
conditions or other factors that may result in cancellations of advance orders
or reductions in the rate of reorders placed by customers and/or continued
weakening of economic conditions.  Additionally, management’s estimates of
future product demand may be inaccurate, which could result in an understated or
overstated provision required for excess and obsolete inventory.





Cost of Sales – Cost of sales
consists of the costs of raw materials utilized in the manufacture of products,
co-packing fees, repacking fees, in-bound freight charges, as well as certain
internal transfer costs, warehouse expenses incurred prior to the manufacture of
our finished products and certain quality control costs.  Raw materials
account for the largest portion of the cost of sales.  Raw materials
include cans, bottles, other containers, ingredients and packaging
materials.




Operating Expenses –
Operating expenses include selling expenses such as distribution expenses to
transport products to customers and warehousing expenses after manufacture, as
well as expenses for advertising, commissions, sampling and in-store
demonstration costs, costs for merchandise displays, point-of-sale materials and
premium items, sponsorship expenses, other marketing expenses and design
expenses. Operating expenses also include payroll costs, travel costs,
professional service fees including legal fees, termination payments made to
certain of our prior distributors, entertainment, insurance, postage,
depreciation and other general and administrative costs.




Stock-Based Compensation – We
account for share-based compensation arrangements in accordance with the
provisions of SFAS No. 123R, “Share-Based Payment” which requires the
measurement and recognition of compensation expense for all share-based payment
awards to employees and directors based on estimated fair values. We use the
Black-Scholes-Merton option pricing formula to estimate the fair value of our
stock options at the date of grant. The Black-Scholes-Merton option pricing
formula was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. Our employee stock
options, however, have characteristics significantly different from those of
traded options. For example, employee stock options are generally subject to
vesting restrictions and are generally not transferable. In addition, option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility, the expected life of an option and the
number of awards ultimately expected to vest. Changes in subjective input
assumptions can materially affect the fair value estimates of an option.
Furthermore, the estimated fair value of an option does not necessarily
represent the value that will ultimately be realized by an employee. We use
historical data to estimate the expected price volatility, the expected option
life and the expected forfeiture rate. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant for the estimated life of
the option. If actual results are not consistent with our assumptions and
judgments used in estimating the key assumptions, we may be required to increase
or decrease compensation expense or income tax expense, which could be material
to our results of operations.





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.




Management
Discussion and Analysis:





Results of
Operations: Year Ended December 31,
2008 compared to Year
Ended December 31,
2007





For the
twelve months ended December 31, 2008, our revenues were $2,179,055 as compared
to $752,825 for the same period last year. This increase in revenues for the
twelve months ended December 31, 2008 is due primarily to the introduction of
the five reformulated Skinny flavors and the increased volume of product
shipment resulting from the development of thee Company’s relationship with
Target Corp. and new distribution relationships established by the Company
during the year.  Direct sales to retailers were $304,809 as compared
to $705,742 for the prior year period. Sales to our DSD network increased to
$1,589,982 in 2008 compared to $37,195 during 2007. Cost of goods sold was
$1,873,477 for the year ended December 31, 2008 as compared to $532,812 incurred
during the same period last year. Marketing and advertising costs were
$2,083,646 for the year ended December 31, 2008 as compared to $721,442 for the
same period last year. This increase is attributable to product design and
increased advertising expenses along with additional personal to assist our
growth in DSD and market areas.




25




The increased revenue for 2008 was
primarily due to an increased volume of product shipment resulting from the
development of the Company’s reformulation, introduction of 5 new flavors of
Skinny Water and growth from our DSDs to 15 at the end of
2008.





General
and administrative costs (which include salaries, rent, office overhead, and
public company expenses) were $3,421,468 for the twelve months ended December
31, 2008 as compared to $1,715,218 over the same period in 2007. This Increase
of 114% is primarily due to costs associated with private placements of stock
along with non-cash expenses related to grants of options and
warrants.





Interest
expense was $67,042 for the year ended December 31, 2008 as compared to $120,514
for the same period last year.





Net loss
for the twelve month period was $6,232,123 as compared to $5,698,643 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. We believe that net cash on hand as of the
date of this Annual Report is only be sufficient to meet our expected cash needs
for working capital and capital expenditures for a period of less than twelve
months and without raising additional capital, the Company will be limited in
its projected growth. 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.





2008
Financing Activities





As
previously reported, we commenced a private offering  of its common
stock in December 2007 for up to a maximum of $3,200,000 of shares at an
offering price of $0.04 per share and the Company had received subscriptions of
approximately $3.1 million. In this offering, we received gross proceeds of
$3,163,000 and sold an aggregate of 79,075,000 shares of common stock to
accredited investors. After giving effect to offering expenses and commissions,
the Company received net proceeds of approximately $2.8 million. The Company
agreed to pay commissions to registered broker-dealers that procured investors
in the offering and issue such persons warrants to purchase such number of
shares as equals 10% of the total number of shares actually sold in the offering
to investors procured by them. Agent warrants shall be exercisable at the per
share price of $0.05 for a period of five years from the date of issuance. Based
on the foregoing, agents have earned an aggregate of $55,000 in commissions and
1,362,500 warrants. In connection with the offering, the Company relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder.
Based on the representations made in the transaction documents, the Company
believes that the Investors are “accredited investors”, as such term is defined
in Rule 501(a) promulgated under the Securities Act.




26




In
addition, as previously reported, commencing in November 2008, we conducted a
private offering in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder pursuant
to which we sought to raise an aggregate amount of $1,875,000 of shares of
common stock (the “November Offering”). On February 5, 2009, the Company
completed the November Offering. Total proceeds raised in the November Offering
were $1,867,690 and the subscribers purchased an aggregate of 31,128,167 shares
of common stock. The Company intends to use the net proceeds from the November
Offering of approximately $1,800,000 for working capital, repayment of debt and
general corporate purposes. In connection with the November Offering, the
Company’s Chief Executive Officer, Chief Financial Officer and Chairman agreed
not to exercise a total of 12,000,000 options and 2,000,000 warrants
beneficially owned by them until such time as the Company’s stockholders adopt
an amendment to its Articles of Incorporation to increase the number of the
Company’s authorized shares of common stock. The Company agreed to pay
commissions to registered broker-dealers that procured investors and issue such
persons warrants to purchase such number of shares as equals 10% of the total
number of shares actually sold in the November Offering to investors procured by
them. Agent warrants are exercisable at the per share price of $0.07 for a
period of five years from the date of issuance. We paid total commissions of
$20,959 and issued agent warrants to purchase 349,317 shares of common stock.
The securities offered have not been registered under the Securities Act and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. Based on the representations made in
the transaction documents, the Company believes that the Investors are
“accredited investors”, as such term is defined in Rule 501(a) promulgated under
the Securities Act.





In
addition to these transactions, the Company sold an aggregate of $175,000 of
shares of its common stock to three individual accredited investors in private
sales and issued these investors a total of 3,541,667 shares of common stock. In
connection with the offering, the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Based on the representations made in the transaction documents, the Company
believes that the Investors are “accredited investors”, as such term is defined
in Rule 501(a) promulgated under the Securities Act.





2007
Financings





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. During 2007, the
Company received proceeds of $1,188,063 from these financings and issued a total
of 15,848,179 shares of common stock to the investors in such offerings. In
connection with such financings, the Company issued 2,759,390 warrants to
“Selling Agents” and paid them $106,954 dollars in commissions. In addition, the
Company also issued an additional 9,809,332 shares of common stock 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.





Debenture
Conversions/Warrant Exercises





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
fiscal 2007, 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 of fiscal 2007, holders of principal of $1,755,000
of convertible debentures converted such amount into 17,550,000 shares of common
stock. During the second quarter of 2007, holders of convertible debentures
converted $40,000 of principal into 400,000 common shares. During the fourth
fiscal quarter, holders of $255,000 in principal of convertible debentures (plus
$51,000 in interest) converted such amounts into 4,613,333 shares of common
stock. In addition one investor was repaid in cash for $20,000 in principal and
$4,000 in interest. In addition, with respect to the conversion of the
debentures that did not elect to convert such securities in response to the
conversion offer, the Company 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
remainder are exercisable at $0.50 per share. All warrants expire three years
from the date of issuance. The securities issued 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.




