**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
      10-KSB**




(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, 2006****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**
            
            **23-3100268**(State
                of incorporation)
            
            (IRS
                Employer Identification Number)




**3
                Bala Plaza East, Suite 117**
              ******Bala
                Cynwyd, PA 19004**(Address
                of principal executive office)




**(610)
                784-2000**(Issuer’s
                telephone number)


Securities
      registered under Section 12(b) of the Exchange Act: **NONE**





Securities
      registered under Section 12(g) of the Exchange Act: **Common
      Stock, par value $0.001 per share**





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





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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of the registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. o





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





The
      issuer had revenues of $628,380 for the fiscal year ended December 31,
      2006.





The
      aggregate market value of the voting stock held by non-affiliates on March
      27,
      2006 was approximately $20,851,000 based on the average bid and asked prices
      of
      the issuer’s common stock on such date.





As
      of
      March 27, 2007, the issuer had 75,573,059 shares of common stock
      outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**


NONE




Transitional
      Small Business Disclosure Format: **Yes**  o  **No**  x








**SKINNY
      NUTRTIONAL CORP.**


**INDEX
      TO ANNUAL REPORT ON FORM 10-KSB**








PAGEPart
                IItem
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            23Item
                3.
            Legal
                Proceedings
            23Item
                4.
            Submission
                Of Matters To A Vote Of the Security Holders
            24Part
                II
            
            24Item
                5.
            Market
                For Common Equity, Related Stockholder Matters And Small Business
                Issuer
                Purchases Of Equity Securities
            24Item
                6.
            Management's
                Discussion And Analysis Or Plan Of Operation
            26Item
                7.
            Financial
                Statements
            35Item
                8.
            Changes
                In And Disagreements With Accountants On Accounting And Financial
                Disclosure
            35Item
                8A.
            Controls
                And Procedures
            35Item
                8B.
            Other
                Information
            36Part
                III
            
            36Item
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) Of the Exchange Act
            36Item
                10.
            Executive
                Compensation
            38Item
                11.
            Security
                Ownership Of Certain Beneficial Owners And Management And Related
                Stockholder Matters
            41Item
                12.
            Certain
                Relationships And Related Transactions
            41Item
                13.
            Exhibits
            43Item
                14.
            Principal
                Accountant Fees And Services
            45Signatures




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.*





**(a)**  **Business
      Development**





Skinny
      Nutritional Corp. (“Skinny”), formerly known as Creative Enterprises
      International, Inc., is
      the
      exclusive worldwide licensee of several trademarks for the use the term
“Skinny.” We develop a line of functional beverages and snacks ,all branded with
      the name “Skinny” that are marketed and distributed primarily to weight
      conscious consumers.
      Our business strategy is to develop a variety of functional beverages and snacks
      utilizing the our licensed Skinny trademarks. These trademarks include Skinny
      Water, Skinny Tea, Skinny Shakes, Skinny Snacks, Skinny Java and others.  In
      2004
      we began implementing our business plan of marketing and distributing bottled
      water and 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.


1




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.”





We
      have
      had limited operations to date. For our 2006 fiscal year, we generated revenues
      of $ 626,380 and incurred a net loss of $2,303,446. 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 2005 fiscal year, we have been able to devote increasing amounts of
      resources to marketing and sales activities regarding our consumer products,
      including the procurement of a number of purchase orders from distributors
      and
      retailers. This trend continued in our 2006 fiscal year.





**(b)**  **Business
      of the Issuer**




**Overview**





We
      operate our business in the rapidly evolving weight loss and health foods
      beverage industries and are currently focused on developing, distributing and
      marketing nutritionally-focused functional beverages, portion-controlled,
      prepared snack food programs and other dietary supplements. Currently, our
      line
      of products consists of:





·   Skinny
      Water; and


·   Skinny
      Snacks.





Our
      Skinny Water product, which we originally introduced in 2005, has been
      reformulated to include three new flavors: Peach, Lemon and Berry, and we expect
      to re-launch this product in our second fiscal quarter of 2007. Our Skinny
      Snacks products consists of high protein shakes, nutrition snack bars, protein
      fortified pretzels and chips and a line of desserts that include protein
      enhanced puddings and gelatins, which were originally launched in the first
      quarter of 2007, are being augmented to include “1 Week” and “1 Day” Snack
      Packs, which we anticipate launching in the second quarter of 2007.




We
      are
      currently developing new product extensions and formulations of new functional
      beverages and snacks and bringing to our products to our distribution network
      for selling. Our current business strategy is to develop and maintain a firm
      focus in establishing a market for the Skinny brand in the United States and
      generate sales and brand awareness through television advertising and internet
      sales as well as building a national sales and distribution force to take our
      products into retail and direct store delivery (DSD) distribution
      channels.





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


2


**Business
      Developments in 2006**





*Financing
      Activities*





As
      described in greater detail below under the caption “Liquidity and Capital
      Resources,” during the twelve months ended December 31, 2006, we have raised a
      total of $1,492,000 in gross proceeds from private transactions with accredited
      investors and current or former members of our executive management team. In
      these financings, we raised gross proceeds of $275,000 from the sale of 687,500
      shares of our Common Stock and 687,500 warrants, issued an aggregate principal
      amount of $692,000 of convertible debentures, of which amount, the holders
      of
      the principal amount of $642,000 of such debentures converted their debt
      instruments into a total of 12,909,860 shares of common stock in October 2006.
      In October 2006 we raised $525,000 in a private placement of our common stock
      to
      accredited investors pursuant to Rule 506 of Regulation D. This financing was
      for a total of $1.2 million of Common Stock, or 24,000,000 shares of Common
      Stock, at the offering price of $0.05 per share. In this financing, we received
      net proceeds of approximately $500,000 and issued an aggregate of 8,500,000
      shares of Common Stock to the investors in this financing. We also issued a
      convertible note to one investor in the principal amount of $100,000 in lieu
      of
      additional shares of common stock. This investor subscribed for $150,000 of
      shares of Common Stock in the financing (3,000,000 shares). This note was
      converted into 2,000,000 shares of common stock in March 2007. In
      connection with this financing, we issued an aggregate of 12,909,860 shares
      of
      common stock upon the conversion of $642,000 of debt, including the convertible
      note we issued to our Chairman in March 2006.





We
      have
      used the proceeds from these transactions for working capital and the repayment
      of debt owed to third parties. The
      securities sold in this financing have not been registered under the Securities
      Act of 1933, as amended, and were offered and sold in reliance upon the
      exemption from registration set forth in Section 4(2) thereof and Regulation
      D,
      promulgated under the Securities Act. We believe that the investors are
“accredited investors” as such term is defined in Rule 501(a) promulgated under
      the Securities Act.





*Reorganization*





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





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





Further,
      o n
      October
      4, 2006, we elected Mr. Ken Brice, who was also serving as our Chief Financial
      Officer, as a member of our board of directors and appointed Mr. Michael R.
      Reis
      as our interim Chief Operating Officer and also elected him as a director.
      In
      addition, on October 6, 2006, we appointed Mr. Donald J. McDonald to serve
      as
      our new Chief Executive Officer, President and as a member of our board of
      directors. Further, on October 6, 2006, Mr. James Robb notified us that
      effective on such date he resigned from our board of directors.





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


3


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





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





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
      are currently 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
      is currently 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.
      A s
      of
      January 31, 2007, we received conversion notices from holders representing
      an
      aggregate principal amount of $2,075,000 of convertible debentures, which
      represents approximately 83% of the outstanding $2,515,000 principal amount
      of
      debentures. We issued these holders an aggregate of 20,750,000 shares of common
      stock. The securities issued in connection with the conversion of debentures
      have not been registered under the Securities Act of 1933, as amended, and
      were
      issued in reliance upon the exemption from registration set forth in Section
      3(a)(9) thereof.





**Subsequent
      Events**





**Recent
      Private Offering of Securities.** As
      of
      March 27, 2007, we consummated a final closing of a private offering of shares
      of common stock for aggregate gross proceeds of $750,000. In this financing,
      we
      sold a total of $749,525, or 9,993,667 shares of common stock, at the offering
      price of $0.075 per share. We received total net proceeds of approximately
      $645,000 after giving effect to payment of approximately $75,000 in commissions
      to registered broker-dealers served as selling agents in the transaction and
      other offering-related expenses. The selling agents also earned warrant
      compensation in the amount of 999,366 warrants to purchase our common stock
      (the
“Agent Warrants”). The Agent Warrants will be exercisable for a period of five
      years at $0.09 per share. We intend to use the proceeds from the offering for
      working capital, repayment of debt and general corporate purposes. 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 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. In connection
      with
      the financing, we also issued an aggregate of 4,812,500 shares of its common
      stock to certain investors in a prior private placement pursuant to a reset
      right granted to such holders. In addition, the company authorized the issuance
      of an additional 481,250 common stock purchase warrants to the selling agent
      in
      such prior financing, which warrants are exercisable for five years at an
      exercise price of $0.06 per share.


4




**Forbearance
      Agreement.** On
      January 4, 2007, we entered into a Forbearance Agreement with Madison Bank,
      a
      Division of Leesport Bank concerning the repayment of a promissory note in
      the
      principal amount of $500,000 made by us to the Bank in March 2005, which note
      was a demand loan payable upon the demand of the Bank. Currently, there is
      an
      outstanding balance of $314,533 due on the note. Pursuant to the Forbearance
      Agreement, we and the Bank agreed to the following repayment schedule for the
      outstanding balance due: (a) an initial amount of $17,000 was paid upon
      execution of the Agreement; (b) monthly installments of $5,000 will be payable
      by the first day of each month through May 2007; and (c) a final payment of
      the
      remaining outstanding balance due will be due on or before May 31, 2007.
      Interest will continue to accrue on the note at the rate of 1% above the Wall
      Street Journal Prime Rate. Provided we comply with these and its other
      obligations under the Agreement, the Bank agrees to forbear from taking any
      action in connection with the note until it is due. In addition, in order to
      secure the repayment of the note and our obligations under the Agreement, our
      Chairman pledged certain shares of common stock of other publicly traded
      companies held by him, we granted the Bank a first priority security interest
      in
      its accounts and other assets and our Chairman and certain of his affiliates
      provided personal guarantees for the loan amount. In the event the aggregate
      market value of the pledged securities is less than $350,000, then the Bank
      may
      exercise its rights to accelerate repayment of the note and otherwise take
      such
      actions as is permitted under the Agreement to protect its security interest
      in
      the collateral. We are currently in final negotiations with another bank to
      refinance this loan over a 12 month period. However, no assurances can be given
      that we will enter into such an agreement.





**Compensation
      Matters.** On
      January 12, 2007, our Board of Directors approved modifications in the monthly
      compensation rates, effective as of January 1, 2007, payable to each of our
      Chairman, Chief Executive Officer and Chief Financial Officer. Each of these
      executives will now receive a monthly fee of $7,500, plus reimbursement of
      approved corporate expenses. In addition, on such date, the Board granted to
      our
      Chairman options to purchase 3,000,000 shares of common stock pursuant to our
      Employee Stock Option Plan. These options are exercisable for a period of five
      years at a per share exercise price of $0.26. Of the options granted, 20% of
      the
      total grant amount vest immediately and the balance vests in equal annual
      installments of 20% on the each anniversary date of the date of grant.





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





**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.


5


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




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





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





**Our
      Products**





Our
      line
      of products currently consists of Skinny Water and Skinny Snacks. Skinny Water,
      which was introduced in 2005 has been reformulated and we expect to relaunch
      this product in our second fiscal quarter of 2007. Management intends to market
      additional “Skinny” products in the future, when it believes that market
      conditions are favorable.





*SkinnyTM
      Snacks*





In
      February 2007, we introduced Skinny Meals, our line of pre-packaged,
      portion-controlled snack foods sold under the Skinny brand. In May, 2007, we
      plan to introduce an modified version of this product under the brand name
      of
      Skinny Snacks. Skinny Snacks - 1 Week Packs consists of 28 separate snacks
      that
      dieters use to substitute for 4 snacks each day. Snacks include bars, shakes
      and
      other snacks and desserts. Customers then eat one or two regular meals to
      complement the snacks for a total calorie consumption of approximately 1,200
      calories per day. Based on independent testimonials, management believes that
      individuals following this diet can loose 2-3 pounds per week. We are also
      introducing a 1-day version of Skinny Snacks which includes 4 snacks to
      complement a regular meal during the day.





*Skinny
      Water* *®*





Skinny
      Water is water containing a proprietary, natural appetite suppressant, with
      a
      lemon taste and 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. We have reformulated Skinny Water in 3 flavors
      and expect to relaunch it in our second quarter of 2007. Skinny Water is being
      bottled at Adirondacks Beverages in upstate New York, a co-packer of functional
      beverages. We purchase finished product in 24 bottle cases ready for shipment
      to
      retailers and distributors anywhere in the U.S.





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


6




Skinny
      Water is ephedrine-free and contains no caffeine, calories, or sugar. Skinny
      Water’s formula features the all natural, clinically tested ingredient,
      Hydroxycitric Acid (“Super CitriMax”) plus a combination of calcium, potassium
      and magnesium. Super CitriMax has been shown to suppress appetite and increase
      fat burning, without stimulating the nervous system when used in conjunction
      with diet and exercise. Skinny Water also includes ChromMate ® **** 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 lose weight when taken in conjunction
      with diet and exercise. Pursuant to this agreement, we must utilize only
      ingredients that are generally recognized as safe and must use concentrate
      and
      formulations agreed to by Peace Mountain. Our license agreement with Peace
      Mountain Natural Beverages Corporation is for a three year term and
      automatically renews for additional one year periods unless terminated, provided
      that we satisfy the minimum purchase amount specified in the contract or make
      a
      $10,000 monthly payment. On
      October 4, 2006, we entered into an amendment to our License and Distribution
      Agreement with Peace Mountain Natural Beverages Corporation. Pursuant to this
      amendment, we agreed to pay Peace Mountain an amount of $30,000 in two equal
      monthly installments commencing on the date of the amendment in satisfaction
      of
      allegations of non-performance by Peace Mountain. In addition, the parties
      further agreed to amend and restate the company’s royalty obligation to Peace
      Mountain, pursuant to which amendment, we will have a minimum royalty obligation
      to Peace Mountain based on a percentage of wholesale sales with a quarterly
      minimum of $15,000.





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 our
      Skinny Water products Further, 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.





**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 smoothies, teas, puddings, energy drinks,
      juices, nutrition bars, healthy snacks and ready-to-eat meals.





**Distribution,
      Sales and Marketing**





*Marketing
      and Sales Strategy*





Our
      primary marketing objective is to cost-effectively promote our brand and to
      build sales of our products through our retailer accounts, distributor
      relationships, and electronic media. We use a combination of direct response
      television commercials, online advertising, and traditional offline advertising
      and promotional/event strategies to accomplish this objective. Management
      believes that proper in-store merchandising is a key element to providing
      maximum exposure to any brand and that retailers focus on effective shelf and
      display merchandising in order to yield increased revenue per shopping customer.
      Promotion is essential to any product launch and we will invest the appropriate
      amount of capital to build interest around our products. We intend to ultimately
      develop an integrated, multi-channel strategy of advertising, which will include
      television coverage, Internet, and sponsorship marketing. In addition, we will
      place an emphasis on targeted event-based tasting and sampling promotions.


7





Through
      our arrangement with Geltech, we intend to primarily sell to our distributors,
      who in turn sell to retail stores. However, subject to the terms of our
      agreement with Geltech, we will sell directly to retail stores as opportunities
      become available. Our representatives will maintain the pipeline flow of our
      products from our distributors (our direct customers), to the retailer (our
      distributors’ customers) to the end customer, the individual consumer.  We
      expect that our customers will purchase product through recurring one-time
      purchase orders and therefore will not be obligated
      to purchase a particular amount of product or to make multiple orders. We cannot
      provide any assurances as to whether customers will purchase specific quantities
      or make recurring purchases of our products.





Marketing
      to Distributors and Retailers





We
      have
      established a national distribution relationship with Geltech to market our
      products to their client stores and distributors using their existing
      distribution network. We expect to have our Skinny products in over 20,000
      store
      locations by the end of fiscal 2008 through this agreement with Geltech. We
      intend to market our products to these channels by utilizing trade shows, trade
      advertising, television and internet advertising and other means of direct
      marketing.





Marketing
      to Consumers





We
      will
      utilize several marketing strategies to market directly to consumers. We have
      established an online ordering system that allows consumers to order directly
      through our site. The orders are paid for in advance and credit cards are
      cleared before the product is shipped via our leased warehouse space in South
      Plainfield, NJ. In addition, our TV advertising will allow consumers to call
      a
      toll-free number where a representative of the company will take the order
      and
      clear the transaction while the consumer is on the phone.





*Distribution
      Strategy*





In
      2006
      we had established distribution contracts with local distributors for Skinny
      Water. However, in February 2007, we entered into an exclusive agreement with
      Geltech for the distribution of our Skinny products in North America. Under
      this
      Agreement, Geltech will have the responsibility of arranging distribution and
      sales agreements for our products with customers and distributors. We will
      remain responsible for ultimately agreeing upon the terms of the sales and
      distribution agreement and Geltech will receive a royalty as consideration
      for
      its services. Neither Geltech nor any customers or distributors which we may
      contract with are subject to material ongoing purchase commitments. Accordingly,
      we expect to rely on recurring purchase orders for product sales and we annot
      determine the frequency or amount of purchase orders any given distributor
      or
      customer will make. We also distribute our products directly to select national
      retail accounts based on purchase order relationships, which are terminable
      by
      either party at-will.





Distribution
      will target category leaders in grocery, convenience, health clubs, retail
      drug,
      and health food establishments. We will contract with independent trucking
      companies to have product shipped from contract packers to independent
      warehouses, and then on to distributors. Distributors will then sell and deliver
      our products either to sub-distributors or directly to retail outlets, and
      such
      distributors or sub-distributors stock the retailers’ shelves with the products.
      We are responsible for managing our network of distributors and brokers and
      the
      hiring of sales managers, who are responsible for their respective specific
      channel of sales distribution.





Although
      we had established relationships with eleven beverage distributors in 2006,
      we
      currently do not have any long-term, written distribution relationships for
      our
      product line that will conflict with our agreement with Geltech. These former
      commercial relationships consisted of agreements with distributors to carry
      our
      products and to use their efforts to sell these products in their defined
      territories. On March 20, 2006, we entered into an agreement with Exclusive
      Beverage Distributors to serve the New York City and Long Island, N.Y. markets
      on an exclusive basis. The initial term of this agreement will expire December
      31, 2009 and we will distribute our Skinny Water products in the designated
      territory pursuant to this agreement. We assigned our rights under this
      agreement for the distribution of Jana Water to Jana North America in connection
      with our restructuring in October 2006.





**Sources
      and Availability of Raw Materials; Manufacturing**


8





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





Skinny
      Snacks are produced through a packing, or co-pack, facility in the United
      States. The co-pack facility assembles our products and charges us a fee, by
      the
      case. We follow a “fill as needed” manufacturing model to the best of our
      ability and we have no significant backlog of orders. Substantially all of
      the
      raw materials used in the preparation, bottling and packaging of our products
      are purchased by us or by our contract packers in accordance with our
      specifications. Generally, we obtain the ingredients used in our products from
      domestic suppliers and each ingredient has several reliable suppliers. We have
      no major supply contracts with any of our suppliers. As a general policy, we
      pick ingredients in the development of our products that have multiple suppliers
      and are common ingredients. This provides a level of protection against a major
      supply constriction or calamity.





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





**Competition**





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






•
            
            brand
                recognition and trustworthiness;




•
            
            functionality
                of product formulations;




•
            
            pricing;•
            
            new
                flavors;•
            
            attractive
                packaging; and




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





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


9





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.





In
      addition, in light of the competition for product placement with independent
      distributors, in 2005 and 2006 we had obtained several national retail accounts
      as an additional distribution channel for our products. These accounts included
      GNC, 7-11 (through its distribution relationship with McLane), Target and
      Safeway. We have reformulated our Skinny Water product and expect to relaunch
      it
      in our second fiscal quarter of 2007 and we believe that our relationships
      with
      these retailers will help alleviate the risk inherent in competition for
      independent distributors.




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




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





**Research
      and Development**





We
      undertake research and development activities in order to monitor developments
      within the dietary supplement industry and to identify or develop new,
      marketable products. These activities include reviewing periodicals, scientific
      research and relevant clinical studies and meeting with vendors. 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 2007, we will focus our efforts on Skinny
      Water, other Skinny functional beverages, and Skinny Snacks.





**Proprietary
      Rights, Brand Names and Trademarks**




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





**Government
      Regulation**


10




The
      production, marketing and importation 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 both FDA, FTC and states’ attorneys general. Any
      type of investigation or enforcement action either by the FDA, FTC or any other
      federal, state or local agency would likely have a material adverse effect
      on
      our consolidated financial position or results of operations.




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





Our
      Skinny Water and other dietary supplements, are subject to the Dietary
      Supplement Health and Education Act of 1994 labeled (“DSHEA”), however a recent
      letter from the FDA has raised an issue with regard to whether the product
      is
      properly identified as a dietary supplement and its name. 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.  11




In
      addition, DSHEA permits “statements of nutritional support” to be included in
      labeling for dietary supplements without FDA pre-approval. Such statements
      may
      describe how a particular dietary ingredient affects the structure, function
      or
      general well being of the body, or the mechanism of action by which a dietary
      ingredient may affect body structure, function or well-being. A dietary
      supplement may not claim to diagnose, cure, mitigate, treat, or prevent a
      disease unless such claim has been reviewed and approved by the FDA as a “health
      claim” or “qualified health claim.” A company that uses a statement of
      nutritional support in labeling must possess evidence substantiating that the
      statement is truthful and not misleading. The label and labeling of our products
      do contain statements of nutritional support, however, and we have no assurance
      that FDA will find the company’s substantiation adequate to support the
      statements of nutritional support being made for our Skinny products. If the
      statement of nutritional support appears on a product label or labeling of
      a
      dietary supplement, there must also appear on such label and labeling a FDA
      disclaimer statement, which is as follows: “This statement has (or these
      statements have) not been evaluated by the Food and Drug Administration. This
      product is not intended to diagnose, treat, cure, or prevent any disease.”
Pursuant to DSHEA, we are also required to notify the FDA about our use of
      the
      statement(s) within 30 days of marketing the product (the “30 Day Letter”). Upon
      receiving the 30 Day Letter and thereafter if FDA were to determine that a
      particular statement of nutritional support is an unacceptable drug claim,
      an
      unauthorized version of a “health claim,” or unsubstantiated, a company may be
      prevented from using the claim and may face further regulatory action. There
      is
      no assurance that FDA will not make any of the aforementioned determinations
      with regard to the claims made for any of the company’s products and no
      assurance that FDA will find the company’s substantiation evidence for Skinny
      Water or on any other of our products, if ever requested, adequate to support
      the claims being made for the company’s products.





FDA
      has
      already stated in a Courtesy Letter dated September 22, 2005, that the use
      of
      the term “water” in the name of our “Skinny Water” product appears to cause our
      product to be a bottled water, which is a standardized, conventional food,
      not a
      dietary supplement. A “Courtesy Letter” is the term commonly used to describe
      the written letter sent by FDA in response to a 30 Day Letter - it is not a
      Warning Letter. We disagree with the position taken by FDA that Skinny Water
      is
      a “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, encourage
      media outlets not to carry advertisements containing bogus weight loss claims
      and to educate consumers to be on their guard against companies promising weight
      loss without diet or exercise. These enforcement actions have often resulted
      in
      consent decrees and the payment of substantial civil penalties and/or
      restitution by the companies involved. Since our dietary supplement product,
      Skinny Water, makes weight loss claims on its label, labeling and advertising,
      there can be no assurance that FTC (or FDA) will not investigate our products.
      Should FTC choose to investigate, we have no assurance that the company’s
      substantiation evidence for the claims made on Skinny Water or on any other
      of
      our products will be adequate and as a result enforcement actions/remedies
      could
      ensue.


12




*Other
      Regulatory Considerations*





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





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





*Environmental
      Protection*





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





**Seasonality**




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





**Number
      of Employees**





As
      of
      December 31, 2006, we had a total of five 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.





**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


13





**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, 2006, we earned revenues of $628,380. There can be no assurance that we
      will
      be able to continue to generate revenues or that we will ever be profitable.
      Prospective investors may lose all or a portion of their investment. Our
      prospects must be considered in light of the risks, expenses and difficulties
      frequently encountered by companies in their early stages of development,
      particularly companies in a highly competitive market, such as the market in
      which we compete. Such risks include, but are not limited to, our ability to
      obtain and retain customers and attract a significant number of new customers,
      the growth of the markets we intend to pursue, our ability to implement our
      growth strategy, especially the sales and marketing efforts, and the
      introduction of new products by us and our competitors.





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





As
      of
      December 31, 2006, we had an accumulated deficit of $10,298,891. For the years
      ended December 31, 2006 and 2005, we incurred losses from operations of
      $2,303,446 and $3,429,846, 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, 2006, our cash and cash equivalents was approximately $175,168.
      We
      have been substantially reliant on capital raised from private placements of
      our
      securities to fund our operations. For instance, during the 2006 fiscal year,
      we
      raised an aggregate amount of $1,492,000 from the sale of securities to
      accredited investors in private transactions pursuant
      to Rule 506 of Regulation D under the Securities Act of 1933, as amended. We
      believe that net cash on hand as of the date of this report and cash anticipated
      from operations and to be raised in private placements of our securities will
      only be sufficient to meet our expected cash needs for working capital and
      capital expenditures for a period six months. Accordingly, we have an immediate
      need for additional cash which we must satisfy either by immediately developing
      a market for our products, selling additional securities in private placements
      or by negotiating for an extension of credit from third party lenders. If we
      are
      unable to obtain additional capital, we will need to reduce costs and operations
      substantially. Our independent auditors have included a “going concern”
explanatory paragraph in their report to our financial statements for the year
      ended December 31, 2006, citing recurring losses from operations. Our capital
      needs in the future will depend upon factors such as market acceptance of our
      products and any other new products we launch, the success of our independent
      distributors and our production, marketing and sales costs. None of these
      factors can be predicted with certainty.




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





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


14


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





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





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





In
      2005,
      we obtained a $500,000 letter of credit with Wachovia Bank to secure our
      purchase orders with Agrokor. 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. We are currently
      negotiating with the bank to restructure the demand loan in order to agree
      upon
      a definite repayment schedule for the amounts outstanding as the bank has
      advised us that it wishes to have the outstanding principal repaid. In January
      2007 we entered into a Forbearance Agreement with Madison Bank pursuant to
      which
      we agreed with the Bank upon an accelerated payment schedule of the outstanding
      principal amount (which was approximately $320,000). Under this arrangement,
      the
      entire loan amount is due by May 31, 2007 and provided we comply with our obligations,
      the Bank agrees to forbear from taking any action in connection with the note
      until it is due. We are currently negotiating with other financial institutions
      to provide us with a loan facility to assist us in satisfying these obligations
      under the Forbearance Agreement. As
      of the
      date hereof, we have not reached a definitive agreement regarding the repayment
      of this note and no assurances can be given that we will enter into such an
      agreement.





**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.





**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.


15


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




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





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





The
      manufacture, packaging, labeling, advertising, promotion, distribution and
      sale
      of our products are subject to regulation by numerous governmental agencies
      which regulate our products. Our products are subject to regulation by, among
      other regulatory entities, the Food and Drug Administration (“FDA”) and the
      Federal Trade Commission (“FTC”). Advertising and other forms of promotion and
      methods of marketing of our products are subject to regulation by the FTC which
      regulates these activities under the Federal Trade Commission Act (“FTCA”). The
      manufacture, labeling and advertising of our products are also regulated by
      various state and local agencies as well as those of each foreign country to
      which we distribute our products. If we are unable to comply with applicable
      regulations and standards in any jurisdiction, we might not be able to sell
      our
      products in that jurisdiction, and our business could be seriously
      harmed.





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





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


16


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, 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, 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.




**Our
      success is dependent on the performance and integration of our new Chief
      Executive Officer.**




Donald
      McDonald joined as our new chief executive officer in October 2006. Our business
      and operations are substantially dependent on the performance and integration
      of
      our new CEO as well as the performance and cooperation of our former chief
      executive officer who continues to serve as our Chairman. These persons have
      worked together for only a short period of time. Inherent with changes in
      management is a change in understanding of the control environment, the business
      processes and internal controls. If we are unable to successfully integrate
      new
      executives into our operations, it may adversely impact our results of
      operations and financial condition.