27




During
fiscal 2008, holders of convertible debentures and warrants previously issued by
the Company converted or exercised such securities into shares of common stock
and warrants as follows. In January 2008, the Company issued 725,000 shares of
common stock upon the conversion of an aggregate amount of $72,500 of
outstanding convertible debentures (inclusive of interest).  The
company also issued 300,000 shares of common stock in exchange for a $15,000
dollar note.  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
notes and interest. 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 April 11, 2008, the Company issued 1,369,375 shares of common stock upon the
conversion of an aggregate amount of $54,775 (inclusive of accrued interest of
$10,455) of outstanding convertible debentures. In addition, in May 2008, the
Company issued 850,000 shares of common stock upon the conversion of an
aggregate amount of $34,000 (inclusive of accrued interest of $2,392) of notes
and interest and also issued 1,696,272 shares of common stock upon the exercise
of common stock purchase warrants pursuant to a cashless exercise provisions
contained in such warrants. Further, on June 2, 2008, the Company issued
1,155,870 shares of common stock in exchange for a note and interest in the
aggregate amount of $161,822 (inclusive of accrued interest of
$51,822).  Also the Company issued 808,414 shares of common stock upon
conversion of an aggregate principal amount of $113,178 of
debentures.  In addition, on June 16, 2008, the Company issued 531,551
shares of common stock upon the conversion of an aggregate amount of $74,417
(inclusive of accrued interest of $18,417) of outstanding convertible debentures
and on June 18, 2008, the Company issued 100,000 shares of common stock upon the
conversion of an aggregate amount of $10,000 of outstanding convertible
debentures. In August 2008, the Company issued 776,828 shares of common stock
upon the conversion of an aggregate amount of $108,756 (inclusive of accrued
interest of $18,756) to the holders of outstanding convertible debentures upon
the conversion of such securities. The Company also issued an aggregate of
111,084 shares of common stock upon the exercise of common stock purchase
warrants pursuant to a cashless exercise provisions contained in such warrants
in June 2008 and in August 2008 issued an aggregate of 87,692 shares of common
stock upon the exercise of common stock purchase warrants pursuant to a cashless
exercise provision contained in such warrants. In November 2009, the Company
issued 129,589 shares of common stock upon the exercise of common stock purchase
warrants pursuant to a cashless exercise provision contained in such warrants.
These securities have not been registered under the Securities Act of 1933, as
amended, and were issued in reliance upon the exemption for registration set
forth in Section 3(a)(9) thereof.





Other
Transactions Impacting our Capital Resources





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 current
balance due on this loan is $162,500. The Company has applied this amount to
satisfy its obligations to Madison Bank under the Forbearance Agreement.
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 the
bank has extended the term of 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. The maturity of this loan had been
extended to March 20, 2009.  We are currently negotiating the
repayment terms of the outstanding balance due on this loan with the bank.
During the current fiscal year, we have made two principal payments totaling
$37,500. On January 10, 2008 the Company issued two million shares of stock to
Chairman in consideration for his personal guarantee of the Valley Green
Loan.





On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”). The agreement initially provided for
an initial funding limit of $300,000. Subsequently, our limit was increased to
$750,000. As of December 31, 2008, we had $3,199 outstanding 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. 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.





In
connection with its establishment of an advisory board in March 2008 and
execution of a consulting agreement with one advisor, the Company agreed to
issue to such persons a total of 6,000,000 common stock purchase warrants to the
advisors. The warrants are exercisable for a period of five years at a price of
$0.05. In addition, the Company also agreed in March 2008 to issue 1,000,000
additional warrants to an individual consultant not serving on the advisory
board in consideration of consulting services to be provided to the Company on
the same terms as described above. The issuance of the foregoing warrants 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 either
accredited investors or otherwise provided with access to material information
concerning the Company.





On
January 10, 2008 the Company issued two million shares of stock to Chairman in
consideration for his personal guarantee of the Valley Green Loan. On March 24,
2008, the Company’s Board of Directors approved the grant of an aggregate of
2,075,000 restricted shares of common stock to each of Mr. Michael Salaman, its
Chairman and Mr. Donald McDonald, its Chief Executive Officer, in consideration
of their agreement to provide a personal guaranty in connection with the
factoring agreement the Company entered into in November 2007.




28




Break Even and Profitability





As
discussed in the overview to this analysis, we have developed a newly formulated
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 second
quarter of calendar 2010 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





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.





In 2008, 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 and other retail outlets 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 build its brand and product awareness through
articles and mentions of Skinny Water in various print, radio, TV, and the
internet. The Company also attended the National Association of Convenience
Stores (NACS) trade show. In 2008, the Company also focused on in
store merchandising and marketing support materials for all of its distributors,
and establishing sampling teams in multiple locations at targeted
events.





In
connection with our marketing campaign, we have expended $2,083,646 for the year
ended December 31, 2008 compared to $721,442 for the year ended December 31,
2007 to fund various advertising and marketing programs to introduce our
products to numerous distribution channels and retail outlets in the U.S. 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 2009
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.





Expected changes in the number of
employees





As of
December 31, 2008 we have 15 employees including, our executive
officers.





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.




29




Recent
Accounting Pronouncements




In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”.  Statement No. 161 establishes,
among other things, the disclosure requirements for derivative instruments and
for hedging activities.  This statement requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about contingent features related to credit risk in
derivative agreements.  Statement No. 161 only affects disclosure
requirements, the adoption of Statement No. 161 effective January 1, 2009 has
not affected our financial position or results of operations.


In June
2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (FSP No. EITF 03-6-1).  FSP No. EITF 03-6-1 addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method described in Statement No. 128.  FSP No. EITF 03-6-1 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008; early adoption is not
permitted.  The adoption of FSP No. EITF 03-6-1 effective January 1,
2009 is not expected to materially affect our calculation of earnings per common
share.
 
 In
November 2008, the FASB ratified its consensus on EITF Issue No. 08-6, “Equity
Method Investment Accounting Considerations” (EITF No. 08-6).  EITF
No. 08-6 applies to all investments accounted for under the equity method and
provides guidance regarding (i) initial measurement of an equity investment,
(ii) recognition of other-than-temporary impairment of an equity method
investment, including any impairment charge taken by the investee, and (iii)
accounting for a change in ownership level or degree of influence on an
investee.  The consensus is effective for fiscal years beginning on or
after December 15, 2008, and interim periods within those fiscal
years.  EITF No. 08-6 is to be applied prospectively and earlier
application is not permitted.  Due to its application to future equity
method investments, the EITF Issue No. 08-6 is not expected to materially affect
our financial position or results of operations.


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
7a. Quantitative and Qualitative Disclosure About Market Risk.





We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.





Item
8.  Financial Statements.




Our
audited financial statements for the fiscal year ended December 31, 2008 follows
Item 15 of this Annual Report on Form 10-K.




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




None





Item
9A(T). Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




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 on
that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of the
end of the year to provide reasonable assurance that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934, as amended, is accurately recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.





Management’s Report on Internal
Control over Financial Reporting




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.




Management
has conducted an evaluation of the Company’s internal control over financial
reporting using the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission as a basis to
evaluate effectiveness and determined that internal control over financial
reporting was effective as of the end of the fiscal year ended December 31,
2008.




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.




30




Remediation
of Material Weakness




We
recently restated our financial statements for the year ended December 31,
2007.  The restatements were to correct the Company’s accounting for
its convertible debentures, options and warrants. In its amended Annual Report
on Form 10-KSB for the year ended December 31, 2007, the Company’s management
revised its original report on internal control over financial reporting and
concluded that due to the failure to properly account for these securities,
there was a material weakness in our internal control over financial reporting
as of December 31, 2007.




As
described in greater detail below, as a result of the material weakness in our
internal control over financial reporting, the Company engaged outside
consultants to ensure that its reported results are in compliance with
accounting principles generally accepted in the United States.  These
changes have improved the effectiveness of our internal control over financial
reporting.  Management believes we have remediated the aforementioned
material weakness by December 31, 2008.





Changes
in Internal Control over Financial Reporting




In
response to our previously reported weakness in our system of internal control
over financial reporting, the Company had 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.





Other
than as described above, there was no change in our system of internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934) during the quarterly period ended December 31, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.




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
9B.  Other Information




Our Board
of Directors adopted a Code of Ethics, as defined by Rule 406 of Regulation S-K
as of March 30, 2009. A copy of this Code of Ethics has been filed as Exhibit
14.1 to this Annual Report on Form 10-K.




31




The
Company has commenced a private offering of up to $2,100,000 of shares of Series
A Convertible Preferred Stock (the “Preferred Shares”) to accredited investors
through April 30, 2009. The shares being offered have not
been registered under the Securities Act of 1933, as amended (the “Act”) or
any state securities laws 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
Preferred Shares will be convertible into shares of the Company’s common stock
at the initial conversion price of $.06 per share. The
Preferred Shares will automatically convert into shares of the Company’s Common
Stock upon the effective date of an amendment to the Company’s Articles of
Incorporation increasing the number of authorized shares of the Company’s Common
Stock in an amount sufficient to permit the conversion of all of the outstanding
Preferred Shares. In the event that the automatic conversion event does not
occur by October 1, 2009, the Company shall thereafter have the option to redeem
the outstanding Preferred Shares. The
Company intends to use the proceeds from the offering for working capital and
general corporate purposes. 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 promulgated under the
Act.




PART
III




Item
10.  Directors and Executive Officers and Corporate Governance





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 four members.  There are no arrangements between our directors
and any other person pursuant to which our directors were nominated or elected
for their positions. There are no family relationships between any of our
directors or executive officers. Officers are elected by and serve at the
discretion of the Board of Directors.