**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, o ur
      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 Fuze and SoBe. Our competitors in the dietary snacks
      products include Weight Watchers, NutriSystems, Jenny Craig and others. 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:




17




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


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





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





We
      must
      engage distributors to sell our products principally to major retailers and
      chains including supermarkets and grocery and convenience stores. These
      relationships are typically on a purchase-order basis we do not have any
      relationships with distributors that are subject to significant minimum purchase
      commitments. Accordingly, we cannot assure any given level of performance by
      our
      distributors and we do not have any assurance that these accounts will result
      in
      recurring orders. The poor performance of our distributors, retailers or chains
      or our inability to collect accounts receivable from our distributors, retailers
      or chains could materially and adversely affect our results of operations and
      financial condition. In addition, distributors and retailers of our products
      offer products which compete directly with our products for retail shelf space
      and consumer purchases. Accordingly, there is a risk that distributors or
      retailers may give higher priority to products of our competitors. In the
      future, our distributors and retailers may not continue to purchase our products
      or provide our products with adequate levels of promotional support.
      Accordingly, there can be no assurance that we will be able successfully to
      sell, market, commercialize or distribute our products at any time in the
      future.




**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. For instance, our agreement with Geltech does
      not
      obligate them to purchase our product and we have the obligation of entering
      into revenue-generating agreements with distributors or retailers that Geltech
      brokers on our behalf. 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.




18





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




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





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




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




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




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





**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.


19




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





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




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


20


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





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





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




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




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




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





Certain
      Factors Related to Our Common Stock




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




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





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




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


21




**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
      March 27, 2007, of the 75,573,059 issued and outstanding shares of our Common
      Stock, approximately 66,209,679 shares may be deemed “restricted shares” and, in
      the future, may be sold in compliance with Rule 144 under the securities Act
      of
      1933, as amended. Rule 144 provides that a person holding restricted securities
      for a period of one year may sell in brokerage transactions an amount equal
      to
      1% of our outstanding Common Stock every three months. A person who is a
“non-affiliate” of our Company and who has held restricted securities for over
      two years is not subject to the aforesaid volume limitations as long as the
      other conditions of the Rule are met. Possible or actual sales of our Common
      Stock by certain of our present shareholders under Rule 144 may, in the future,
      have a depressive effect on the price of our Common Stock in any market which
      may develop for such shares. Such sales at that time may have a depressive
      effect on the price of our Common Stock in the open market.





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





As
      of
      December 31, 2006, there were outstanding and immediately exercisable options
      to
      purchase 2,050,000 shares of Common Stock and other warrants to purchase
      9,350,660 shares of Common Stock. In addition, as of January 31, 2007, after
      giving effect to the conversion of $1,795,000 of debentures pursuant to our
      debenture conversion offer, there remains outstanding an aggregate principal
      amount of $720,000 of convertible debentures which are convertible into an
      aggregate of 1,800,000 shares of Common Stock and an additional 1,800,000
      warrants. The shares underlying our outstanding convertible debentures represent
      approximately 2.4% of our common stock, the shares underlying warrants
      (including the warrants that are issuable upon conversion of the debentures)
      represent approximately 14.8% of our common stock, and the shares underlying
      our
      currently outstanding options represents approximately 2.7% of our common stock.
      The conversion or exercise of these securities will cause dilution to our
      shareholders and the sale of the underlying Common Stock (or even the potential
      of such exercise or sale) may have a depressive effect on the market price
      of
      our securities. Moreover, the terms upon which we will be able to obtain
      additional equity capital may be adversely affected, since the holders of the
      outstanding options and warrants can be expected to exercise them at a time
      when
      we would, in all likelihood, be able to obtain any needed capital on terms
      more
      favorable to us than the exercise terms provided by the outstanding options
      and
      warrants.


22


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





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




**Item
      2.  Description of Property.**





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




**I** **tem
      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.





We
      are
      currently the co-defendant along with our Chairman in a civil suit filed in
      Miami-Dade County Circuit Court under the caption *Swan
      v. Salaman and Creative Enterprises International, Inc.* Plaintiff
      claims that we breached an oral agreement of employment and is seeking
      compensatory damages. A motion to dismiss filed by the co-defendants was
      rejected in part and is pending in part. We will vigorously defend this matter
      if our motion to dismiss is denied. Based on the
      facts of which we are currently aware, management believes that the resolution
      of this claim will not have a materially adverse effect on our financial
      condition. However, no assurances can be given that such belief will ultimately
      prove to be accurate or that other facts adverse to our position currently
      not
      known to management will not be uncovered, in which case the ultimate resolution
      of this claim could potentially ** have
      a
      material adverse effect **** on
      our
      financial condition.





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





On
      or
      about May 8, 2006 a default judgment was entered against us in the Supreme
      Court
      of the State of New York for the County of New York (Index No. 600618/06) in
      the
      amount of $43,835.06 in an action brought against it by Evins Communications,
      Ltd. (“Evins”) purportedly commenced in February 2006 (and with respect to which
      complaint we do not believe it was served). The basis for such action is not
      known to the company. That judgment was later domesticated in Pennsylvania
      on or
      about August 3, 2006. We intend to move for relief against this judgment in
      the
      New York court.


23




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.**





On
      November 15, 2006, holders of approximately 53% of our issued and outstanding
      common stock consented in writing to (1) amend 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) amend
      our
      Employee Stock Option Plan to increase the number of shares of common stock
      available to be issued thereunder to 20,000,000 shares. These actions became
      effective as of December 27, 2006.





**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 432 shareholders of our common stock as of December 31,
      2006 holding 42,673,327 common shares.





**High
                Bid**
            
            **Low
                Bid****Fiscal
                2006**March
                31, 2006
            
            $
            0.65
            
            $
            0.34June
                30, 2006
            
            $
            0.20
            
            $
            0.20September
                30, 2006
            
            $
            0.12
            
            $
            0.12December
                31, 2006
            
            $
            0.18
            
            $
            0.16**Fiscal
                2005**March
                31, 2005
            
            $
            0.73
            
            $
            0.55June
                30, 2005
            
            $
            1.25
            
            $
            1.01September
                30, 2005
            
            $
            1.55
            
            $
            0.70December
                31, 2005
            
            $
            1.04
            
            $
            0.65


*Dividends
      and Dividend Policy*





There
      are
      no restrictions imposed on us that limits our ability to declare or pay
      dividends on our common stock, except as limited by state corporate law. During
      the year ended December 31, 2006, 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*


24





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





*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, 2006, 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**
            10,650,000
            $0.224
            9,350,000**Equity
                Compensation Plans Not Approved by Stockholders
                (1)**
            2,443,750
            $0.288
            N/A**Total**
            13,093,750
            -
            9,350,000


__________________


(1)
      Consists of warrants issued to third parties for services rendered and our
      grant
      of 600,000 shares of restricted stock to certain of our employees during
      2006.





*Recent
      Sales of Unregistered Securities*





Except
      as
      described below, we
      did
      not issue any securities that were not registered under the Securities Act
      of
      1933, as amended (the “Securities Act”) during the fiscal year ended
      December 31, 2006 or during the current fiscal year, other than those
      disclosed in previous SEC filings.




As
      of
      March 27, 2007, we consummated a final closing of our private placement of
      $750,000 shares of its common stock. In the final closing, we received
      additional gross proceeds of $90,000 and we closed on gross proceeds of $749,525
      in the aggregate. At the final closing, we issued an aggregate of 1,200,000
      shares of common stock at the offering price of $0.075 per share and received
      net proceeds of approximately $80,000 in the final closing, after giving effect
      to payment of approximately $9,000 in commissions to registered broker-dealers
      that served as selling agents in the transaction and other offering-related
      expenses. The selling agents have also earned additional warrant compensation
      in
      the amount of 120,000 warrants to purchase our common stock (the “Agent
      Warrants”). The Agent Warrants will be exercisable for a period of five years at
      $0.09 per share. We intend to use the proceeds from the offering for working
      capital, repayment of debt and general corporate purposes. 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 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.




On
      March
      23, 2007, we issued 1,333,333 to a consultant in consideration for services
      to
      be rendered to us pursuant to a consulting agreement we entered into with such
      firm. The securities have not been registered under the Securities Act of 1933,
      as amended, and were issued reliance upon the exemption from registration set
      forth in Section 4(2) of the Securities Act of 1933, as amended, as the
      consultant represented to us that is an “accredited investor”, as such term is
      defined in Rule 501(a) promulgated under the Securities Act.




25


On
      March
      23, 2007, we issued 2,011,015 shares of common stock to the investor in our
      October 2006 private placement to whom we issued a convertible promissory note
      in the principal amount of $100,000 upon his conversion of the principal and
      interest of such note. The securities issued in connection with the conversion
      of the note have not been registered under the Securities Act of 1933, as
      amended, and were issued in reliance upon the exemption from registration set
      forth in Section 3(a)(9) thereof.




*Stock
      Repurchases*




During
      fiscal 2006, we did not repurchase any shares of our common stock.




**Item
      6.   Management’s Discussion and Analysis or Plan of
      Operation.**




***Overview***




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





**Nature
      of Operations**





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





We
      have
      had limited operations to date and until 2005 our efforts were focused primarily
      on the development and implementation of our business plan. Since the middle
      of
      2005 we have engaged in significant marketing and sales activities related
      to
      our business plan of selling functional beverages and dietary supplements.
      We
      have generated revenues of $628,380 for fiscal 2006 and incurred a net loss
      of
      $3,429,846 for fiscal 2005 and $2,303,446 for year ended December 31, 2006.
      Our
      net loss in 2006 included $205,000 in non-cash charges. 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.





*Our
      Products and Strategy*





Through
      the year ended December 31, 2006, we have operated our business in the rapidly
      evolving consumer beverage and dietary supplement industries. More recently
      we
      have determined to focus on marketing and distributing our dietary supplement
      product, “Skinny Water” and developing a line of complementary nutritional
      products which we intend to market under the “Skinny” brand. These additional
      products consist of a line of weight loss products that will include meal
      replacement shakes, nutrition bars, healthy snacks, desserts and additional
      nutraceutical powders and capsules which are being formulated to help consumers
      lose weight.




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 and we had been in discussions with Jamnica to restructure our
      relationship with them.


26


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





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





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





We
      will
      principally generate revenues, income and cash by introducing, marketing,
      selling and distributing finished products in the health and nutrition
      industries. We will sell these products to national retailers through our
      national agreement with Geltech, a large distributor serving over 20,000 stores
      as well as through the internet and telephone sales via TV and Cable
      advertising. We have been focused on, and will continue to increase our existing
      product lines and further develop our markets, including direct marketing
      through the Internet. We had established relationships with national retailers,
      including Target for the distribution of Skinny Water. However, we have
      reformulated Skinny Water in order to reduce our costs and in light of the
      termination of our agreement with Jamnica. We expect to continue our efforts
      to
      distribute Skinny Water through the distributors and retailers that have
      previously purchased product from us. 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.


27


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 preference promote long term growth.





*Management
      Changes*





In
      October 2006, we reorganized our executive management team. On October 4, 2006,
      our board of directors elected Mr. Ken Brice, currently serving as our Chief
      Financial Officer, 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, our 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.





*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 thereunder to 20,000,000 shares. These actions became effective as of
      December 27, 2006. Also effective as of such date, we granted an aggregate
      of
      10,650,000 options under its Employee
      Stock Option Plan, including a total of 5,500,000 options granted to certain
      of
      our executive officers.





On
      December 22, 2006, we began an offering to the holders of an aggregate principal
      amount of $2,515,000 of convertible debentures the ability to convert such
      securities at a reduced conversion rate. The convertible debentures are
      scheduled to mature at various dates between December 2006 and October 2007
      and
      are currently 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
      is currently 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.
      A s
      of
      January 31, 2007, we received conversion notices from holders representing
      an
      aggregate principal amount of $1,795,000 of convertible debentures, which
      represents approximately 71% of the outstanding $2,515,000 principal amount
      of
      debentures. We issued these holders an aggregate of 17,950,000 shares of common
      stock.


28


**Going
      Concern and Management Plans**





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





As
      described in greater detail below under the caption “Liquidity and Capital
      Resources,” during the twelve months ended December 31, 2006, we have raised a
      total of $1,492,000 in gross proceeds from private transactions with accredited
      investors and current or former members of our executive management team. In
      these financings, we raised gross proceeds of $275,000 from the sale of 687,500
      shares of our Common Stock and 687,500 warrants, issued an aggregate principal
      amount of $692,000 of convertible debentures, of which amount, the holders
      of
      the principal amount of $642,000 of such debentures converted their debt
      instruments into a total of 12,909,860 shares of common stock in October 2006.
      In October 2006, we raised $525,000 in a private placement of our common stock
      to accredited investors pursuant to Rule 506 of Regulation D. This financing
      is
      for a total of $1.2 million of Common Stock, or 24,000,000 shares of Common
      Stock, at the offering price of $0.05 per share. In this financing, we received
      net proceeds of approximately $500,000 and issued an aggregate of 8,500,000
      shares of Common Stock to the investors in this financing. We also issued a
      convertible note to one investor in the principal amount of $100,000 in lieu
      of
      additional shares of common stock. This investor subscribed for $150,000 of
      shares of Common Stock in the financing (3,000,000 shares). This note was
      converted into 2,000,000 shares of common stock in March 2007.





Based
      on
      our current levels of expenditures and our business plan, we
      believe that our existing cash and cash equivalents (including the proceeds
      received from our recent private placement), will only be sufficient to fund
      our
      anticipated levels of operations for a period of six months. Accordingly,
      g enerating
      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, 2006, 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.





*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





We
      sell
      products through multiple distribution channels including resellers and
      distributors. Revenue is recognized when the product is shipped to the customer
      and is recognized net of discounts and returns.





Use
      of
      Estimates in the Preparation of Financial Statements


29




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, 2006 compared to Year Ended December
      31,
      2005***





For
      the
      twelve months ended December 31, 2006, our revenues were $628,380 as compared
      to
      $514,146 for the same period last year. This increase in revenues for the twelve
      months ended December 31, 2006 is due primarily to the results of our first
      nine
      months of operations during 2006 and our decision to not sell Jana brand water
      and to focus its resources on the Skinny brand. Cost of goods sold was $576,882
      for the year ended December 31, 2006 as compared to $456,270 incurred during
      the
      same period last year. Initial product orders did not occur until May 2005,
      so
      the year to year comparisons are insignificant. In addition, we decided to
      focus
      on its new products during the fourth quarter of the 2007 fiscal year. Marketing
      and advertising costs were $394,949 for the year ended December 31, 2006 as
      compared to $1,307,186 for the same period last year, or a decrease of 70%.
      This
      decrease is attributed to the refocusing of the organization towards the
      development of the Skinny brand. A portion of this decrease was a result of
      our
      focus on cost containment cash conservation as we built our new brands and
      terminated our relationship with Jamnica.