Our
directors and officers are currently as follows:





Name
                
                Age
                
                PositionRonald
      Wilson
                
                59
                
                Chief
      Executive Officer, President and DirectorDonald
      J. McDonald
                
                56
                
                Chief
      Financial Officer and DirectorMichael
      Salaman
                
                46
                
                Chairman
      of the BoardMichael
      Reis
                
                63
                
                Interim
      Chief Operating Officer and
Director




Business
Experience





Ronald Wilson.Mr. Wilson
became our President and Chief Executive Officer in December 2008. Mr. Wilson
has worked in the soft drink industry for over 38 years, spending the majority
of his career with the Philadelphia Coca-Cola Bottling Company. He began his
career with Coca-Cola in 1977 as a Financial Analyst with Coca-Cola Bottling Co.
of N.Y. During the succeeding years, Mr. Wilson was promoted within Coke New
York to a number of positions, including Vice President/General Manager for Coke
New York’s Northern New England operation and Vice President/General Manager for
the New Jersey division. In 1985, Mr. Wilson was appointed the President and
Chief Operating Officer for The Philadelphia Coca-Cola Bottling Company and held
this office until his retirement in November 2006. He began his career in 1969
at a PepsiCo Inc. owned plant in various capacities in production, warehousing,
and sales. Mr. Wilson serves on numerous charitable and industry boards and
currently is the Vice Chair for the Board of Overseers at Rutgers University,
and is as an advisor to Rutgers School of Business. Mr. Wilson has also served
as the President of The Coca-Cola Bottlers’ Association and a board member of
The Dr Pepper Bottlers’ Association. Mr. Wilson graduated from Rutgers
University in 1971 with a Bachelor’s degree in history.





Donald J. McDonald. Donald J.
McDonald joined us as President and Chief Executive Officer, and a director, in
October 2006. Subsequently, he became our Chief Financial Officer in July, 2007.
Mr. McDonald was replaced by Mr. Wilson as the Company’s President and Chief
Executive Officer in December 2008. Mr. 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.




32




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 became the principal officer of the Company and directed
its operations as a marketing and distribution company and in 2005 focused the
Company’s efforts in the enhanced water business.





Michael Reis. Michael Reis
became our interim Chief Operating Officer and a director in October 2006. 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.





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.




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





Our Board
of Directors currently consists of four individuals. None of our current
directors is independent as defined in the Marketplace Rules of The NASDAQ Stock
Market. During the fiscal year ended December 31, 2008, our board of directors
held one meeting and acted by unanimous written consent on 10
occasions.




Due to
the fact that our Board currently consists of four 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-K of the Securities
Act of 1933. We are actively seeking to expand our Board membership to include
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 2008
fiscal year, all Reporting Persons complied with all Section 16(a) filing
requirements.




Code
of Ethics




Our Board
of Directors adopted a Code of Ethics, as defined by Rule 406 of Regulation S-K
on March 30, 2009. A copy of this Code of Ethics has been filed as Exhibit 14.1
to this Annual Report on Form 10-K.




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. We subsequently appointed Mr. Wilson as our Chief Executive Officer
and elected him to serve on our Board of Directors.




33




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.




Item
11.  Executive Compensation




Summary
of Cash and Certain Other Compensation





The
following table sets forth all annualized compensation paid to our named
executive officers at the end of the fiscal years ended December 31, 2008
and 2007. Individuals we refer to as our “named executive officers” include our
Chief Executive Officer and our most highly compensated executive officers whose
salary and bonus for services rendered in all capacities exceeded $100,000
during the fiscal year ended December 31, 2008.





Summary
Compensation Table




Name
      and Principal
                          Position
                        
                        Year
                        
                        Salary
                          ($)
                        
                        
                        Bonus
                          ($)
                        
                        
                        Stock
                          Awards
                          ($)(4)
                        
                        
                        Option
                          Awards
                          ($)(4)
                        
                        
                        All
      Other
                          Compensation
                          ($)
                        
                        
                        Total
      ($)(a)
                        
                        (b)
                        
                        (c)
                        
                        
                        (d)
                        
                        
                        (e)
                        
                        
                        (f)
                        
                        
                        (i)
                        
                        
                        (j)Ronald
      Wilson (1)
                        
                        2008
                        
                        $
                        12,500
                        
                        
                        $
                        0
                        
                        
                        $
                        180,000
                        
                        
                        $
                        143,500
                        (2)
                        
                        $
                        1,700
                        
                        
                        
                        337,700Donald
      J. McDonald
                        
                        2008
                        
                        $
                        115,777
                        
                        
                        $
                        0
                        
                        
                        $
                        37,350
                        
                        
                        $
                        837,000
                        
                        
                        $
                        1,400
                        
                        
                        
                        991,527Chief
      Financial Officer (3)
                        
                        2007
                        
                        $
                        98,333
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        136,931
                        
                        
                        $
                        0
                        
                        
                        
                        235,264Michael
      Salaman,Chairman
                        
                        2008
                        
                        $
                        126,962
                        
                        
                        $
                        0
                        
                        
                        $
                        137,350
                        
                        
                        $
                        837,000
                        
                        
                        $
                        1,400
                        
                        
                        
                        1,102,7122007
                        
                        $
                        100,000
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        202,500
                        
                        
                        $
                        0
                        
                        
                        
                        302,500




(1)
Mr. Wilson became our Chief Executive Officer and President on December 1, 2008.
Upon joining the Company, Mr. Wilson was awarded 2,000,000 shares of restricted
common stock, warrants to purchase 2,000,000 shares of common stock and, subject
to the approval of the Company’s stockholders of a new equity compensation plan,
options to purchase 2,000,000 shares of common stock.


(2)
Expense relating to the grant of 2,000,000 warrants has been included in this
column and calculated in accordance with SFAS 123R.  Excludes an
aggregate of 2,500,000 warrants issued to Mr. Wilson in fiscal 2008 prior to his
becoming an officer of the Company in consideration for services
rendered.


(3) 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. Mr.
McDonald was replaced as our Chief Executive Officer and President by Mr. Wilson
on December 1, 2008.


(4) This
column represents the dollar amount recognized for financial statement reporting
purposes for fiscal 2008 and 2007, as applicable, in accordance with SFAS 123R.
Pursuant to SEC rules, the amounts shown exclude the impact of estimated
forfeitures related to service-based vesting conditions. See notes to our
audited consolidated financial statements in our Annual Report on Form 10-K for
the year ended December 31, 2008 for details as to the assumptions used to
determine the fair value of the awards.





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.




34




Employment
Agreements





On
December 1, 2008, we entered into an employment relationship with Mr. Ronald D.
Wilson, who will serve as the President and Chief Executive Officer of the
Company effective immediately. Pursuant to an offer letter Mr. Wilson entered
into with the Company, the Company will pay and provide the following
compensation to Mr. Wilson: (a) base salary of $150,000 per annum; (b) grant of
2,000,000 shares of restricted common stock; (c) grant of warrants to purchase
2,000,000 shares of common stock which shall be immediately exercisable on the
date of grant for a period of five years at an exercise price equal to the
closing price of the Company’s common stock on the date of grant; (d) subject to
the approval of the Company’s stockholders of a new equity compensation plan,
options to purchase 2,000,000 shares of common stock, exercisable for a period
of five years and which options will vest in full on the first anniversary of
the grant date and have an exercise price equal to the fair market value of the
Company’s common stock, as determined in accordance with the new equity
compensation plan, on the date that such plan is approved by the Company’s
stockholders; (e) a car allowance of $700 per month; (f) reimbursement of health
benefits or cash equivalent in an amount not to exceed $1,000 per month; and (g)
$2,000 per month for a rental lease for housing for 1 year
period.





We have
not entered into written employment agreements with any of our other executive
officers. During the first 10 months for 2007 Messrs. Salaman and McDonald 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 them. Mr. Salaman will receive
compensation of $12,500 per month and a $700 dollar monthly automobile allowance
and Mr. McDonald will receive compensation of $11,667 dollars per month and a
$700 monthly automobile allowance.




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,
2008.




Option
      Awards
                            
                            
                            Stock
      Awards(1)Name
                            
                            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
                              Plan
      Awards:
                              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)Ronald
      Wilson(2)
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __Donald
      J. McDonald
                            
                            
                            750,000
                            
                            
                            
                            2,250,000
                            
                            
                            
                            __
                            
                            
                            
                            .33
                            
                            
                            7/30/13855,625
                            
                            
                            
                            1,644,375
                            
                            
                            
                            __
                            
                            
                            
                            .17
                            
                            
                            10/6/11
                            
                            
                            
                            __
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __625,000
                            
                            
                            
                            1,875,000
                            
                            
                            
                            __
                            
                            
                            
                            .08
                            
                            
                            11/28/12
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __Michael
      Salaman
                            
                            
                            750,000
                            
                            
                            
                            2,250,000
                            
                            
                            
                            __
                            
                            
                            
                            .33
                            
                            
                            7/30/13600,000
                            
                            
                            
                            2,400,000
                            
                            
                            
                            __
                            
                            
                            
                            .25
                            
                            
                            1/12/12
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __750,000
                            
                            
                            
                            2,250,000
                            
                            
                            
                            __
                            
                            
                            
                            .08
                            
                            
                            11/28/12
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __
                            
                            
                            
                            __





(1)
            Excludes
      (a) 2,075,000 shares of restricted stock granted to each of Mr. McDonald
      and Mr. Salaman on March 24, 2008; (b) 2,000,000 shares of restricted
      stock granted to Mr. Salaman on November 28, 2007; and (c) 2,000,000
      shares of restricted stock granted to Mr. Wilson on December 1, 2008, as
      each of the foregoing awards were immediately
  vested.


(2)
            Excludes
      the grant of 2,000,000 common stock purchase warrants granted to Mr.
      Wilson on December 1, 2008.





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 terminated ten years from the date of its adoption by the Board. Our
Board of Directors, on October 6, 2006, had 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, 2008,
19,425,000 options were issued and outstanding.




35




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.




Item
12.  SecurityOwnership of Certain Beneficial Owners and
Management.




The
following table sets forth the beneficial ownership of our Common Stock as of
December 31, 2008, 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, 2008, there were 195,503,317
shares issued and outstanding.





Shares
      of Common Stock
                          Beneficially
      OwnedName
      and Address of Owner
                        
                        Number
                        
                        
                        Percent (%)Officers
      and DirectorsRonald
      Wilson (1)
                          c/o
      Skinny Nutritional Corp.
                          3
      Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
                        
                        
                        7,000,000
                        
                        
                        
                        3.5
                        %Michael
      Salaman (2)
                          c/o
      Skinny Nutritional Corp.
                          3
      Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
                        
                        
                        10,987,657
                        
                        
                        
                        5.6
                        %Donald
      McDonald (3)c/o
      Skinny Nutritional Corporation3
      Bala Plaza East Suite # 117 Bala Cynwyd PA 19004
                        
                        
                        4,825,000
                        
                        
                        
                        2.4
                        %Michael
      Reis  (4)
                          c/o Skinny Nutritional
      Corp.
                          3
      Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
                        
                        
                        762,500
                        
                        
                        
                        *All
      Directors and Officers as a Group (4 Persons)
                        
                        
                        23,575,157
                        
                        
                        
                        11.7
                        %




36







*
              Denotes ownership percentage of
      less than 1%.


(1)
            Includes
      warrants to purchase 2,500,000 shares of common stock that are vested.
      Excludes warrants to purchase 2,000,000 shares of common stock that are
      subject to a non-exercise agreement pursuant to which Mr. Wilson agreed
      not to exercise such warrants until such time as the Company’s
      stockholders approve an amendment to its Certificate of Incorporation to
      increase the number of authorized shares of Common Stock. The warrant that
      is subject to the lock-up agreement would be exercisable upon the approval
      of the amendment to the Company’s Certificate of
      Incorporation.


(2)
            Consists of 10,987,657 shares of
      common stock. Excludes a total of 9,000,000 options to purchase common
      stock that are subject to a non-exercise agreement pursuant to which Mr.
      Salaman agreed not to exercise such options until such time as the
      Company’s stockholders approve an amendment to its Certificate of
      Incorporation to increase the number of authorized shares of Common Stock.
      Of this amount, 4,050,000 options had vested prior to this agreement and
      would be exercisable upon the approval of the amendment to the Company’s
      Certificate of
Incorporation.


(3)
            Includes vested options to
      purchase 2,750,000 shares of Common Stock and excludes 5,250,000 unvested
      options. Also includes 2,075,000 shares of restricted common stock granted
      on March 24, 2008. Of the unvested options, options to purchase 3,000,000
      shares of common stock are subject to a non-exercise agreement pursuant to
      which Mr. McDonald agreed not to exercise such options until such time as
      the Company’s stockholders approve an amendment to its Certificate of
      Incorporation to increase the number of authorized shares of Common Stock.
      Of this amount, 750,000 options had vested prior to this agreement and
      would be exercisable upon the approval of the amendment to the Company’s
      Certificate of
Incorporation.


(4)
            Includes
      vested options to purchase 462,500 shares of common stock. Excludes
      unvested options to purchase 487,500 shares of common
    stock.




Item
13:  Certain Relationships and Related Transactions and Director
Independence.




For
information concerning employment arrangements with, and compensation of, our
executive officers and directors, see the disclosure in the section of this
Annual Report on Form 10-K 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.  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. 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. 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
and was extended to March 20, 2009.  The current balance on the loan
is $162,500. We are currently negotiating the repayment terms of the outstanding
balance due on this loan with the bank.  No assurances, however, can
be given that the bank will continue to extend the term of this loan for any
specific duration, if at all. 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.




37




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. Subsequently, our borrowing limit was increased to
$750,000. As of December 31, 2008, an amount of $3,199 was outstanding 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 f ace 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. On March 24,
2008, the Company’s Board of Directors approved the grant of an aggregate of
2,075,000 restricted shares of common stock to each of Mr. Michael Salaman, its
Chairman and Mr. Donald McDonald, its Chief Executive Officer, in consideration
of their agreement to provide a personal guaranty in connection with this
arrangement.





In
connection with the Company’s private placement of $1,875,000 shares of its
common stock, the Company’s Chief Executive Officer, Chief Financial Officer and
Chairman agreed not to exercise a total of 12,000,000 options and 2,000,000
warrants beneficially owned by them until such time as the Company’s
stockholders adopt an amendment to its Articles of Incorporation to increase the
number of the Company’s authorized shares of common stock.





As of December 31, 2008, we did not
have any independent directors.





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, 2008 and 2007.




Year
      Ended
                        December
      31, 2008
                      
                      
                      Year
      Ended
                        December
      31, 2007Audit
      Fees (1)
                      
                      $
                      35,000
                      
                      
                      $
                      25,000Audit-Related
      Fees (2)
                      
                      
                      0
                      
                      
                      
                      0Tax
      Fees (3)
                      
                      
                      7,500
                      
                      
                      
                      10,000All
      Other Fees (4)
                      
                      
                      0
                      
                      
                      
                      0Total
                      
                      $
                      42,500
                      
                      
                      $
                      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 four individuals, none 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 2008, we did not
pre-approve the performance of any non-audit services by our independent
registered public accounting firm.




Item
15.  Exhibits and Financial Statement Schedules.





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 or are subject to our pending 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.




38




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).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).4.12*
                
                Form
      of Agent Warrant issued in connection with 2008 private
      placements.4.13*
                
                Form
      of Warrant issued to Members of Advisory Board.4.14*
                
                Form
      of Warrant issued to Ronald Wilson in April 20084.15(1)*
                
                Form
      of Warrant issued to Ronald Wilson in December
  2008





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).




39




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
                
                Separation
      Agreement between the Company and Christopher Durkin (filed as Exhibit
      10.1 to Current Report on Form 8-K filed October 11,
  2006).10.9#
                
                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).10.10
                
                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).10.11
                
                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).10.15#
                
                Letter
      Agreement with Pasqual Croce10.16*
                
                Form
      of subscription agreement entered into in connection with private
      placements of common stock in 2008.10.17(1)*
                
                Employment
      Letter with Ronald Wilson dated as of December 1,
    2008.10.18*
                
                Sublease
      with Hallinan Capital Corp. for Three Bala Plaza, Suite
    101.14.1
                
                Code
      of Ethics21
                
                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.




40




Skinny Nutritional Corp and
Subsidiary


December 31, 2008 and
2007








Contents





PageIndependent
      Auditor's Report
            F-1Financial
      StatementsConsolidated
      Balance Sheet, December 31, 2008 and 2007
            F-2
      - F-3Consolidated
      Statements of Operations For the Years Ended December 31, 2008 and
      2007
            F-4Consolidated
      Statements of Stockholders' Equity (Deficit) For the Year Ended December
      31, 2008, 2007 and 2006
            F-5
      - F-7Consolidated
      Statements of Cash Flows For the Years Ended December 31, 2008, 2007 and
      2006
            F-8
      - F-9Notes
      to Consolidated Financial Statements
            F-10
      - F-28








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, 2008 and 2007 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,
2008.  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
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, 2008 and 2007 and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.




The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.  As discussed in Note 2 to the financial
statements, the Company has 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 2.  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 6,
2009




F-1




Skinny Nutritional Corp and
Subsidiary


Consolidated Balance
Sheet




ASSETS




December 31,2008
            
            
            2007CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            236,009
            
            
            $
            14,247Cash
      – escrow, restricted
            
            
            
            
            
            
            3,697Accounts
      receivable
            
            
            489,944
            
            
            
            401,487Inventory
            
            
            231,405
            
            
            
            86,575Prepaid
      expenses
            
            
            64,920
            
            
            
            3,180Total
      current assets
            
            
            1,022,278
            
            
            
            509,186OTHER
      ASSETSDeposits
            
            
            45,346Total
      other assets
            
            
            45,346TOTAL
      ASSETS
            
            $
            1,067,624
            
            
            $
            509,186






See
accompanying notes and accountant’s report.