General
      and administrative costs (which include salaries, rent, office overhead, and
      public company expenses) were $1,894,768 for the twelve months ended December
      31, 2006 as compared to $1,950,320 over the same period in 2005. This decrease
      of 2.8% is primarily due to cost containment and restructuring the company.
      For
      the twelve months ended December 31, 2006, we also incurred additional expenses
      in connection with operating as a reporting company, which began in December
      2005.





Interest
      expense was $32,932 for the year ended December 31, 2006 as compared to $230,216
      for the same period last year. This decrease as well as the $82,592 in interest
      income is attributable to the conversion of our debt into equity during the
      first quarter of 2007.





Net
      loss
      from the disposition of fixed assets reflects the settlement with Jamnica and
      the related fixed assets that were part of the settlement.





Net
      loss
      for the twelve month period was $2,303,446 as compared to $3,429,846 for the
      same period last year or an improvement of 32.8%. This improvement was
      attributable to the company’s decision to no longer market Jana water, the
      conversion of its debt into equity and its cost containment
      measures.





**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 have an immediate need for cash to fund
      our working capital requirements and business model objectives. As of December
      31, 2006, we had approximately $3,410,284 in working capital deficit and our
      cash balance was approximately $175,168. In January 2007, we converted
      $1,795,000 in convertible debt into equity, reducing our working capital deficit
      to $1,615,284. In October 2006, we raised a total of $525,000 in gross proceeds
      from private sales of 8,500,000 shares of our common stock and a convertible
      note in the principal amount of $100,000 to accredited investors in a private
      placement pursuant to Rule 506 of Regulation D under the Securities Act of
      1933.
      To provide for our working capital during the year ended December 31, 2006,
      we
      had raised during the 2005 fiscal year approximately $2.6 million through a
      private placement of convertible debentures. We also raised an additional
      $205,000 during December 2005 from the sale of 512,500 shares of our common
      stock and 512,500 warrants to certain accredited investors in a private
      transaction and during the quarter ended March 31, 2006, we raised an additional
      $275,000 from the private sale of 687,500 shares of common stock and 687,500
      warrants to accredited investors, receiving net proceeds of $247,500 after
      payment of commissions to a registered broker-dealer, which we will use for
      working capital and general corporate purposes. These transactions were made
      pursuant to Rule 506 of Regulation D under the Securities Act of
      1933.


30


As
      of
      March 27, 2007, we consummated a final closing of a private offering of shares
      of common stock for aggregate gross proceeds of $750,000. In this financing,
      we
      sold a total of $749,525, or 9,993,667 shares of common stock, at the offering
      price of $0.075 per share. We received total net proceeds of approximately
      $645,000 after giving effect to payment of approximately $75,000 in commissions
      to registered broker-dealers served as selling agents in the transaction and
      other offering-related expenses. The selling agents also earned warrant
      compensation in the amount of 999,366 warrants to purchase our common stock
      (the
“Agent Warrants”). The Agent Warrants will be exercisable for a period of five
      years at $0.09 per share. We intend to use the proceeds from the offering for
      working capital, repayment of debt and general corporate purposes. 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 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. In connection
      with
      the financing, we also issued an aggregate of 4,812,500 shares of its common
      stock to certain investors in a prior private placement pursuant to a reset
      right granted to such holders. In addition, the company authorized the issuance
      of an additional 481,250 common stock purchase warrants to the selling agent
      in
      such prior financing, which warrants are exercisable for five years at an
      exercise price of $0.06 per share





In
      addition, we have received short-term loans from unaffiliated third-parties
      of
      approximately $220,000, of which the principal amount of approximately $145,000
      was outstanding as of December 31, 2006. This loan bears interest at the rate
      of
      15% per annum and was due August 24, 2006. We recently renegotiated the terms
      of
      the loan including adding the outstanding interest to the principal, reducing
      the interest rate to 12% and extending the due date to September 1, 2008. The
      loan requires monthly payments of $10,000 on the first of each month.





In
      March
      and April 2006, we received an aggregate amount of $642,000 in loans made by
      our
      Chairman and former Chief Executive Officer and four additional accredited
      investors. These loans were convertible into securities we may issue in any
      financing transaction that we consummate during the term of the notes. The
      notes
      are due one year from the date of issuance and shall accrue interest at the
      rate
      of 10% per annum, payable upon maturity. In connection with our recent private
      placement, the holders of these convertible debentures converted the entire
      principal amount and accrued but unpaid interest into an aggregate of 12,909,860
      shares of our common stock. Of this amount, a total of 4,879,324 shares were
      issued to our Chairman upon the conversion of the note he held.





In
      addition, in June 2006, two of our then-current directors provided us with
      a
      loan in the aggregate amount of $50,000, in consideration of which we issued
      a
      convertible promissory note that is convertible into the securities we issue
      in
      any financing transaction of at least $500,000 gross proceeds that we consummate
      during the term of the note. The note is due one year from the date of issuance
      and the principal amount of the note shall accrue interest at the rate of 10%
      per annum, payable upon maturity. As described below in greater detail, we
      subsequently amended the repayment term of this note in connection with our
      October 2006 financing.





In
      October 2006, we raised an additional $525,000 in a private placement of our
      common stock to accredited investors pursuant to Rule 506 of Regulation D.
      This
      financing is for a total of $1.2 million of Common Stock, or 24,000,000 shares
      of Common Stock, at the offering price of $0.05 per share. In this financing,
      we
      have received net proceeds of approximately $500,000 and have issued an
      aggregate of 8,500,000 shares of Common Stock to the investors in this
      financing. As part of this financing, we also issued a convertible note to
      one
      investor in the principal amount of $100,000 in lieu of additional shares of
      common stock. This investor subscribed for $150,000 of shares of Common Stock
      in
      the financing (3,000,000 shares). As described above, in connection with this
      financing, we issued an aggregate of 12,909,860 shares of common stock upon
      the
      conversion of $642,000 of debt, including the convertible note we issued to
      our
      Chairman in March 2006. We are using the proceeds from the offering for working
      capital, payment of accrued compensation and the repayment of debt owed to
      third
      parties.


31





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.





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





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





*Other
      Transactions Impacting our Capital Resources*





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





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





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


32


We
      obtained a $500,000 letter of credit with Wachovia Bank to secure our purchase
      orders with Agrokor. 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. These bottles have been shipped into the U.S.
      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 debt obligation. Pursuant to
      the
      Forbearance Agreement, we and the Bank agreed to the following repayment
      schedule for the outstanding balance due of $320,125: (a) an initial amount
      of
      $17,000 was paid upon execution of the Agreement; (b) monthly installments
      of
      $5,000 will be payable by the first day of each month through May 2007; and
      (c)
      a final payment of the remaining outstanding balance due will be due on or
      before May 31, 2007. Interest will continue to accrue on the note at the rate
      of
      1% above the Wall Street Journal Prime Rate. Provided we comply with these
      and
      its other obligations under the Agreement, the Bank agrees to forbear from
      taking any action in connection with the note until it is due. In addition,
      in
      order to secure the repayment of the note and our obligations under the
      Agreement, our Chairman pledged certain shares of common stock of other publicly
      traded companies held by him, we granted the Bank a first priority security
      interest in its accounts and other assets and our Chairman and certain of his
      affiliates provided personal guarantees for the loan amount. In the event the
      aggregate market value of the pledged securities is less than $350,000, then
      the
      Bank may exercise its rights to accelerate repayment of the note and otherwise
      take such actions as is permitted under the Agreement to protect its security
      interest in the collateral. We are currently in final negotiations with another
      bank to refinance this loan over a 12 month period. However, no assurances
      can
      be given that we will enter into such an agreement.





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





*Break
      Even and Profitability* ****





As
      discussed in the overview to this analysis, we are developing a new product
      line
      based on our Skinny brand which we began selling in the first quarter of 2007
      in
      addition to our current retail business for Skinny water. We have developed
      a
      financial plan that shows that if our assumptions for the cost of marketing
      and
      distribution are correct, we will be at breakeven in the third quarter of
      calendar 2007 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.


33





*Marketing/Advertising* ****





In
      connection with our recent marketing campaign, we have invested over $900,000
      of
      our working capital during the 2006 fiscal year and an additional $387,000
      during 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 2007
      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, 2006 we have 5 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,
      2005, we were not aware of any obligations under such indemnification agreements
      that would require material payments.





*Recent
      Accounting Pronouncements*





In
      September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
      Fair Value Measurements. This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. This Statement
      applies under other accounting pronouncements that require or permit fair value
      measurements, the Board having previously concluded in those accounting
      pronouncements that fair value is the relevant measurement attribute.
      Accordingly, this Statement does not require any new fair value measurements.
      However, for some entities, the application of this Statement will change
      current practice. This Statement is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Earlier application is encouraged, provided that the
      reporting entity has not yet issued financial statements for that fiscal year,
      including financial statements for an interim period within that fiscal year.
      The adoption of this Statement is not expected to have a material impact on
      the
      Company’s financial statements.




34


**Item
      7.  Financial Statements.**




Our
      audited financial statements for the fiscal year ended December 31, 2006 follows
      Item 14 of this Annual Report on Form 10-KSB, beginning at page
      F-1.




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




*None.*




**Item
      8A.  Controls and Procedures.**




*Disclosure
      Controls*




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




Based
      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.




*Internal
      Controls*




In
      connection with the effectiveness of our Registration Statement on Form 10-SB,
      we first became subject to the reporting obligations of Section 13 of the
      Exchange Act in December 2005. During the 2006 fiscal year, we began to adopt
      and implement various measures in order to improve control processes and
      corporate governance. As a non-reporting company, we were not required to adopt
      the types of internal control procedures that a public company must adopt and
      maintain. Measures we adopted during the course of our 2006 fiscal year to
      enhance existing policies, or implement new ones, so as to have an effective
      system of internal controls over financial reporting were reported on our prior
      periodic reports during the year. During the fiscal quarter ended December
      31,
      2006, we increased the membership of our board of directors to consist of four
      persons and engaged an interim Chief Operating. We continue to implement
      additional measures in response to specific accounting and reporting weaknesses,
      including personnel and organizational changes to improve supervision and
      increased training for finance and accounting personnel.




Except
      for the events described above, there have been no other changes in the internal
      control over financial reporting during the fiscal quarter ended December 31,
      2006 that have materially affected, or are reasonably likely to materially
      affect, internal controls over financial reporting.




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.


35


**Item
      8B.  Other Information.**




None.





**PART
      III**




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





The
      following table summarizes the name, age and title of each of our current
      directors and executive officers. Directors are elected annually by our
      stockholders and hold office until their successors are elected and qualified,
      or until their earlier resignation or removal. Our Board of Directors currently
      consists of four members. There are no family relationships among our current
      executive officers and directors. Officers are elected by and serve at the
      discretion of the Board of Directors.





Effective
      March 8, 2006, Mr. Christopher Durkin was elected to our board of directors
      and
      was appointed as our Chief Executive Officer and President, Mr. James Robb
      was
      elected to our board, Mr. Michael Salaman resigned as Chief Executive Officer
      and President (while remaining as Chairman) and Mr. Scott Perlstein resigned
      from our board. Subsequently, in October 2006, Messrs. Durkin and Robb resigned
      from all positions with us and we appointed Mr. Donald J. McDonald as our Chief
      Executive Officer, President and director, Mr. Michael Reis and our interim
      Chief Operating Officer and a director and Mr. Kenneth Brice, who had been
      serving as our Chief Financial Officer, to also serve on our board of
      directors.





Our
      directors and officers are currently as follows:





**Name**
            
            **Age**
            
            **Position**Donald
                J. McDonald
            
            54
            
            Chief
                Executive Officer, President and DirectorMichael
                Salaman
            
            44
            
            Chairman
                of the BoardMichael
                Reis
            
            62
            
            Interim
                Chief Operating Officer and DirectorKenneth
                Brice
            
            60
            
            Chief
                Financial Officer and Director





**Business
      Experience**





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





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


36





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





**Kenneth
      Brice.** Kenneth
      P. Brice is our chief financial officer and has been associated with us since
      June 2005. Mr. Brice is currently president of CFO Resources, Inc., a New Jersey
      based firm that he founded in January 1994 that provides accounting services
      to
      small and medium sized companies. From February 1995 to May 2003, Mr. Brice,
      through CFO Resources, also served as interim Chief Financial Officer of F.
      Brinn and Associates, a New York based firm that specializes in finding
      employment opportunities for individuals on welfare and public assistance.
      Prior
      to that, Mr. Brice worked in senior financial roles at Automatic Data
      Processing, Inc., where he was Group Controller for Employer Services; Interim
      Services, Inc., where he was Corporate Controller; Digital Solutions, Inc.
      and
      Hydromer, Inc. where he was Chief Financial Officer. Mr. Brice graduated from
      the University of Miami in 1973 with a Bachelors degree in
      accounting.





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; and





•  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.





**Significant
      Employee**





**April
      Shelley Brown.** On
      October 6, 2006, the Company appointed Ms. April Brown as its Chief Marketing
      Officer. Ms. Brown was most recently employed by Nautilus, Inc. from April
      2002
      to May 2006 where she has held the positions of Senior Director - Marketing
      Strategy since 2004, the Director of Creative Services and Marketing Operations
      and Creative Director. Prior to that, Ms. Brown was the Senior Art Director
      of
      Publicis Advertising from December 1999 to September 2001. From 1998 - 1999,
      Ms.
      Brown was a Graphic Design Strategist at Nike, Inc. and from 1996 - 1998, she
      served as a creative director for BHP, Ltd. Ms. Brown is 42 years old and
      graduated from Reed College in 1990 with a B.A. in Fine Art and Theoretical
      Physics.




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


37




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, 2006, our board of directors held two
      meetings and acted by unanimous written consent on 11 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-B of the Securities
      Act of 1933. In connection with our transition to being a reporting company
      we
      are actively seeking to expand our Board membership to include a majority of
      independent directors, including at least one person that satisfies the
      definition of “financial expert.”




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




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




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




**Code
      of Ethics**




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




**Item
      10.  Executive Compensation**




**Summary
      of Cash and Certain Other Compensation**





The
      following table sets forth information concerning the total compensation that
      we
      have paid or that has accrued on behalf of each person who served as our chief
      executive officer, our chief financial officer and other executive officers
      (the
“Named Executive Officers”) with annual compensation exceeding $100,000 during
      the fiscal year ended December 31, 2006.