F-2




Skinny Nutritional Corp and
Subsidiary


Consolidated Balance
Sheet




LIABILITIES AND
STOCKHOLDERS’ DEFICIT




December 31,2008
            
            
            2007CURRENT
      LIABILITIESCurrent
      maturities of long term debt
            
            $
            
            
            
            $
            220,936Revolving
      line of credit
            
            
            3,199
            
            
            
            317,561Line
      of credit
            
            
            200,000
            
            
            
            340,000Accounts
      payable
            
            
            873,315
            
            
            
            642,297Accrued
      expenses
            
            
            102,796
            
            
            
            57,500Accrued
      interest payable
            
            
            
            
            
            
            85,271Current
      portion of convertible notes
            
            
            44,000
            
            
            
            310,000Settlements
      payable
            
            
            75,000
            
            
            
            104,350Advances
      on purchase of common stock
            
            
            375,600Total
      current liabilities
            
            
            1,673,910
            
            
            
            2,077,915STOCKHOLDERS’
      DEFICITPreferred
      stock, $.001 par value, 1,000,000 shares
              authorized,
      none issued and outstandingCommon
      stock, $.001 par value, 250,000,000 shares
              authorized,
      195,503,317 shares issued and outstanding
              at
      December 31, 2008 and 93,822,225 issued and
              outstanding
      at December 31, 2007
            
            
            195,503
            
            
            
            93,822Stock
      subscriptions receivable
            
            
            (473,500
            )Additional
      paid-in capital
            
            
            21,901,368
            
            
            
            14,334,983Accumulated
      deficit
            
            
            (22,229,657
            )
            
            
            (15,997,534
            )Total
      stockholders’ deficit
            
            
            (606,286
            )
            
            
            (1,568,729
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            1,067,624
            
            
            $
            509,186






See
accompanying notes and accountant’s report.





F-3




Skinny Nutritional Corp and
Subsidiary


Consolidated Statements of
Operations




For the Years Ended December
      31,2008
            
            
            2007
            
            
            2006Revenue
      – net
            
            $
            2,179,055
            
            
            $
            752,825
            
            
            $
            628,380Cost
      of goods sold
            
            
            1,873,477
            
            
            
            532,812
            
            
            
            576,882Gross
      profit
            
            
            305,578
            
            
            
            220,013
            
            
            
            51,498ExpensesMarketing
      and advertising
            
            
            2,083,646
            
            
            
            721,442
            
            
            
            394,949General
      and administrative
            
            
            3,421,468
            
            
            
            1,715,218
            
            
            
            1,894,768Total
      expenses
            
            
            5,505,114
            
            
            
            2,436,660
            
            
            
            2,289,717Net
      (loss) from operations
            
            
            (5,199,536
            )
            
            
            (2,216,647
            )
            
            
            (2,238,219
            )Other
      income (expense)Loss
      from disposition of fixed assets
            
            
            
            
            
            
            (9,690
            )
            
            
            (114,887
            )Interest
      expense
            
            
            (67,042
            )
            
            
            (120,514
            )
            
            
            (32,932
            )Interest
      income
            
            
            
            
            
            
            
            
            
            
            82,592Other
      income
            
            
            2,081
            
            
            
            20,172Debt
      conversion expense
            
            
            (967,626
            )
            
            
            (3,371,964
            )Total
      other expenses
            
            
            (1,032,587
            )
            
            
            (3,481,996
            )
            
            
            (65,227
            )Income
      TaxesCurrent
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Deferred
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Total
      income taxes
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Net
      (Loss)
            
            $
            (6,232,123
            )
            
            $
            (5,698,643
            )
            
            $
            (2,303,446
            )(Loss)
      per common share
            
            $
            (.05
            )
            
            $
            (.07
            )
            
            $
            (.10
            )






See
accompanying notes and accountant’s report.





F-4




Skinny Nutritional Corp and
Subsidiary


Consolidated Statement of
Stockholders’ Equity (Deficit)


For The Years Ended December
31, 2008 and 2007




Additional
            
            
            StockCommon Stock
            
            
            Paid-In
            
            
            Subscriptions
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Receivable
            
            
            DeficitBalance,
      December 31, 2006
            
            
            41,473,328
            
            
            $
            41,473
            
            
            $
            6,733,408
            
            
            
            
            
            
            $
            ( 10,298,891
            )Issuance
      of common stock for cash at $.075 per share less $365,602 in costs for
      issuing the stock
            
            
            15,848,179
            
            
            
            15,849
            
            
            
            816,162Conversion
      of convertible debt into common shares at $.50 per share
            
            
            40,000
            
            
            
            40
            
            
            
            19,960Conversion
      of convertible debt into common shares at $.10 per share plus debt
      conversion costs of $3,042,525
            
            
            17,950,000
            
            
            
            17,950
            
            
            
            4,819,575Conversion
      of convertible debt into common shares at $.10 per share plus debt
      conversion costs of $227,939
            
            
            3,013,333
            
            
            
            3,013
            
            
            
            450,926Conversion
      of convertible debt into common shares at $.05 per share plus debt
      conversion costs of $101,500
            
            
            1,600,000
            
            
            
            1,600
            
            
            
            179,900Issuance
      of common stock for note and interest
            
            
            2,629,720
            
            
            
            2,630
            
            
            
            133,314Issuance
      of common stock in exchange of services @.075
            
            
            1,333,333
            
            
            
            1,333
            
            
            
            98,670Issuance
      of common stock in exchange of services @.006
            
            
            125,000
            
            
            
            125
            
            
            
            9,250Issuance
      of common stock per reset agreement
            
            
            9,809,332
            
            
            
            9,809
            
            
            
            (9,809
            )Options
      issued on exchange of services
            
            
            
            
            
            
            
            
            
            
            232,550Capitalize
      inventory balances
            
            
            
            
            
            
            
            
            
            
            18,604








(Continued)


F-5




Skinny Nutritional Corp and
Subsidiary


Consolidated Statement of
Stockholders’ Equity (Deficit)


For The Years Ended December
31, 2008 and 2007




Additional
            
            
            StockCommon Stock
            
            
            Paid-In
            
            
            Subscriptions
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Receivable
            
            
            DeficitWarrants
      issued for services
            
            
            
            
            
            
            
            
            
            
            832,473Net
      loss for the year ended December 31, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,698,643
            )Balance,
      December 31, 2007
            
            
            93,822,225
            
            
            $
            93,822
            
            
            $
            14,334,983
            
            
            
            
            
            
            $
            (15,997,534
            )Issuance
      of common stock for cash rendered at $.04 per share less $255,926 in costs
      for issuing shares
            
            
            70,700,000
            
            
            
            70,700
            
            
            
            2,501,374Conversion
      of convertible debt into common shares at $.14 per share plus debt
      conversion costs of $454,052
            
            
            2,116,793
            
            
            
            2,117
            
            
            
            748,286Conversion
      of convertible debt into common shares at $.10 per share plus debt
      conversion costs of $179,437
            
            
            825,000
            
            
            
            825
            
            
            
            261,112Conversion
      of convertible debt into common shares at $.05 per share plus debt
      conversion costs of $63,000
            
            
            1,200,000
            
            
            
            1,200
            
            
            
            121,800Conversion
      of convertible debt into common shares at $.04 per share plus debt
      conversion costs of $271,137
            
            
            1,369,375
            
            
            
            1,369
            
            
            
            324,543Issuance
      of common stock in exchange for note and interest at $.14 per
      share
            
            
            1,155,870
            
            
            
            1,156
            
            
            
            160,666Issuance
      of common stock in exchange for note and interest at $.05 per
      share
            
            
            300,000
            
            
            
            300
            
            
            
            14,700Issuance
      of common stock in exchange for note and interest at $.04 per
      share
            
            
            1,975,000
            
            
            
            1,975
            
            
            
            77,025Issuance
      of common stock in exchange for services rendered at $.33 per
      share
            
            
            300,000
            
            
            
            300
            
            
            
            98,700






(Continued)


F-6




Skinny Nutritional Corp and
Subsidiary


Consolidated Statement of
Stockholders’ Equity (Deficit)


For The Years Ended December
31, 2008 and 2007




Additional
            
            
            StockCommon Stock
            
            
            Paid-In
            
            
            Subscriptions
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Receivable
            
            
            DeficitIssuance
      of common stock to officers for guarantees
            
            
            6,150,000
            
            
            
            6,150
            
            
            
            467,350
            
            
            
            (473,500
            )Issuance
      of common stock for cash at $.06 per share
            
            
            11,564,417
            
            
            
            11,564
            
            
            
            682,301Issuance
      of common stock in exchange for warrant cancellation
            
            
            2,024,637
            
            
            
            2,025
            
            
            
            (2,025
            )Options
      issued in exchange of services
            
            
            
            
            
            
            
            
            
            
            448,939Warrants
      issued for services
            
            
            
            
            
            
            
            
            
            
            1,483,614Issuance
      of common stock for compensation at $.09 per share
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            178,000Net
      loss for the year ended December 31, 2008
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,232,123
            )Balance,
      December 31, 2008
            
            
            195,503,317
            
            
            $
            195,503
            
            
            $
            21,901,368
            
            
            $
            (473,500
            )
            
            $
            (22,229,657
            )






See
accompanying notes and accountant's report.