**Summary
      Compensation Table**




**Name
                and Principal Position**
            
            
            **Year**
            
            
            **Salary**
              **($)**
            
            
            **Bonus**
              **($)**
            
            
            **Stock
                Awards**
              **($)**
            
            
            **Option
                Awards**
              **($)**
            
            
            **All
                Other Compensation**
              **($)**
            
            
            **Total
                ($)**(a)
            
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (i)
            
            
            (j)Donald
                J. McDonald
              Chief
                Executive Officer and President (1)
            
            
            2006
            
            $
            20,000
            
            $
            0
            
            
            0
            
            
            75,000
            
            
            0
            
            
            95,000Kenneth
                Brice,
              Chief
                Financial Officer (2)
            
            
            2006
            
            $
            0
            
            $
            0
            
            
            2,500
            
            
            75,000
            
            
            103,112
            
            
            181,112Michael
                Salaman,
              Chairman
                and former Chief Executive Officer (3)
            
            
            2006
            
            $
            28,605
            
            $
            0
            
            
            0
            
            
            0
            
            
            5,000
            
            
            33,065Christopher
                Durkin,
              Former
                Chief Executive
              Officer
                (4)
            
            
            2006
            
            $
            43,253
            
            
            0
            
            
            3,000
            
            
            0
            
            
            32,500
            
            
            78,753


38
 ____________


(1)
      Mr.
      McDonald became our Chief Executive Officer and President on October 6,
      2006.


(2)
      We
      pay compensation to our Chief Financial Officer to a consulting firm of which
      he
      is a principal.


(3)
      Mr.
      Salaman served as our Chief Executive Officer and President until March 8,
      2006.
      Mr. Salaman continues to serve as our Chairman.


(4)
      Mr.
      Durkin served as our Chief Executive Officer and President from March 8, 2006
      until October 5, 2006.





**Director
      Compensation**





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





**Employment
      Agreements**





We
      have
      not entered into written employment agreements with any of our executive
      officers. During 2006, we compensated each of our Chairman, Chief Executive
      Officer and Chief Financial Officer at the rate of $5,000 per month. On January
      12, 2007, the Board of Directors of the Company approved increases in the
      monthly compensation rates, effective as of January 1, 2007, payable to each
      of
      its Chairman, Chief Executive Officer and Chief Financial Officer. Each of
      these
      executives will now receive a monthly fee of $7,500, representing an increase
      of
      $2,500 per month, plus reimbursement of approved corporate expenses. The amounts
      payable to our Chief Financial Officer are paid to a consulting company of
      which
      our Chief Financial Officer is a principal.





**** **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,
      2006.





**Option
                Awards**
            
            **Stock
                Awards****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)Donald
                J. McDonald
            
            
            500,000
            
            
            2,000,000
            
            
            500,00
            
            $
            0.12
                (1
            )
            
            10/06/11
            
            
            __
            
            
            __
            
            
            __
            
            
            __Kenneth
                Brice
            
            
            500,000
            
            
            2,000,000
            
            
            500,000
            
            $
            0.12
                (1
            )
            
            10/06/11
            
            
            __
            
            
            __
            
            
            __
            
            
            __Michael
                Salaman (2)
            
            
            150,000
            
            
            0
            
            
            0
            
            $
            0.50
            
            
            1/18/07
            
            
            __
            
            
            __
            
            
            __
            
            
            __Christopher
                Durkin
            
            
            0
            
            
            0
            
            
            0
            
            
            N/A
            
            
            N/A
            
            
            __
            
            
            __
            
            
            __
            
            
            __


________________________


(1)
            The
                exercise price of the vested options is $0.12 per share. The exercise
                price of the unvested options is $0.25 per share. Unvested options
                vest in
                equal annual increments of 20% on each anniversary of the grant
                date.


(2)
            Excludes
                grant of 3,000,000 options on January 12,
                2007.




**Stock
      Option Plan**  39





Our
      Board
      of Directors initially adopted our Employee Stock Option Plan (the “Plan”) on
      November 16, 1998 and it was approved by our stockholders on December 21, 2001.
      The Plan will terminate ten years from the date of its adoption by the Board,
      unless sooner terminated. Our Board of Directors, on October 6, 2006,
      unanimously approved and recommended for shareholder approval the amendment
      of
      the Plan to increase the number of shares authorized for issuance thereunder
      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, 2006, 10,650,000 options were issued
      and
      outstanding.





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





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





*Types
      of Awards* .
      Awards
      under the Plan include incentive stock options and nonstatutory 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. Nonstatutory 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 Nonstatutory 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 issuable 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, reprice
      outstanding awards or adversely effect the provisions relating to an award’s
      vesting and exercisability.


40




**Item
      11.  Security Ownership**




The
      following table sets forth the beneficial ownership of our Common Stock as
      of
      March 30, 2007, by (i) each director and each executive officer, (ii) and all
      directors and executive officers as a group, and (iii) persons (including any
      “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act
      of l934), known by us to be the beneficial owner of more than five percent
      of
      its common stock. Shares of Common Stock subject to options exercisable within
      60 days from the date of this table are deemed to be outstanding and
      beneficially owned for purposes of computing the percentage ownership of such
      person but are not treated as outstanding for purposes of computing the
      percentage ownership of others. As of March 26, 2007, there were 75,573,059
      shares issued and outstanding.








**Shares
                of Common Stock**
              **Beneficially
                Owned****Name
                and Address of Owner**
            
            **Number**
            
            **Percent (%)***Officers
                and Directors*Michael
                Salaman (1)
              c/o
                Skinny Nutritional Corp.
              3
                Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
            
            
            7,712,657
            
            
            10.1
            %Donald
                J. McDonald (2)
              c/o
                Skinny Nutritional Corp.
              3
                Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
            
            
            500,000
            
            
            *Kenneth
                Brice (3)
              c/o
                Skinny Nutritional Corp.
              3
                Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
            
            
            750,000
            
            
            *Michael
                Reis (4)
              c/o Skinny Nutritional
                Corp.
              3
                Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
            
            
            400,000
            
            
            **Other
                Beneficial Owners*Charles
                Hallinan
              P.O.
                Box 915, Bala Cynwyd, PA 19004
            
            
            5,000,000
            
            
            6.6
            %Yehuda
                Dachs
              P.O.
                Box 495, Lakewood, NJ 08701
            
            
            7,026,941
            
            
            9.3
            %All
                Directors and Officers as a Group (4 persons) (1)(2)(3)(4)
            
            
            9,362,657
            
            
            12.1
            %


_____________________


*
            Denotes
                ownership percentage of less than 1%.(1)
            Based
                on information set forth in a Schedule 13D filed with the SEC on
                October
                16, 2006. Includes vested options to purchase 600,000 shares of common
                stock. Excludes unvested options to purchase 2,400,000 shares of
                common
                stock.


(2)
            Includes
                options to purchase 500,000 shares of Common Stock and excludes 2,000,000
                unvested options.(3)
            Includes
                options to purchase 500,000 shares of Common Stock and excludes 2,000,000
                unvested options.(4)
            Includes
                options to purchase 100,000 shares of Common Stock and excludes 400,000
                unvested options.




**Item
      12.  Certain Relationships and Related
      Transactions.**




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




41




On
      October 19, 2006, our board of directors approved the grant of an aggregate
      of
      600,000 restricted shares of common stock to certain of our employees, including
      a total of 250,000 shares to Mr. Kenneth Brice, our Chief Financial Officer
      and
      a member of the board.





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





On
      June
      5, 2006, Christopher Durkin, our former Chief Executive Officer and a member
      of
      our board of directors, and James Robb, a former member of our board of
      directors, each provided us with a loan in the amount $25,000, in consideration
      of which we issued a convertible promissory note. The note was convertible
      into
      the securities we issue in any financing transaction of at least $500,000 gross
      proceeds that we consummate during the term of the note. The note is due one
      year from the date of issuance and the principal amount accrues interest at
      the
      rate of 10% per annum, payable upon maturity. On October 4, 2006, we entered
      into an agreement modifying the note, pursuant to which we agreed to modify
      the
      repayment terms by paying an amount of $10,000 upon the initial closing of
      our
      October 2006 private placement and the balance of the principal and accrued
      and
      unpaid interest within 60 days thereafter. The principal amount due to Mr.
      Robb
      is $50,000, which includes the assignment of a $25,000 convertible note to
      Mr.
      Robb in a private transaction, which note was originally issued to Mr. Durkin.
      Following a further modification of the repayment obligation, this note was
      paid
      in full on March 13, 2007.





As
      of
      March 20, 2006, we issued convertible notes in the aggregate amount of $442,000
      to Michael Salaman, our Chairman and former Chief Executive Officer and three
      other accredited investors. The notes are convertible at the option of the
      holder, into the securities we issue in any financing transaction we consummate
      during the term of the Notes. The Notes will be due one year from the date
      of
      issuance and the principal amount of the Notes shall accrue interest at the
      rate
      of 10% per annum, payable upon maturity. In connection with our October 2006
      private placement of securities, holders of an aggregate principal amount of
      $442,000 of convertible notes, including our Chairman, elected to convert their
      notes into an aggregate of 8,909,860 shares of Common Stock. Of this amount,
      a
      total of 4,879,324 shares of Common Stock were issued to Mr. Salaman.





We
      obtained a $500,000 letter of credit with Wachovia Bank to secure our purchase
      orders with Agrokor. 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. These bottles have been shipped into the U.S.
      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. Currently, there is an outstanding
      balance of $320,125.72 due on the note. Pursuant to the Forbearance Agreement,
      we and the Bank agreed to the following repayment schedule for the outstanding
      balance due: (a) an initial amount of $17,000 was paid upon execution of the
      Agreement; (b) monthly installments of $5,000 will be payable by the first
      day
      of each month through May 2007; and (c) a final payment of the remaining
      outstanding balance due will be due on or before May 31, 2007. Interest will
      continue to accrue on the note at the rate of 1% above the Wall Street Journal
      Prime Rate. Provided we comply with these and its other obligations under the
      Agreement, the Bank agrees to forbear from taking any action in connection
      with
      the note until it is due. In addition, in order to secure the repayment of
      the
      note and our obligations under the Agreement, our Chairman pledged certain
      shares of common stock of other publicly traded companies held by him, we
      granted the Bank a first priority security interest in its accounts and other
      assets and our Chairman and certain of his affiliates provided personal
      guarantees for the loan amount. In the event the aggregate market value of
      the
      pledged securities is less than $350,000, then the Bank may exercise its rights
      to accelerate repayment of the note and otherwise take such actions as is
      permitted under the Agreement to protect its security interest in the
      collateral. We are currently in final negotiations with another bank to
      refinance this loan over a 12 month period. However, no assurances can be given
      that we will enter into such an agreement.




42





**Item
      13.  Exhibits**





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





*Exhibit
                No.*
            *Description*3.1
            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 issuable 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 2006.4.10*
            Form
                of Warrant issued in February 2007 pursuant to Distribution
                Agreement.10.1
            Agreement
                and Plan of Reorganization with Inland Pacific Resources, Inc. (filed
                as
                Exhibit 10.2 to Registration Statement on Form SB-2/A filed with
                the
                Commission on January 29, 2003).10.2#
            Agreement
                with Jamnica, d.d., as amended, dated July 21, 2004 (filed as Exhibit
                10.2
                to Registration Statement on Form 10-SB/A filed with the Commission
                on
                February 8, 2006).10.3#
            Agreement
                with Peace Mountain Natural Beverages Corporation, dated August 1,
                2004
                (filed as Exhibit 10.3 to Registration Statement on Form 10-SB/A
                filed
                with the Commission on February 8, 2006).10.4#
            Agreement
                with InterHealth Nutraceuticals, Inc., dated June 9, 2004 (filed
                as
                Exhibit 10.4 to Registration Statement on Form 10-SB/A filed with
                the
                Commission on February 8, 2006).10.5#
            Agreement
                with Big Geyser, Inc., dated December 14, 2004 (filed as Exhibit
                10.5 to
                Registration Statement on Form 10-SB/A filed with the Commission
                on
                February 8, 2006).




43


10.6
                (1)
            Amended
                Stock Option Plan and Form of Option Award (filed as Exhibit B to
                definitive Information Statement dated December 5, 2006).10.7
            Demand
                Note held by Madison Bank (filed as Exhibit 10.7 to Registration
                Statement
                on Form 10-SB/A filed with the Commission on December 16,
                2005).10.8
            Lease
                Agreement dated September 12, 2005 between the Company and Rose Hill
                Property Assoc., Inc. (filed as Exhibit 10.8 to Registration Statement
                on
                Form 10-SB filed with the Commission on October 19,
                2005).10.9#
            Agreement
                with Exclusive Beverage Distributors dated March 20, 2006 (filed
                as
                Exhibit 10.9 to our Annual Report on Form 10-KSB for the year ended
                December 31, 2005).10.10
            Separation
                Agreement between the Company and Christopher Durkin (filed as Exhibit
                10.1 to Current Report on Form 8-K filed October 11,
                2006).10.11*##
            Amendment
                Agreement between the Company and Peace Mountain Natural Beverages
                Corp.10.12*
            Termination
                Agreement between the Registrant, Jamnica, d.d. and Jana North America,
                Inc.10.13
            Forbearance
                Agreement between the Company and Madison Bank (filed as Exhibit
                10.1 to
                Current Report on Form 8-K filed on January 10, 2007).10.14*##
            Distribution
                Agreement with Geltech LLC dated February 27, 2007.21*
            Subsidiaries
                of Small Business Issuer.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.




44





**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, 2006 and 2005. Fees for
      professional services by our independent auditors for the fiscal years 2006
      and
      2005 in each of the following categories are as follows:




**Year
                Ended**
              **December
                31, 2006**
            
            
            **Year
                Ended**
              **December
                31, 2005****Audit
                Fees (1)**
            
            $
            25,000
            
            $
            25,000**Audit-Related
                Fees (2)**
            
            
            0
            
            
            0**Tax
                Fees (3)**
            
            
            10,000
            
            
            10,000**All
                Other Fees (4)**
            
            
            0
            
            
            0**Total**
            
            $
            35,000
            
            $
            35,000


**______________**


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




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




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




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




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




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





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




45






Skinny
          Nutritional Corp
 and
          Subsidiary
 
 Consolidated
          Financial Statements
 
 December
          31, 2006
         
 
 Skinny
          Nutritional Corp
 and
          Subsidiary
 December
          31, 2006
 
 Contents
 PageIndependent
                      Auditor's Report
                  F-1Financial
                      StatementsConsolidated
                      Balance Sheet, December 31, 2006
                  F-2
                      - F-4Consolidated
                      Statements of OperationsFor
                      the Years Ended December 31, 2006, 2005 and 2004
                  F-5Consolidated
                      Statements of Stockholders' Equity (Deficit)For
                      the Year Ended December 31, 2006 and 2005
                  F-6 -
                      F-7Consolidated
                      Statements of Cash FlowsFor
                      the Years Ended December 31, 2006 and 2005 and 2004
                  F-8 -
                      F-9Notes
                      to Consolidated Financial Statements
                  F-10
                      - F-28
 
 
 
 REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
          the
          Board of Directors and Stockholders of
 Skinny
          Nutritional Corp and Subsidiary
 3
          Bala
          Plaza - Suite 117
 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, 2006 and 2005
          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,
          2006. 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, 2006 and 2005 and the results of their operations and their cash flows
          for
          each of the years in the three year period ended December 31, 2006 in conformity
          with accounting principles generally accepted in the United States of
          America.
 
 The
          accompanying financial statements have been prepared assuming the Company
          will
          continue as a going concern. As discussed in Note 2 to the financial statements,
          the Company has 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
 March
          27,
          2007
 
 F-1
    
 
 Skinny
          Nutritional Corp and Subsidiary
 
 Consolidated
          Balance Sheet
 
 December
          31, 2006
 
 
 
 F-2
 
 
 Skinny
          Nutritional Corp and Subsidiary
 Consolidated
          Balance Sheet
  ASSETS
 December31,2006
                  
                  2005CURRENT
                      ASSETSCash
                      and cash equivalents
                  
                  $
                  118,683
                  
                  $
                  76,780Cash
                      - escrow, restricted
                  
                  
                  56,485Accounts
                      receivable
                  
                  
                  3,406
                  
                  
                  71,877Inventory
                  
                  
                  
                  
                  
                  193,082Prepaid
                      expenses
                  
                  
                  46,460
                  
                  
                  97,878Total
                      current assets
                  
                  
                  225,034
                  
                  
                  439,617FIXED
                      ASSETSFixed
                      assets
                  
                  
                  9,973
                  
                  
                  138,833Accumulated
                      depreciation
                  
                  
                  (3,699
                  )
                  
                  (18,439
                  )Total
                      fixed assets
                  
                  
                  6,274
                  
                  
                  120,394OTHER
                      ASSETSSecurity
                      deposits
                  
                  
                  
                  
                  
                  11,790TOTAL
                      ASSETS
                  
                  $
                  231,308
                  
                  $
                  571,801
 
 F-3
 
 Skinny
          Nutritional Corp and Subsidiary
 Consolidated
          Balance Sheet
 
 
 LIABILITIES
          AND STOCKHOLDERS’ DEFICIT
  December
                      31,2006
                  
                  2005CURRENT
                      LIABILITIESCurrent
                      maturities of long term debt
                  
                  $
                  300,283
                  
                  $
                  106,216Line
                      of credit
                  
                  
                  314,533
                  
                  
                  314,533Accounts
                      payable
                  
                  
                  296,596
                  
                  
                  516,255Accrued
                      expenses
                  
                  
                  30,000Accrued
                      interest payable
                  
                  
                  118,906
                  
                  
                  204,504Current
                      portion of convertible notes
                  
                  
                  2,395,000
                  
                  
                  177,000Settlements
                      payable
                  
                  
                  180,000Total
                      current liabilities
                  
                  
                  3,635,318
                  
                  
                  1,318,508LONG
                      TERM LIABILITIESLong-term
                      debt, net of current portion
                  
                  
                  
                  
                  
                  20,320Convertible
                      notes payable, net of current portion
                  
                  
                  
                  
                  
                  2,459,000Total
                      long term liabilities
                  
                  
                  
                  
                  
                  2,479,320STOCKHOLDERS’
                      DEFICITPreferred
                      stock, $.001 par value, 1,000,000 sharesauthorized,
                      none issued and outstandingCommon
                      stock, $.001 par value, 250,000,000 sharesauthorized,
                      42,673,327 shares issued and outstandingat
                      December 31, 2006 and 15,115,000 issued andoutstanding
                      at December 31, 2005
                  
                  
                  42,673
                  
                  
                  15,115Additional
                      paid-in capital
                  
                  
                  6,852,208
                  
                  
                  4,754,303(Deficit)
                      accumulated during the development stage
                  
                  
                  (10,298,891
                  )
                  
                  (7,995,445
                  )Total
                      stockholders’ deficit
                  
                  
                  (3,404,010
                  )
                  
                  (3,226,027
                  )TOTAL
                      LIABILITIES ANDSTOCKHOLDERS’
                      DEFICIT
                  
                  $
                  231,308
                  
                  $
                  571,801
 See
          accompanying notes and accountant’s
          report.
  F-4
 
 Skinny
          Nutritional Corp and Subsidiary
 Consolidated
          Statements of Operations
 
 For
                      the Years Ended December 31,2006
                  
                  2005
                  
                  2004
                      *Revenue
                      - net
                  
                  $
                  628,380
                  
                  $
                  514,146
                  
                  $
                  11,704Cost
                      of goods sold
                  
                  
                  576,882
                  
                  
                  456,270
                  
                  
                  49,484Gross
                      profit
                  
                  
                  51,498
                  
                  
                  57,876
                  
                  
                  (37,780
                  )ExpensesMarketing
                      and advertising
                  
                  
                  394,949
                  
                  
                  1,307,186
                  
                  
                  604,490General
                      and administrative
                  
                  
                  1,894,768
                  
                  
                  1,950,320
                  
                  
                  506,046Total
                      expenses
                  
                  
                  2,289,717
                  
                  
                  3,257,506
                  
                  
                  1,110,536Net
                      (loss) from operations
                  
                  
                  (2,238,219
                  )
                  
                  (3,199,630
                  )
                  
                  (1,148,316
                  )Other
                      income (expense)Loss
                      from disposition of fixed assets
                  
                  
                  (114,887
                  )Interest
                      expense
                  
                  
                  (32,932
                  )
                  
                  (230,216
                  )
                  
                  (40,620
                  )Interest
                      income
                  
                  
                  82,592Total
                      other expenses
                  
                  
                  (65,227
                  )
                  
                  (230,216
                  )
                  
                  (40,620
                  )Income
                      TaxesCurrent
                  
                  
                  -0-
                  
                  
                  -0-
                  
                  
                  -0-Deferred
                  
                  
                  -0-
                  
                  
                  -0-
                  
                  
                  -0-Total
                      income taxes
                  
                  
                  -0-
                  
                  
                  -0-
                  
                  
                  -0-Net
                      (Loss)
                  
                  
                  ($2,303,446
                  )
                  
                  ($3,429,846
                  )
                  
                  ($1,188,936
                  )(Loss)
                      per common share
                  
                  
                  ($
                      .10
                  )
                  
                  ($
                      .26
                  )
                  
                  ($
                      .10
                  )
 
 *  Restated
          for comparative purposes
 
 See
          accompanying notes and accountant’s report.
  F-5
 
 Skinny
          Nutritional Corp and Subsidiary
 Statement
          of Stockholders’ Equity (Deficit)
 For
          The Years Ended December 31, 2005 and 2004
  Additional
                  
                  StockCommon
                      Stock
                  
                  Paid-In
                  
                  Subscription
                  
                  AccumulatedShares
                  
                  Amount
                  
                  Capital
                  
                  Receivable
                  
                  DeficitBalance,
                      December 31, 2004
                  
                  
                  12,977,500
                  
                  $
                  12,977
                  
                  $
                  3,847,941
                  
                  $
                  (25,329
                  )
                  $
                  (4,565,599
                  )Issuance
                      of common stock forservices
                      rendered at$.20
                      per share
                  
                  
                  125,000
                  
                  
                  125
                  
                  
                  24,875Repayment
                      of stock subscription
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,329Issuance
                      of shares as incentivefor
                      bridge at $1.00 per share
                  
                  
                  52,000
                  
                  
                  52
                  
                  
                  51,948Conversion
                      of convertible debtinto
                      common shares at$.40
                      per share
                  
                  
                  1,338,000
                  
                  
                  1,338
                  
                  
                  533,862Stock
                      issued for consultingservices
                      at $.83 per share
                  
                  
                  110,000
                  
                  
                  110
                  
                  
                  91,190Issuance
                      of common stockfor
                      cash at $.40 per share
                  
                  
                  512,500
                  
                  
                  513
                  
                  
                  204,487Net
                      loss for the year endedDecember
                      31, 2005
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,429,846
                  )Balance,
                      December 31, 2005
                  
                  
                  15,115,000
                  
                  $
                  15,115
                  
                  $
                  4,754,303
                  
                  $
                  
                  
                  $
                  (7,995,445
                  )
 (Continued)
  F-6
 
 Skinny
          Nutritional Corp and Subsidiary
 Statement
          of Stockholders’ Equity (Deficit)
 For
          The Years Ended December 31, 2006 and 2005
  Common
                      Stock
                  
                  Additional
                    Paid-In
                  
                  Stock
                    Subscription
                  
                  AccumulatedShares
                  
                  Amount
                  
                  Capital
                  
                  Receivable
                  
                  DeficitBalance,
                      December 31, 2005
                  
                  
                  15,115,000
                  
                  $
                  15,115
                  
                  $
                  4,754,303
                  
                  $
                  
                  
                  $
                  (7,995,445
                  )Conversion
                      of convertible debt intocommon
                      shares at $.40 per share
                  
                  
                  302,500
                  
                  
                  303
                  
                  
                  120,697Issuance
                      of common stockfor
                      cash at $.40 per share
                  
                  
                  687,500
                  
                  
                  687
                  
                  
                  274,313Issuance
                      of common stockfor
                      cash at $.05 per share
                  
                  
                  8,000,000
                  
                  
                  8,000
                  
                  
                  392,000Issuance
                      of common stockfor
                      cash at $.075 per share
                  
                  
                  3,558,467
                  
                  
                  3,558
                  
                  
                  263,345Issuance
                      of common stock forservices
                      at $.01 per share
                  
                  
                  900,000
                  
                  
                  900
                  
                  
                  8,100Conversion
                      of loans intocommon
                      shares at $.05per
                      share
                  
                  
                  12,840,000
                  
                  
                  12,840
                  
                  
                  629,160Interest
                      shares on aboveconversion
                      at $.144 per share
                  
                  
                  69,861
                  
                  
                  70
                  
                  
                  9,990Issuance
                      of common stock inexchange
                      for convertibledebentures
                      at $.10
                  
                  
                  1,200,000
                  
                  
                  1,200
                  
                  
                  118,800Warrants
                      issued in exchangefor
                      services
                  
                  
                  
                  
                  
                  
                  
                  
                  85,200Options
                      issued in exchangefor
                      services
                  
                  
                  
                  
                  
                  
                  
                  
                  196,300Net
                      loss for the year endedDecember
                      31, 2006
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,303,446
                  )Balance,
                      December 31, 2006
                  
                  
                  42,673,328
                  
                  $
                  42,673
                  
                  $
                  6,852,208
                  
                  $
                  0
                  
                  $
                  (10,298,891
                  )
 See
          accompanying notes and accountant's report.
  F-7
  Skinny
          Nutritional Corp and Subsidiary
 Statements
          of Cash Flows
 
 Increase
          (Decrease) in Cash and Cash Equivalents
 For
                      the Years Ended December 31,2006
                  
                  2005
                  
                  2004CASH
                      FLOWS FROM OPERATING ACTIVITIESNet
                      loss
                  
                  $
                  (2,303,446
                  )
                  $
                  (3,429,846
                  )
                  $
                  (1,188,936)Adjustments
                      to reconcile net loss to net cashused
                      by operating activities:Loss
                      from disposition of fixed assets
                  
                  
                  114,887Stock
                      based compensation
                  
                  
                  9,000Stock
                      issued for service
                  
                  
                  
                  
                  
                  
                  
                  
                  406,000Warrants
                      issued for services
                  
                  
                  85,200Stock
                      options issued for services
                  
                  
                  196,300Changes
                      in operating assets and liabilities:(Increase)
                      decrease in:Depreciation
                  
                  
                  2,740
                  
                  
                  13,904
                  
                  
                  2,392Accounts
                      receivable
                  
                  
                  68,471
                  
                  
                  (71,877
                  )Inventories
                  
                  
                  193,082
                  
                  
                  (193,082
                  )
                  
                  14,517Prepaid
                      expenses
                  
                  
                  51,418
                  
                  
                  (97,878
                  )Other
                      assets
                  
                  
                  11,790
                  
                  
                  (11,790
                  )Increase
                      (decrease) in:Accounts
                      payable
                  
                  
                  (
                      219,659
                  )
                  
                  342,588
                  
                  
                  (35,018
                  )Accrued
                      expenses
                  
                  
                  30,000Accrued
                      interest
                  
                  
                  (
                      85,598
                  )
                  
                  202,134Settlements
                      payable
                  
                  
                  180,000Net
                      cash used in operating activities
                  
                  
                  (1,665,815
                  )
                  
                  (3,245,847
                  )
                  
                  (801,045
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIESPurchase
                      of fixed assets
                  
                  
                  (3,507
                  )
                  
                  (121,342
                  )
                  
                  (2,490
                  )Net
                      cash used in investing activities
                  
                  
                  (3,507
                  )
                  
                  (121,342
                  )
                  
                  (2,490
                  )
 
 (Continued)
  F-8
  
 Skinny
          Nutritional Corp and Subsidiary
 Statements
          of Cash Flows
 
 Increase
          (Decrease) in Cash and Cash Equivalents
 For
                      the Years Ended December 31,2006
                  
                  2005
                  
                  2004CASH
                      FLOWS FROM FINANCING ACTIVITIESProceeds
                      (payments) from stockholders loans (net)
                  
                  $
                  
                  
                  $
                  25,324
                  
                  $
                  (
                      287,052
                  )Contributed
                      capital
                  
                  
                  
                  
                  
                  906,670Proceeds
                      (payments) from convertible debenture,net
                      of conversions
                  
                  
                  (241,000
                  )
                  
                  2,636,000Proceeds
                      (payments) from advances
                  
                  
                  
                  
                  
                  (507,750
                  )
                  
                  507,750Proceeds
                      from long-term debt
                  
                  
                  173,747
                  
                  
                  64,036
                  
                  
                  62,500Issuance
                      of common stock
                  
                  
                  1,834,963
                  
                  
                  1,830
                  
                  
                  522,000Net
                      cash provided in financing activities
                  
                  
                  1,767,710
                  
                  
                  3,440,643
                  
                  
                  805,198NET
                      INCREASE IN CASH
                  
                  
                  98,388
                  
                  
                  73,454
                  
                  
                  1,663Cash
                      and cash equivalents, beginning of period
                  
                  
                  76,780
                  
                  
                  3,326
                  
                  
                  1,663CASH
                      AND CASH EQUIVALENTS,END
                      OF PERIOD
                  
                  $
                  175,168
                  
                  $
                  76,780
                  
                  $
                  326SUPPLEMENTAL
                      DISCLOSUREINVESTING
                      AND FINANCING ACTIVITIESCash
                      paid during the year for interest
                  
                  $
                  32,932
                  
                  $
                  174,756
                  
                  $
                  -0-
 
  See
          accompanying notes and accountant's report.
  F-9
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 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, 2006
 
 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 customer and is recognized net of discounts and
                    returns.
                    Revenues generated up to December 31, 2006 are related to product
                    lines
                    that have been discontinued.
 