F-7




Skinny Nutritional Corp and
Subsidiary


Consolidated Statements of
Cash Flows




Increase
(Decrease) in Cash and Cash Equivalents




For the Years Ended December
      31,2008
            
            
            2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (
      6,232,123
            )
            
            $
            (
      5,698,643
            )
            
            $
            (
      2,303,446
            )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
            
            
            
            
            
            
            
            
            
            
            2,740Loss
      from disposition of fixed assets
            
            
            
            
            
            
            6,274
            
            
            
            114,887Stock
      based compensation
            
            
            180,000
            
            
            
            
            
            
            
            9,000Stock
      issued for service
            
            
            
            
            
            
            109,378Warrants
      issued for services
            
            
            1,483,614
            
            
            
            832,473
            
            
            
            85,200Stock
      options issued for services
            
            
            448,939
            
            
            
            232,550
            
            
            
            196,300Debt
      conversion costs
            
            
            967,626
            
            
            
            3,371,964Changes
      in operating assets and liabilities:(Increase)
      decrease in:Accounts
      receivable
            
            
            (88,457
            )
            
            
            (398,081
            )
            
            
            68,471Inventories
            
            
            (144,830
            )
            
            
            (67,971
            )
            
            
            193,082Prepaid
      expenses
            
            
            (61,740
            )
            
            
            43,280
            
            
            
            51,418Other
      assets
            
            
            (45,346
            )
            
            
            
            
            
            
            11,790Increase
      (decrease) in:Advances
      on purchase of common stock
            
            
            375,600Accounts
      payable
            
            
            231,018
            
            
            
            345,701
            
            
            
            (219,659
            )Accrued
      expenses
            
            
            45,296
            
            
            
            27,500
            
            
            
            30,000Accrued
      interest
            
            
            (85,271
            )
            
            
            (33,635
            )
            
            
            (85,598
            )Settlements
      payable
            
            
            (29,350
            )
            
            
            (75,650
            )
            
            
            180,000Net
      cash used in operating activities
            
            
            (2,955,024
            )
            
            
            (1,304,860
            )
            
            
            (1,665,815
            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of fixed assets
            
            
            
            
            
            
            
            
            
            
            (3,507
            )Net
      cash used in investing activities
            
            
            
            
            
            
            
            
            
            
            (3,507
            )






(Continued)


F-8




Skinny Nutritional Corp and
Subsidiary


Consolidated Statements of
Cash Flows




Increase
(Decrease) in Cash and Cash Equivalents




For the Years Ended December
      31,2008
            
            
            2007
            
            
            2006CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of common stock for note and interest
            
            $
            255,822
            
            
            $
            135,944
            
            
            $Proceeds
      (payments) from convertible debenture, net payment of
      conversions
            
            
            70,699
            
            
            
            (83,999
            )
            
            
            (241,000
            )Proceeds
      from revolving line of credit
            
            
            (314,361
            )
            
            
            317,560Proceeds
      (payments) from line of credit
            
            
            (140,000
            )
            
            
            25,467Proceeds
      (payments) from notes payable
            
            
            (220,936
            )
            
            
            220,936Proceeds
      (payments) from long-term debt
            
            
            
            
            
            
            (300,283
            )
            
            
            173,747Issuance
      of common stock
            
            
            3,521,865
            
            
            
            832,011
            
            
            
            1,834,963Net
      cash provided in financing activities
            
            
            3,173,089
            
            
            
            1,147,636
            
            
            
            1,767,710NET
      INCREASE IN CASH
            
            
            218,065
            
            
            
            (157,224
            )
            
            
            98,388Cash
      and cash equivalents, beginning of period
            
            
            17,944
            
            
            
            175,168
            
            
            
            76,780CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            236,009
            
            
            $
            17,944
            
            
            $
            175,168SUPPLEMENTAL
      DISCLOSURE INVESTING AND FINANCING ACTIVITIESCash
      paid during the year for interest
            
            $
            67,042
            
            
            $
            20,035
            
            
            $
            32,932






See
accompanying notes and accountant's report.





F-9




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








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





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 each year 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
      cancelled by either party.











F-10




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








2.
            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.




3.
            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 intercompany 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 the resellers and is recognized net of discounts and
      returns.  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 approximates 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,
2008






3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING
  POLICIES  (Continued)





Cash –
      Restricted





The
      Company in its efforts to raise capital has established escrow accounts
      where funds are transmitted until it is cleared by the Company’s
      attorneys.  Once cleared, the monies are transferred into the
      Company’s operating account.  At December 31, 2006, 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 $20,894 and $ -0-
      were recorded for the years ended December 31, 2008 and 2007,
      respectfully.





Inventories





Inventories
      are stated at the lower of cost to purchase and/or manufacture the
      inventory or the current estimated market value of the
      inventory.  We regularly review our inventory quantities on hand
      and record a provision for excess and obsolete inventory based primarily
      on our estimated forecast of product demand, production availability and
      /or our ability to sell the product(s) concerned.  Demand for
      our products can fluctuate significantly.  Factors that could
      affect demand for our products include unanticipated changes in consumer
      preferences, general market and economic conditions or other factors that
      may result in cancellations of advance orders or reductions in the rate of
      reorders placed by customers and/or continued weakening of economic
      conditions.  Additionally, management’s estimates of future
      product demand may be inaccurate, which could result in an understated or
      overstated provision required for excess and obsolete
      inventory.





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.

















F-12




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008






3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING
  POLICIES  (Continued)





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)”).  SAF 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).  We use
      the Black-Scholes-Merton option pricing formula to estimate the fair value
      of our stock options at the date of grant.  The
      Black-Scholes-Merton option pricing formula was developed for use in
      estimating the fair value of traded options that have no vesting
      restrictions and are fully transferable.  Our employee stock
      options, however, have characteristics significantly different from those
      of traded options.  For example, employee stock options are
      generally subject to vesting restrictions and are generally not
      transferable.  In addition, option valuation models require the
      input of highly subjective assumptions, including the expected stock price
      volatility, the expected life of an option and the number of awards
      ultimately expected to vest.  Changes in subjective input
      assumptions can materially affect the fair value estimates of an
      option.  Furthermore, the estimated fair value of an option does
      not necessarily represent the value that will ultimately be realized by an
      employee.  We use historical data to estimate the expected price
      volatility, the expected option life and the expected forfeiture
      rate.  The risk-free rate is based on the
      U.S.  Treasury yield curve in effect at the time of grant for
      the estimated life of the option.  If actual results are not
      consistent with our assumptions and judgments used in estimating the key
      assumptions, we may be required to increase or decrease compensation
      expense or income tax expense, which could be material to our results of
      operations.





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.




















F-13




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008






3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING
  POLICIES  (Continued)





Cost of
Sales





Cost of
sales consists of the costs of raw materials utilized in the manufacture of
products, co-packing fees, in-bound freight charges, as well as certain internal
transfer costs, warehouse expenses incurred prior to the manufacture of our
finished products and certain quality control costs.  Raw materials
account for the largest portion of the cost of sales.  Raw materials
include cans, bottles, other containers, ingredients and packaging
materials.




Operating
Expenses





Operating
expenses include selling expenses such as distribution expenses to transport
products to customers and warehousing expenses after manufacture, as well as
expenses for advertising, commissions, sampling and in-store demonstration
costs, costs for merchandise displays, point-of-sale materials and premium
items, sponsorship expenses, other marketing expenses and design
expenses.  Operating expenses also include payroll costs, travel
costs, professional service fees including legal fees, termination payments made
to certain of our prior distributors, entertainment, insurance, postage,
depreciation and other general and administrative costs.




4.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL
STATEMENTS





The
      Company has filed Form 10KSB/A to restate its financial statements in
      order to change its method of accounting for convertible
      debentures.  The Company corrected an error in the Company’s
      accounting and disclosures for its convertible debentures, 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.





The
      Company restated their consolidated balance sheets at December 31, 2007
      and December 31, 2006, and consolidated statements of operations and cash
      flows for the year ended December 31, 2007, and the notes related
      thereto.  The restatement reflects 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 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.











F-14




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








4.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL
  STATEMENTS  (Continued)





The
      Company also reported 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 2007 in 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 adjusted “additional
      paid-in capital” by a net amount of $69,525.  The net increase
      of $69,525 to additional paid-in capital flowed through the balance sheet
      as a decrease to “Total stockholders’ deficit” and an increase to “Total
      Liabilities Stockholders’ Deficit”.




5.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”.  Statement No. 161 establishes,
among other things, the disclosure requirements for derivative instruments and
for hedging activities.  This statement requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about contingent features related to credit risk in
derivative agreements.  Statement No. 161 only affects disclosure
requirements, the adoption of Statement No. 161 effective January 1, 2009 has
not affected our financial position or results of operations.





In June
2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (FSP No. EITF 03-6-1).  FSP No. EITF 03-6-1 addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method described in Statement No. 128.  FSP No. EITF 03-6-1 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008; early adoption is not
permitted.  The adoption of FSP No. EITF 03-6-1 effective January 1,
2009 is not expected to materially affect our calculation of earnings per common
share.





In
November 2008, the FASB ratified its consensus on EITF Issue No. 08-6, “Equity
Method Investment Accounting Considerations” (EITF No. 08-6).  EITF
No. 08-6 applies to all investments accounted for under the equity method and
provides guidance regarding (i) initial measurement of an equity investment,
(ii) recognition of other-than-temporary impairment of an equity method
investment, including any impairment charge taken by the investee, and (iii)
accounting for a change in ownership level or degree of influence on an
investee.  The consensus is effective for fiscal years beginning on or
after December 15, 2008, and interim periods within those fiscal
years.  EITF No. 08-6 is to be applied prospectively and earlier
application is not permitted.  Due to its application to future equity
method investments, the EITF Issue No. 08-6 is not expected to materially affect
our financial position or results of operations.