 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
 
 F-11
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 3.
                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)  instruments
                    included in cash and cash equivalents approximates fair value
                    because of
                    the short maturities for the instruments
                    held.
 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 $56,485
                    in
                    restricted escrow cash all of which cleared in January,
                    2007.
 
 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 $35,507.19 and
                    $-0- were
                    recorded for the years ended December 31, 2006 and 2005,
                    respectfully.
 
 Inventories
 
 Inventory
                    consists of finished goods and is stated at the lower of cost
                    or market
                    determined by the first-in, first-out method. As of December
                    31, 2006,
                    there was no inventory on the
                    books.
 
 Loss
                    Per Share
 
 Basic
                    net loss per share is computed by dividing net loss available
                    for common
                    stock by the weighted average number of common shares outstanding
                    during
                    the period.
 
 Stock
                    Based Compensation
 
 The
                    Company measures compensation cost to employees from our equity
                    incentive
                    plan in accordance with Statement of Financial Accounting Standards
                    No.
                    123 (R) (“SFAS 123 (R)”). 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
  F-12
  Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 3.
                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)  equity
                    compensation issued to employees to be expensed over the requisite
                    service
                    period (usually the vesting period).
 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.
 4.
                  RECENT
                      ACCOUNTING PRONOUNCEMENTS
 
 In
          September 2006, the Financial Accounting Standards Board issued SFAS No.
          157,
          Fair Value Measurements. This Statement defines fair value, establishes
          a
          framework for measuring fair value in generally accepted accounting principles
          (GAAP), and expands disclosures about fair value
 measurements.
          This Statement applies under other accounting pronouncements that require
          or
          permit fair value measurements, the Board having previously concluded in
          those
          accounting pronouncements that fair value is the relevant measurement attribute.
          Accordingly, this Statement does not require any new fair value measurements.
          However, for some entities, the application of this Statement will change
          current practice. This Statement is effective for financial statements
          issued
          for fiscal years beginning after November 15, 2007, and interim periods
          within
          those fiscal years. Earlier application is encouraged, provided that the
          reporting entity has not yet issued financial statements for that fiscal
          year,
          including financial statements for an interim period within that fiscal
          year.
          The adoption of this Statement is not expected to have a material impact
          on the
          Company’s financial statements.
  F-13
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 5. RELATED
          PARTY TRANSACTIONS
 
 In
          March
          and April 2006, the Company received an aggregate amount of $642,000 in
          loans
          made by its Chairman and former Chief Executive Officer and four additional
          accredited investors. The amount of the loan from our Chairman was $242,000.
          In
          connection with the Company’s private placement in October 2006, the holders of
          these convertible debentures converted the entire principal amount and
          accrued
          but unpaid interest into an aggregate of 12,909,860 shares of the Company’s
          Common Stock at a conversion rate of $0.05 applicable to the principal
          outstanding.
 
 On
          October 4, 2006, the Company restructured a loan from a former director
          in the
          amount of $50,000. The principle amount of the note was paid in full on
          March
          16, 2007.
  As
          of
          December 31, 2006, we compensate each of our Chief Executive Officer, Chairman
          and our Chief Financial Officer at the rate of $7,500 per month based on
          a
          consulting arrangement. We have not entered into a written agreement with
          these
          persons.
  On
          October 19, 2006, the board of directors of the Company approved the grant
          of an
          aggregate of 600,000 restricted shares of common stock to certain of its
          key
          management personnel for past services rendered, including a total of 250,000
          shares to the Company’s Chief Financial Officer and a member of the board.
 
 6.
                PENDING
                    CLAIMS
 On
              January 19, 2006, the Company received a demand for arbitration filed
              by our New
              York distributor. The Company has settled this demand with this distributor
              and
              has reflected the $40,000 settlement in the attached financial statements.
              The
              settlement is payable in 1 payment of $10,000 and 6 equal installments
              of $5,000
              starting August 10, 2006. This settlement was paid in full in February
              2007, as
              agreed.
 
 The
          Company is currently the co-defendant, along with its Chairman, in a civil
          suit
          filed in Miami-Dade County Circuit Court under the caption *Swan
          v. Salaman and Creative Enterprises International, Inc.* Plaintiff claims that we breached an oral agreement of employment and is
          seeking
          compensatory damages. A motion to dismiss filed by the co-defendants was
          rejected in part and is pending in part. The Company will vigorously defend
          this
          matter if our motion to dismiss is denied. Based on the facts of which
          the
          Company is currently aware, management believes that the resolution of
          this
          claim will not have a materially adverse effect on the Company’s financial
          condition.
 
 In
          addition, we may be subject to other claims and litigation arising in the
          ordinary course of business. Management considers that any liability from
          any
          reasonably foreseeable disposition of such other claims and litigation,
          individually or in the aggregate, would not have a material adverse effect
          on
          our consolidated financial position, results of operations or cash
          flows.
 
 F-14
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 7. 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.
 
 The
          outstanding convertible debentures include an aggregate principal amount
          of
          approximately $2.4 million that was subject to a rescission offer which
          expired
          on October 31, 2005 and our sale of an additional $165,000 of convertible
          debentures that were offered concurrently with the rescission offer. Holders
          of
          an aggregate of $160,000 of convertible debentures principal amount of
          convertible debentures elected to accept our rescission offer. These rescissions
          were paid on October 7, 2005
 
 Holders
                    of $791,200 of these debentures converted to 1,978,000 shares
                    of the
                    Company’s common stock. As of December 31, 2006, there were outstanding
                    an
                    aggregate principal amount of $2,395,000 of convertible
                    debentures.
 
 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.
  F-15
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 7. CONVERTIBLE
          DEBENTURES (Continued)
 
 As
          of
          December 31, 2006, holder of $120,000 of convertible debentures agreed
          to
          convert to these new shares. Subsequently, holders of an additional $1,675,000
          of convertible debentures have exchanged their convertible debentures for
          16,750,000 shares of common stock.
 
 The
          holders that declined this offer continue to hold their convertible debentures
          and could elect to either convert such debentures on the original terms
          thereof
          or receive repayment of the principal and accrued and unpaid interest thereon,
          on the stated maturity date of such debentures. Should the remaining investors
          not convert their remaining debentures, the Company will have to pay the
          holders
          as follows upon maturity:
 
 Year
          1        $690,000
 
 8.     
          SALE OF EQUITY SECURITIES
 
 The
                    Company raised a total of $205,000 during the quarter ended December
                    31,
                    2005 to accredited investors from the sale of 512,500 shares
                    of its common
                    stock at $.40 per share. These shares also included a five-year
                    warrant
                    attached for each share, for total of 512,500 warrants. Additionally,
                    the
                    company raised an additional $275,000 during the quarter ended
                    March 31,
                    2006 to accredited investors from the sale of 687,500 shares
                    of its common
                    stock at $.40 per share. These shares included a five-year warrant
                    attached for each share, for total of 687,500
                    warrants.
 
 On
          October 4, 2006, the Company completed the initial closing of a private
          placement financing (the “Financing”) in which the investors made investments in
          the Company totaling $525,000. The Financing was for a total of $1.2 million
          of
          Common Stock, or 24,000,000 shares of Common Stock, at the offering price
          of
          $0.05 per share. In connection with the Financing, one of the investors
          agreed
          to structure his investment in part as a convertible debt instrument in
          the
          principal amount of $100,000 (the “Note”). The Note bears interest at the rate
          of 10% per annum and has a maturity date of 2 years from the date of issuance.
          The holder has the right to convert the outstanding principal of the Note
          into
          shares of Common Stock at the initial conversion rate of $0.05. In the
          financing, the Company received net proceeds of approximately $500,000
          and
          issued an aggregate of 8,500,000 shares of Common Stock to the investors
          in
          addition to the Note.
 
 In
          connection with the Financing, the Company issued an aggregate of 12,909,860
          shares of its Common Stock upon the conversion of $642,000 of debt and
          accrued
          interest, including the convertible note the Company issued to our Chairman
          in
          March 2006. The Company is using the proceeds from the Financing for working
          capital, payment of accrued compensation and the repayment of debt owed
          to third
          parties.
 
 The
          securities sold in the transactions described above are restricted securities
          and have not been registered under the Securities Act of 1933, as amended,
          and
          were offered and sold in reliance upon
 
 F-16
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 8. SALE
          OF
          EQUITY SECURITIES (Continued)
 
 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 agents are “accredited investors”, as such term is defined in Rule
          501(a) promulgated under the Securities Act.
 
 On
          October 19, 2006, the board of directors of the Company approved the grant
          of an
          aggregate of 600,000 restricted shares of common stock to certain of its
          employees, including a grant of 250,000 shares the Company’s Chief Financial
          Officer and a member of the board.
 
 In
          December 2006, the Company raised an additional $266,885 in a private placement
          of our common stock to accredited investors pursuant to Rule 506 of Regulation
          D. This financing was for a total of $750,000, or 10,000,000 shares of
          common
          stock, at the offering price of $.075 per share. This offering will expire
          on
          March 31, 2007 and the Company expects to raise the full offering of $750,000
          by
          the expiration date. See Subsequent Events at Note 19 for additional information
          regarding this financing.
 
 9. LINE
          OF
          CREDIT
 
 The
          Company obtained a $500,000 letter of credit with Wachovia Bank to secure
          our
          purchase orders with Agrokor. This letter of credit was secured by personal
          assets of our chairman and bore interest at a rate of 7.5% per annum. The
          Company borrowed $314,000 against this letter of credit in placing our
          initial
          order with Agrokor for 1,200,000 bottles of product. These bottles have
          been
          shipped into the U.S. 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. Madison Bank called this note and on
          January 4, 2007, the Company entered into a Forbearance Agreement with
          the Bank
          regarding this loan amount. Pursuant to the Forbearance Agreement, which
          is
          dated as of December 13, 2006, the Company and the Bank agreed upon the
          following repayment schedule concerning the outstanding balance due on
          the Note:
          (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 on the Note amount will be due on or before May 31, 2007. Interest
          will
          continue to accrue on the outstanding amount of the Note at the rate of
          1% above
          the Wall Street Journal Prime Rate. Provided the Company complies with
          these and
          its other obligations under the Agreement, the Bank agrees to forbear from
          taking any action in connection with the Note until it is due. In addition,
          in
          order to secure the repayment of the Note and the Company’s obligations under
          the Agreement, the Company’s Chairman pledged certain shares of common stock of
          other publicly traded companies held by him, the Company granted the Bank
          a
          first priority security interest in its accounts and other assets and the
          Company’s Chairman and certain of his affiliates provided personal guarantees
          for the loan amount. In the event the aggregate market value of the pledged
          securities is less than $350,000, then the Bank may exercise its rights
          to
 
 F-17
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
  9. LINE
          OF
          CREDIT (Continued)
 accelerate
              repayment of the Note and otherwise take such actions as is permitted
              under the
              Agreement to protect its security interest in the collateral.
 
 The
          company is currently in negotiations with another financial institution
          to enter
          into a new loan facility, the proceeds of which would be used to repay
          the
          Company’s obligations under the Forbearance Agreement with Madison Bank. As
          of the
          date hereof, we have not reached a definitive agreement
          regarding this new loan facility and no assurances can be given that we
          will
          enter into such an agreement.
  10. LONG-TERM
          DEBT
 
 Long-term
          debt consisted of the following at December 31, 2006 and 2005.
 2006
                  
                  2005Notes
                      payable to an individual unsecured,payable
                      on demand, including interestat
                      12% due September 1, 2008
                  
                  $
                  145,283
                  
                  $
                  100,000Notes
                      payable to GMAC, secured byequipment
                      payable in 60 monthlypayments
                      of $418.40, includinginterest
                      at 6.09% payable throughOctober
                      2009
                  
                  
                  
                  
                  
                  26,536Notes
                      payable to accredited investor,convertible
                      into shares of theCompany’s
                      stock at $.05 per shareinterest
                      at 10% annum convertedJanuary
                      2007
                  
                  $
                  125,000Note
                      payable, convertible into theCompany’s
                      stock unsecured,interest
                      at 10% per year, due 2/07
                  
                  $
                  30,000$
                  300,283
                  
                  
                  126,536Less
                      current
                  
                  
                  300,283
                  
                  
                  106,216$
                  0
                  
                  $
                  20,320
  F-18
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 10. LONG-TERM
          DEBT (Continued)
 
 Future
          maturities of long-term debt for the years ending December 31 are as
          follows:
 
 Year
                    Ending
                  December
                    31,
                
                Amount2007
                
                $275,000
 
 Creative
                    Enterprises International, Inc. and Subsidiary paid interest
                    of $27,551
                    and $9,925 for the years ended December 31, 2006 and 2005,
                    respectively.
 
 11. 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.
  F-19
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 11. LICENSING
          AND AGREEMENTS (Continued)
 
 Each
          of
          the parties also agreed to release the other from any obligations or claims
          arising from the distribution agreement.
  12. CASH
              DEPOSITED IN FINANCIAL INSTITUTIONS
 The
              Company maintains its cash in bank deposit accounts and financial institutions.
              Accounts at each institution are insured by the Federal Deposit Insurance
              Corporation up to $100,000. The bank accounts at times exceed federally
              insured
              limits. The Company has not experienced any losses on such
              accounts.
 
 13. 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, 2006, the Company has available unused operating loss carryforwards
                    of
                    approximately $7,300,000 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
 
 14. STOCKHOLDERS'
          EQUITY
  At
                    December 31, 2006, the Company had 250,000,000 shares of common
                    stock
                    authorized par value $.001. Shares outstanding at December 31,
                    2006 were
                    42,673,327.
 
 15. 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
 
 F-20
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 15. STOCK
          OPTIONS (Continued)
 
 issued
                    over the term of the plan shall not exceed 20,000,000 shares,
                    as amended
                    on October 6, 2006. Awards under this plan are made by the Board
                    of
                    Directors or a committee of the Board.
 
 Under
                    the plan options that are granted at the market price of the
                    stock on the
                    day of the grant. Options granted 10% or more stockholders are
                    granted at
                    110% of the fair market price on the day of the grant. Each option
                    exercisable at such time or times, during such period and for
                    such numbers
                    of shares shall be determined by the Plan Administrator. However,
                    no
                    option shall have a term in excess of 10 years from the date
                    of the
                    grant.
 
 On
                    January 18, 2002, the Company granted stock options exercisable
                    for
                    450,000 shares of its common stock. These options were issued
                    without cash
                    consideration. All the options were exercisable immediately at
                    .50 per
                    share. 300,000 options were later returned to the Company and
                    cancelled.
  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.
 
 The
                    fair value of the stock options granted under the 2006 plan was
                    $934,700.
                    Each stock option award is estimated as of the date of grant
                    using a
                    Black-Scholes option valuation model that uses the assumptions
                    noted in
                    the table below. To address the lack of historical volatility
                    data for the
                    Company, expected volatility is based on the volatilities of
                    peer
                    companies. The risk-free rate for the expected term of the option
                    is based
                    on the U.S. Treasury yield curve in effect at the time of
                    grant.
 
 As
                    of December 31, 2006, there were 10,650,000 options issued and
                    outstanding
                    under the plan.
  Expected
                    volatility
                144%Expected
                    dividends
                0%Expected
                    terms
                4 yearsRisk-free
                    rate
                4.78%
 
 F-21
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 15. STOCK
          OPTIONS (Continued)
 
 A
                    summary of option activity as of December 31,
                    2006.
 Weighted-AverageWeighted-Average
                  
                  RemainingOptions
                  
                  Shares
                  
                  Exercise
                      Price
                  
                  Contractual
                      TermOutstanding
                      at January 1, 2005
                  
                  
                  450,000
                  
                  $
                  0.50
                  
                  
                  8GrantedExercisedForfeited
                      or expired
                  
                  
                  (300,000
                  )Outstanding
                      at January 1, 2006
                  
                  
                  150,000
                  
                  $
                  0.50
                  
                  
                  7Granted
                  
                  
                  10,650,000
                  
                  
                  .17
                  
                  
                  10ExercisedForfeited
                      or expiredOutstanding
                      at December 31, 2006
                  
                  
                  10,650,000
                  
                  
                  0.18
                  
                  
                  10
 A
          summary
          of the status of the Company’s nonvested shares as of December 31, 2006 and
          changes  during
          the period then ended is presented below:
 Weighted-AverageGrant
                      DateNonvested
                      shares
                  
                  Shares
                  
                  Fair
                      ValueNonvested
                      at January 1, 2005GrantedVestedForfeitedNonvested
                      at January 1, 2006Granted
                  
                  
                  10,650,000
                  
                  
                  0.144Vested
                  
                  
                  1,300,000
                  
                  
                  0.151ForfeitedNonvested
                      at January 1, 2006
                  
                  
                  9,350,000
                  
                  
                  0.144
 
 F-22
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 15. STOCK
          OPTIONS (Continued)
 
 There
                    was $738,400 of unrecognized compensation cost related to the
                    nonvested
                    stock granted under the plan as of December 31, 2006. The unrecognized
                    compensation cost is expected to be recognized using the straight-line
                    method over the requisite service period (October 12, 2006 through
December
                    31, 2006).
 
 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 per share.
 
 In
          January 2007, 150,000 stock options issued in January 2002 expired. On
          March 26,
          2007, 4,000,000 options expired from terminated employees.
 
 16. 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, 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
                    2013.
 
 During
          the quarter ended December 31, 2005, the Company issued 1,338,000 warrants
          to
          investors who converted their convertible debentures into shares of common
          stock. These warrants have an exercise price of $0.75 each.
 
 In
          October 2006, the Company approved the 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 $0.05 per share.
 
 In
          November 2006, the company approved the grant of 175,000 warrants to individual
          consultants in consideration for services rendered to company during
          2006.
 
 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-23
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 A
          summary
          of the status of the Company’s outstanding stock warrants as of December 31,
          2006 is as follows:
 Shares
                  
                  Weighted-AverageExercise
                      PriceOutstanding
                      at January 1, 2004Granted
                  
                  
                  1,000,000
                  
                  $
                  0.40ExercisedForfeitedOutstanding
                      at January 1, 2005
                  
                  
                  1,000,000
                  
                  
                  0.40Granted
                  
                  
                  1,138,000
                  
                  
                  0.75ExercisedForfeitedOutstanding
                      at January 1, 2006
                  
                  
                  2,138,000
                  
                  
                  0.31Granted
                  
                  
                  800,000
                  
                  
                  0.07ExercisedForfeitedOutstanding
                      atDecember
                      31, 2006
                  
                  
                  2,938,000
                  
                  
                  0.45Exercisable
                      atDecember
                      31, 2006
                  
                  
                  2,938,000
                  
                  
                  0.45
 
 17. 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, 2006 and 2005 issued 10,800,000 options and 3,238,000 warrants
                    which
                    would have an antidilutive effect on earnings.
  December
                      31,2006
                  
                  2005Loss
                      from continuing operations availableto
                      common stockholders
                  
                  $
                  (2,303,446
                  )
                  $
                  (3,429,846
                  )Weighted
                      average of common shares outstandingused
                      in earnings per share during the period
                  
                  
                  22,634,500
                  
                  
                  13,044,000Loss
                      per common shares
                  
                  $
                  (.10
                  )
                  $
                  (.26
                  )
 
 F-24
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 
 18. 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.
 
 
 19. SUBSEQUENT
          EVENTS
 
 On
          February 27, 2007, Skinny Nutritional Corp. (the “Registrant”) entered into
          a Marketing and Distribution Agreement (the “Agreement”) with Geltech Sales, LLC
          (“Geltech”) for the national distribution of the Registrant’s Skinny-branded
          products. The initial term of the Agreement is three years, and it is renewable
          in one-year increments. The Agreement is exclusive subject to certain
          contractually-specified exceptions.
  In
          consideration for Geltech’s services, the Registrant agreed to pay Geltech a
          commission based on the quantity of product sold through its network and
          agreed
          to issue to Geltech, or its designees, an aggregate of 1,500,000 common
          stock
          purchase warrants. The warrants are exercisable for a seven year period
          at a
          price of $0.24 per share. The Registrant will have the right to redeem
          up to
          750,000 of the warrants in the event that Geltech does not satisfy the
          required
          performance metrics.
  As
          of
          March 27, 2007, the Company consummated a final closing of a private offering
          of
          shares of common stock for aggregate gross proceeds of $750,000. In this
          financing, the Company sold a total of $749,525, or 9,993,667 shares of
          common
          stock, at the offering price of $0.075 per share. The Company received
          total net
          proceeds of approximately $645,000 after giving effect to payment of
          approximately $75,000 in commissions to registered broker-dealers served
          as
          selling agents in the transaction and other offering-related expenses.
          The
          selling agents also earned warrant compensation in the amount of 999,366
          warrants to purchase the Company’s common stock (the “Agent Warrants”). The
          Agent Warrants will be exercisable for a period of five years at $0.09
          per
          share. The Company intends to use the proceeds from the offering for working
          capital, repayment of debt and general corporate purposes. In connection
          with
          the financing, the Company also issued an aggregate of 4,812,500 shares
          of its
          common stock to certain investors in a prior private placement pursuant
          to a
          reset right granted to such holders. In addition, the Company authorized
          the
          issuance of an additional 481,250 common stock purchase warrants to the
          selling
          agent in such prior financing, which warrants are exercisable for five
          years at
          an exercise price of $0.06 per share.
  F-25
 
 Skinny
          Nutritional Corp and Subsidiary
 Notes
          to Consolidated Financial Statements
 December
          31, 2006
 
 19. SUBSEQUENT
          EVENTS (Continued)
 
 In
          consideration for consulting and/or advisory services provided by certain
          third
          party consultants, the Company has issued an aggregate of 775,000 five
          year
          warrants to purchase common stock to three consultants as of January 5,
          2007. Of
          these warrants, 250,000 warrants have a per share exercise price of $0.11;
          400,000 warrants have a per share exercise price of $0.06; and 125,000
          warrants
          have a per share exercise price of $0.40. In addition, in November 2006,
          the
          Company issued an additional 100,000 warrants to purchase common stock
          to two
          additional consultants for services rendered by them. These warrants are
          exercisable for a period of five years at an exercise price of $0.10 per
          share.
          The issuance of these 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
          the
          acquirers were provided with access to material information concerning
          the
          company.
 
 On
          January 12, 2007, the Board of Directors of the Company approved increases
          in
          the monthly compensation rates, effective as of January 1, 2007, payable
          to each
          of its Chairman, Chief Executive Officer and Chief Financial Officer. Each
          of
          these executives will now receive a monthly fee of $7,500, representing
          an
          increase of $2,500 per month, plus reimbursement of approved corporate
          expenses.
          In addition, on such date, the Board granted to the Company’s Chairman options
          to purchase 3,000,000 shares of common stock pursuant to the Company’s Employee
          Stock Option Plan. These options are exercisable for a period of five years
          at a
          per share exercise price of $0.26. Of the options granted, 20% of the total
          grant amount vest immediately and the balance vests in equal annual installments
          of 20% on the each anniversary date of the date of grant.
 
 As
          of
          March 1, 2007, the company has received a total of $1,795,000 of convertible
          debt exchanges from its shareholders which are convertible into 17,950,000
          shares of the company’s common stock at $.10 per share, most of which were
          received in January 2006. The securities issued in connection with the
          conversion of debentures have not been registered under the Securities
          Act of
          1933, as amended, and were issued in reliance upon the exemption from
          registration set forth in Section 3(a)(9) thereof. The following Proforma
          balance sheet reflects those transactions as though they had been received
          by
          December 31, 2006.
  F-26
 Skinny
          Nutritional Corp
 Proforma
          Balance Sheet - Unaudited
 December
          31, 2006
  ASSETS
  For
                        the 12 months endedDecember
                      31,2006
                  
                  2005CURRENT
                      ASSETSCash
                      and cash equivalents
                  
                  $
                  175,168
                  
                  $
                  76,780Accounts
                      receivable
                  
                  
                  3,406
                  
                  
                  71,877Inventory
                  
                  
                  
                  
                  
                  193,082Prepaid
                      expenses
                  
                  
                  46,562
                  
                  
                  97,878Total
                      current assets
                  
                  
                  225,136
                  
                  
                  439,617FIXED
                      ASSETSFixed
                      assets
                  
                  
                  9,973
                  
                  
                  138,833Accumulated
                      depreciation
                  
                  
                  (2,158
                  )
                  
                  (18,439
                  )Total
                      fixed assets
                  
                  
                  7,815
                  
                  
                  120,394OTHER
                      ASSETSSecurity
                      deposits
                  
                  
                  
                  
                  
                  11,790Deferred
                      tax asset
                  
                  
                  66,742TOTAL
                      ASSETS
                  
                  $
                  299,693
                  
                  $
                  571,801
 
 F-27
 
 Skinny
          Nutritional Corp
 Proforma
          Balance Sheet - Unaudited
 December
          31, 2006
 
 LIABILITIES
                        AND STOCKHOLDERS’ DEFICIT
   For
                          the 12 months endedDecember
                        31,2006
                    
                    2005CURRENT
                        LIABILITIESLine
                        of credit
                    
                    $
                    314,533
                    
                    $
                    -Notes
                        payable
                    
                    
                    300,283
                    
                    
                    420,749Accounts
                        payable
                    
                    
                    281,596
                    
                    
                    516,255Accrued
                        expenses
                    
                    
                    30,000Accrued
                        interest payable
                    
                    
                    118,906
                    
                    
                    204,504Current
                        portion of convertible notes
                    
                    
                    675,000
                    
                    
                    177,000Settlements
                        payable
                    
                    
                    180,000Current
                        maturities of long term debtTotal
                        current liabilities
                    
                    
                    1,900,318
                    
                    
                    1,318,508LONG
                        TERM LIABILITIESLong-term
                        debt, net of current portion
                    
                    
                    
                    
                    
                    20,320Convertible
                        notes payable, net of current portion
                    
                    
                    
                    
                    
                    2,459,000Total
                        long term liabilities
                    
                    
                    
                    
                    
                    2,479,320STOCKHOLDERS’
                        DEFICITPreferred
                        stock, $.001 par value, 1,000,000 sharesauthorized,
                        none issued and outstandingCommon
                        stock, $.001 par value, 250,000,000 sharesauthorized,
                        42,673,327 shares issued and outstandingat
                        December 31, 2006 and 14,807,000 issued andoutstanding
                        at December 31, 2005
                    
                    
                    59,873
                    
                    
                    14,807Additional
                        paid-in capital
                    
                    
                    8,555,008
                    
                    
                    4,754,611(Deficit)
                        accumulated during the development stage
                    
                    
                    (10,215,506
                    )
                    
                    (7,995,445
                    )Total
                        stockholders’ deficit
                    
                    
                    (1,600,625
                    )
                    
                    (3,226,027
                    )TOTAL
                        LIABILITIES ANDSTOCKHOLDERS’
                        DEFICIT
                    
                    $
                    299,693
                    
                    $
                    571,801
  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 2, 2007
            
            **SKINNY
                NUTRITIONAL CORP.**By:
            /s/
                Donald J. McDonaldDonald
                J. McDonald
              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/
                Donald J. McDonald
              
              Donald
                J. McDonald
            Chief
                Executive Officer, President and Director
            April
                2, 2007/s/
                Michael Salaman
              Michael
                Salaman
            Chairman
                of the Board of Directors
            April
                2, 2007/s/
                Michael Reis
              Michael
                Reis
            Director
            April
                2, 2007/s/
                Kenneth Brice
              Kenneth
                Brice
            Chief
                Financial Officer, Principal Accounting Officer and
                Director
            April
                2, 2007