F-15




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








6.
              RELATED
      PARTY TRANSACTIONS





The
Company’s Chairman pledged certain marketable securities held either by him or
by entities with which he is affiliated in order to provide security for the
Company’s $500,000 letter of credit with Madison Bank.  The Chairman
similarly agreed to pledge such securities in order to secure our loan agreement
with Valley Green Bank pursuant to which we satisfied our obligations to Madison
Bank.  For more information regarding these transactions see Note 9 to
these financial statements.


On
January 10, 2008 the Company issued two million shares of stock to the Chairman
in consideration for his personal guarantee of the Valley Green
Loan.  On March 24, 2008, the Company’s Board of Directors approved
the grant of an aggregate of 2,075,000 restricted shares of common stock to Mr.
Michael Salaman, its Chairman and Mr. Donald McDonald, its Chief Executive
Officer, in consideration for their agreement to provide a personal guaranty in
connection with the factoring agreement the Company entered into in November
2007.


7.
            PENDING
      CLAIMS





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





On
      March 24, 2008, the Company requested arbitration with Peace Mountain
      Corporation to clarify certain aspects of the licensing
      agreement.  The arbitration will be administered by the American
      Arbitration Association in Providence, R.I.  The items in
      question are the timing of payments to Peace Mountain, the approval
      process for the use of trademarks, the approval process for formulas and
      the protection of trademark rights in foreign countries.  The
      Company feels that this arbitration will result in a more definitive
      agreement for the future.  The date for the arbitration has not
      been determined.





On
      or about June 30, 2008, the Company filed an arbitration claim with the
      Financial Industry Regulatory Authority (“FINRA”) against ROGO Capital,
      LLC (“ROGO”), FINRA Case No. 08-02163, alleging breach of contract and
      fraud claims concerning ROGO’s alleged misrepresentations made in
      connection with the Company’s retention of ROGO to serve as its placement
      agent and ROGO’s alleged non-performance under the placement
      agreement.  ROGO disputes these claims and in response, on or
      about September 4, 2008, ROGO filed a counterclaim in the FINRA
      arbitration against the Company alleging breach of the placement agreement
      and claiming damages of approximately $241,000.  The Company
      disputes ROGO’s allegations and is vigorously defending the
      counterclaim.  The parties are now engaged in
      discovery.  The FINRA arbitration hearing on the dispute is
      scheduled to begin on July 13,
2009.





In
      addition, the Company may be subject to other claims and litigation
      arising in the ordinary course of business.  The Company’s
      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 its consolidated
      financial position, results of operations or cash
  flows.






F-16




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








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 is currently approximately $337,000, in the
aggregate.





During
the 2007 calendar year there was $2,070,000 of convertible debentures that were
converted into common shares of stock.  On March 8, 2007, principal of
$1,755,000 was converted into 17,550,000 shares of common stock.  Also
in the first quarter 2007, 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.  During the fourth quarter an additional conversion of
$188,333 of principal and $37,667 in interest were converted into 3,013,333
shares of common stock at a conversion rate of $.075 per
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 in principal and $4,000 in interest to retire his
debenture.  Upon conversion of the convertible
debentures,








F-17




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008







8.
            CONVERTIBLE
      DEBENTURES (Continued)





In
accordance with FASB 84, there was debt conversion costs of $3,421,965 which was
realized as an expense to the 2007 Statement of Operations.





During
fiscal 2008, holders of convertible debentures and warrants previously issued by
the Company converted or exercised such securities into shares of common stock
and warrants as follows.  In January 2008, the Company issued 725,000
shares of common stock upon the conversion of an aggregate amount of $72,500 of
outstanding convertible debentures (inclusive of interest).  The
Company also issued 300,000 shares of common stock in exchange for a $15,000
dollar note.  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) in exchange for note and interest.  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 April 11, 2008, the
Company issued 1,369,375 shares of common stock upon the conversion of an
aggregate amount of $54,775 (inclusive of accrued interest of $10,455) of
outstanding convertible debentures.  In addition, the Company issued
850,000 shares of common stock upon the conversion of an aggregate amount of
$34,000 (inclusive of accrued interest of $2,392) in exchange for note and
interest.  Further, on June 2, 2008, the Company issued 1,155,870
shares of common stock in exchange for note and interest of $161,822 (inclusive
of accrued interest of $51,822).  Also, the Company issued 808,414 of
common stock upon conversion of an aggregate amount of $113,178.  In
addition, on June 16, 2008, the Company issued 531,551 shares of common stock
upon the conversion of an aggregate amount of $74,417 (inclusive of accrued
interest of $18,417) of outstanding convertible debentures and on June 18,
2008, the Company issued 100,000 shares of common stock upon the conversion of
an aggregate amount of $10,000 of outstanding convertible
debentures.  In August 2008, the Company issued 776,828 shares of
common stock upon the conversion of an aggregate amount of $108,756 (inclusive
of accrued interest of $18,756) to the holders of outstanding convertible
debentures upon the conversion of such securities.  Upon conversion of
the convertible debentures, in accordance with FASB 84, there was debt
conversion costs of $967,626 which was realized as an expense to the 2008
Statement of Operations.














F-18




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008






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.  We received
proceeds of $502,238 in this offering with 6,696,509 shares being
issued.  The third offering commenced in September 2007 and ended
November 2007 with 13,333,333 shares being offered for an aggregate amount of
$1,000,000.  We received proceeds of $203,750 in this offering with
2,716,666 shares being offered.  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 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 previous
subscription agreements.





The
      Company commenced a private offering of its common stock in December 2007
      for up to a maximum of $3,200,000 of shares at an offering price of $0.04
      per share and the Company had received subscriptions of approximately $3.1
      million.  In this offering, the Company received gross proceeds
      of $3,163,000 and sold an aggregate of 79,075,000 shares of common stock
      to accredited investors.  After giving effect to offering
      expenses and commissions, the Company received net proceeds of
      approximately $3,108,000.  The Company agreed to pay commissions
      to registered broker-dealers that procured investors in the offering and
      issue such persons warrants to purchase such number of shares as equals
      10% of the total number of shares actually sold in the offering to
      investors procured by them.  Agent warrants shall be exercisable
      at the per share price of $0.05 for a period of five years from the date
      of issuance.  Based on the foregoing, agents have earned an
      aggregate of $55,000 in commissions and 1,362,500 warrants.  In
      connection with the offering, the Company relied on the exemption from
      registration provided by Section 4(2) of the Securities Act of 1933, as
      amended (the “Securities Act”), and Rule 506 promulgated
      thereunder.  Based on the representations made in the
      transaction documents, the Company believes that the Investors are
      “accredited investors”, as such term is defined in Rule 501(a) promulgated
      under the Securities Act.





In
      addition, as previously reported, commencing in November 2008, the Company
      conducted a private offering in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act and Rule 506
      promulgated thereunder pursuant to which the Company sought to raise an
      aggregate amount of $1,875,000 of shares of common stock (the “November
      Offering”).  On February 5, 2009, the Company completed the
      November Offering.  Total proceeds raised in the November
      Offering were $1,867,690 and the subscribers purchased an aggregate of
      31,128,167 shares of common stock.  The Company intends to use
      the net proceeds from the November Offering of
    approximately







F-19




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008






9.
            SALE
      OF EQUITY
SECURITIES  (Continued)




$1,800,000
for working capital, repayment of debt and general corporate
purposes.  In connection with  the
November Offering, the Company’s Chief Executive Officer, Chief Financial
Officer and Chairman agreed not to exercise a total of 12,000,000 options and
2,000,000 warrants beneficially owned by them until such time as the Company’s
stockholders adopt an amendment to its Articles of Incorporation to increase the
number of the Company’s authorized shares of common stock.  The Company
agreed to pay commissions to registered broker-dealers that procured investors
and issue such persons warrants to purchase such number of shares as equals 10%
of the total number of shares actually sold in the November Offering to
investors procured by them.  Agent warrants are exercisable at the per
share price of $0.07 for a period of five years from the date of
issuance.  The Company paid total commissions of $20,959 and issued
agent warrants to purchase 349,317 shares of common stock.  The
securities offered have not been registered under the Securities Act and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.  Based on the
representations made in the transaction documents, the Company believes that the
Investors are “accredited investors”, as such term is defined in Rule 501(a)
promulgated under the Securities Act.





In
      addition to these transactions, the Company sold an aggregate of $175,000
      of shares of its common stock to three individual accredited investors in
      private sales and issued these investors a total of 3,541,667 shares of
      common stock.  In connection with the offering, the Company
      relied on the exemption from registration provided by Section 4(2) of the
      Securities Act of 1933, as amended.  Based on the
      representations made in the transaction documents, the Company believes
      that the Investors are “accredited investors”, as such term is defined in
      Rule 501(a) promulgated under the Securities
  Act.




10.
            OTHER
      COMMON STOCK TRANSACTIONS





The
      Company in May, June, July, August and November 2008 issued 1,696,272
      shares, 111,084 shares, 87,692 shares and 129,589 shares of stock,
      respectively upon the exercise of common stock purchase warrants pursuant
      to a cashless exercise provision contained in such
      warrants.  These securities have not been registered under the
      Securities Act of 1933, as amended, and were issued in reliance upon the
      exemption for registration set forth in Section 3(a)(9)
      thereof.




11.
            LINE
      OF CREDIT





On April
4, 2007, the Company closed on a secure loan agreement with Valley Green Bank
pursuant to which it received funds in the amount of $350,000.  The
Company has applied this amount to satisfy its obligations to Madison Bank under
the Forbearance Agreement.  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






F-20




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








11.
            LINE
      OF CREDIT  (Continued)





the
bank’s demand, but in no event later than March 20, 2008.  Since that
date the bank has extended 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
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.  The maturity of this debt was extended to March 20,
2009 and we are currently negotiating the repayment terms of the outstanding
balance due with the bank.  The current balance outstanding as of
December 31, 2008 is $200,000.


12.
            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.











F-21




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008




13.
            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 $250,000.  The bank
      accounts at times exceed federally insured limits.  The Company
      has not experienced any losses on such
accounts.








14.
            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
      carryforwards.  At December 31, 2008, the Company has available
      unused operating loss carryforwards of approximately $12,000,000 which may
      be applied against future taxable income and which expire in various years
      through 2020.





The
      amount of and ultimate realization of the benefits from the operating loss
      carryforwards 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 carryforwards the
      Company has established a valuation allowance equal to the tax effect of
      the loss carryforwards and, therefore, no deferred tax asset has been
      recognized for the loss
carryforwards




15.
            STOCKHOLDERS'
      EQUITY





At
      December 31, 2008, the Company had 250,000,000 shares of common stock
      authorized par value $.001.  Shares outstanding at December 31,
      2008 were 195,503,317.




16.
            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






F-22




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








16.
            STOCK
      OPTIONS (Continued)





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 and the remaining 150,000 options
      expired 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 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.  As of December 31, 2008, 100,000 options
      were returned to the Company and
cancelled.





On
      July 30, 2008, the Company granted 7,275,000 stock options to employees
      and officers of the Company under the Option Plan.  The options
      granted have a 5 year contractual life and are exercisable at a price
      equal to $0.33 per share.  Of the options granted, 25% vested
      immediately and the balance will vest in equal annual installments of 25%
      of the unvested portion on each anniversary date of the grant until fully
      vested.  As of December 31, 2008, 75,000 options were returned
      to the Company and cancelled.





Each
      stock option award is estimated as of the date of grant using a
      Black-Scholes Merton 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, 2008, there were 19,425,000 options issued and outstanding
      under the plan.





Expected
      volatility
            142.20%
      to 148.64%Expected
      dividends
            0%







F-23




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








16.           STOCK
OPTIONS (Continued)





Expected
      terms
            5
      yearsRisk-free
      rate
            1.50%
      to 3.03%





A
      summary of option activity as of December 31,
  2008:





Weighted-AverageWeighted-Average
            
            
            RemainingOptions
            
            Shares
            
            
            Exercise Price
            
            
            Contractual TermOutstanding
      at January 1, 2007
            
            
            3,000,000
            
            
            $
            0.17Granted
            
            
            9,325,000
            
            
            
            .14ExercisedForfeited
      or expiredOutstanding
      at January 1, 2008
            
            
            12,325,000
            
            
            $
            .14Granted
            
            
            7,275,000
            
            
            
            .33ExercisedForfeited
      or expired
            
            
            (175,000
            )Outstanding
      at December 31, 2008
            
            
            19,425,000
            
            
            
            .22








A summary of the status of the
Company’s nonvested shares as of December 31, 2008 and changes during the period
then ended is presented below:





Weighted-AverageGrant
      DateNonvested shares
            
            Shares
            
            
            Fair ValueNonvested
      at January 1, 2007
            
            
            3,000,000
            
            
            
            0.17Granted
            
            
            9,325,000
            
            
            
            0.13Vested
            
            
            (3,958,000
            )
            
            
            0.14ForfeitedNonvested
      at January 1, 2008
            
            
            8,367,000
            
            
            
            0.13Granted
            
            
            7,275,000
            
            
            
            0.33Vested
            
            
            (3,572,000
            )
            
            
            0.33Forfeited
            
            
            (175,000
            )
            
            
            0.33Nonvested
      at December 31, 2008
            
            
            11,895,000
            
            
            
            0.19






F-24




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








17.
            STOCK
      PURCHASE WARRANTS





In
      March 2004, the Company granted 1,000,000 warrants to purchase its common
      stock for a purchase price of $.20 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, an additional
      100,000 warrants were granted to distributor for a purchase price of $.40
      per share as an incentive to enter into an exclusive marketing agreement
      for New York.  The warrants can be exercised at the purchase
      price of $.40 any time from the date of 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 five years with an exercisable price of
    $.75.





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.





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.  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 per share.




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.  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.




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.  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
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 price ranging from $.06 to
$.11 per share.  During the third and fourth 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
period with an exercise price of $.50.




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 per share.







F-25




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008








17.
            STOCK
      PURCHASE
WARRANTS  (Continued)




In
December 2007, the Company issued 75,000 warrants to investors holding
convertible debentures which were converted to common stock.  These
warrants are exercisable for a period of three years with an exercise price of
$0.05 per share.




In
December 2007, the Company issued 255,000 warrants to investors holding
convertible debentures which were converted to common stock.  These
warrants are exercisable for a period of three years with an exercise price of
$0.20 per share.




In
January 2008, the Company issued 112,500 warrants to investors holding
convertible debentures which were converted to common stock.  These
warrants are exercisable for a period of three years with an exercise price of
$0.05 per share.




In March
2008, the Company issued 112,500 warrants to investors holding convertible
debentures which were converted to common stock.  These warrants are
exercisable for a period of three years with an exercise price of $0.05 per
share.




In March
2008, the Company granted 7,000,000 warrants to consultants and advisory board
members in a private transaction.  These warrants are exercisable for
a period of five years with an exercise price of $0.05.




In April
2008, the Company granted 1,000,000 warrants to a consultant in a private
transaction.  These warrants are exercisable for a period of five
years with an exercise price of $0.05.




In
September 2008, the Company granted 1,362,500 warrants to “Selling Agents” for
private placement of common shares.  These warrants have an
exercisable period of five years with an exercise price of $.05.




In
December 2008, the Company granted 236,337 warrants to “Selling Agents” for
private placement of common shares.  These warrants have an
exercisable period of five years with an exercise price of $.07.




In
connection with the Company’s private placement that commenced in December 2007,
the Company issued selling agents an aggregate of 1,362,500 warrants to purchase
common stock.  Such warrants are exercisable at the per share price of
$0.05 for a period of five years from the date of issuance.




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-26




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008






17.
            STOCK
      PURCHASE
WARRANTS  (Continued)





A summary
of the status of the Company’s outstanding stock warrants as of December 31,
2008 is as follows:


Weighted-AverageShares
            
            
            Exercise PriceOutstanding
      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
      at January 1, 2008
            
            
            9,814,890
            
            
            
            0.36Granted
            
            
            9,823,833
            
            
            
            0.06Exercised
      and expired
            
            
            (3,923,000
            )ForfeitedOutstanding
      at December 31, 2008
            
            
            15,715,723Exercisable
      at December 31, 2008
            
            
            15,715,723








18.
            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, 2008, has outstanding 19,425,000 options and
      15,715,723 warrants which would have an antidilutive effect on
      earnings.











F-27




Skinny Nutritional Corp and
Subsidiary


Notes to Consolidated
Financial Statements


December 31,
2008






18.
            LOSS
      PER SHARE  (Continued)





December
      31,2008
            
            
            2007Loss
      from continuing operations available to common
stockholders
            
            $
            (
      6,232,123
            )
            
            $
            5,698,643Weighted
      average of common shares outstanding used in earnings per share during the
      period
            
            
            135,773,615
            
            
            
            82,706,893Loss
      per common shares
            
            $
            (05
            )
            
            $
            (.07
            )








19.
            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.








20.
            SUBSEQUENT
      EVENTS




On
January 9, 2009, the Company entered into an agreement with Hallinan Capital
Corp to sublease approximately 1,978 square feet of office space located at
Three Bala Plaza East, Suite 101, Bala Cynwyd, PA 19004.  The premises
will serve as the Company’s new corporate headquarters.  The sublease
expires two years following the commencement date and will terminate on such
expiration date provided that either party gives six months notice of its
intention to terminate the lease to the other party.  In the event
that neither party provides such notice, the sublease will continue on a month
to month basis, with either party having the right to terminate at any time upon
the provision of six months written notice.  The sublease will
however, terminate without regard to such notice provisions upon the expiration
or termination of the lease under which premises have been sublet to the
Company.




The
sublease calls for monthly payments of $5,192.55 from the commencement date and
through October 2009.  Thereafter, the rent due under the sublease
will be increased by $1,978 per annum.







F-28




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:
      April 7, 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
                    
                    April
      7, 2009Ronald
      Wilson/s/ Donald J.
McDonald
                    
                    Chief
      Financial Officer and Director
                    
                    April
      7, 2009Donald
      J. McDonald/s/ Michael Salaman
                    
                    Chairman
      of the Board of Directors
                    
                    April
      7, 2009Michael
      Salaman/s/ Michael Reis
                    
                    Director
                    
                    April
      7, 2009Michael
      Reis