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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.20549

Form 10-KSB

(MarkOne)

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|   | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year endedDecember  31,  2005 |

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|   | TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934 For the transition period from                     to                     |

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|-----------------------|--|--|--|--|--|--|
| 0-51313               |
| Commission filenumber |
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|                                                                 |  |                                     |  |  |  |  |
|-----------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| CREATIVEENTERPRISES INTERNATIONAL, INC.                         |
| (Exactname of small business issuer as specified in itscharter) |
| Nevada                                                          |  | 23-3100268                          |
| (Stateof incorporation)                                         |  | (IRS Employer IdentificationNumber) |
|                                                                 |

|                                                  |  |  |  |  |  |  |
|--------------------------------------------------|--|--|--|--|--|--|
| 461Park Avenue South, Suite 303New York, NY10016 |
| (Address of principal executiveoffice)           |
| (212)868-5262                                    |
| (Issuer’s telephonenumber)                 |
|                                                  |

Securities registered under Section12(b) of the Exchange Act: NONE

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

Check whether the issuer isnot required to file reports pursuant to Section 13 or 15(d) of theExchange Act. 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. YesNo

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

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

The issuer hadrevenues of $514,146 for the fiscal year ended December31,  2005.

The aggregate market value of the votingstock held by non-affiliates on April  11,  2006 wasapproximately $5,858,051 based on the average bid and asked prices ofthe issuer’s common stock on such date.

As ofApril  11,  2006, the issuer had 16,105,000 shares ofcommon stock outstanding.

DOCUMENTS INCORPORATED BYREFERENCE

NONE

Transitional SmallBusiness Disclosure Format: YesNo

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CREATIVEENTERPRISES INTERNATIONAL, INC.INDEX TO ANNUAL REPORT ON FORM10-KSB

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|       |  |                                                                                                          |  | PAGE   |
| PartI      |  |                                                                                                          |  |   |
| Item1.     |  | Description ofBusiness                                                                                        |  | 1      |
| Item2.     |  | Description ofProperty                                                                                        |  | 32     |
| Item3.     |  | LegalProceedings                                                                                              |  | 32     |
| Item4.     |  | Submission Of Matters To A Vote Of the SecurityHolders                                                        |  | 32     |
| PartII     |  |                                                                                                          |  |   |
| Item5.     |  | Market For Common Equity, Related Stockholder Matters AndSmall Business Issuer Purchases Of EquitySecurities  |  | 33     |
| Item6.     |  | Management's Discussion And Analysis Or Plan OfOperation                                                      |  | 36     |
| Item7.     |  | FinancialStatements                                                                                           |  | 42     |
| Item8.     |  | Changes In And Disagreements With Accountants On AccountingAnd FinancialDisclosure                            |  | 42     |
| Item8A.    |  | Controls AndProcedures                                                                                        |  | 42     |
| Item8B.    |  | OtherInformation                                                                                              |  | 44     |
| PartIII    |  |                                                                                                          |  |   |
| Item9.     |  | Directors, Executive Officers, Promoters and ControlPersons; Compliance With Section 16(a) Of the ExchangeAct |  | 45     |
| Item10.    |  | ExecutiveCompensation                                                                                         |  | 47     |
| Item11.    |  | Security Ownership Of Certain Beneficial Owners AndManagement And Related StockholderMatters                  |  | 49     |
| Item12.    |  | Certain Relationships And RelatedTransactions                                                                 |  | 49     |
| Item13.    |  | Exhibits                                                                                                      |  | 50     |
| Item14.    |  | Principal Accountant Fees AndServices                                                                         |  | 51     |
| Signatures |  |                                                                                                          |  |   |
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PARTI

Item 1.    Description of Business

ForwardLooking Statements

This Report contains statements whichconstitute forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and the Securities Exchange Act of 1934.We have based these forward-looking statements largely on our currentexpectations and projections about future events and financial trendsthat we believe may affect our financial condition, results ofoperations, business strategy and financial needs. Theseforward-looking statements are subject to a number of risks,uncertainties and assumptions, including those described in‘‘Risk factors.’’ No forward-lookingstatement is a guarantee of future performance and you should not placeundue reliance on any forward-looking statement. Our actual results maydiffer materially from those projected in any forward-lookingstatements, as they will depend on many factors about which we areunsure, including many factors which are beyond our control. The words‘‘may,’’‘‘would,’’‘‘could,’’‘‘will,’’‘‘expect,’’‘‘anticipate,’’‘‘believe,’’‘‘intend,’’‘‘plan,’’ and‘‘estimate,’’ as well as similarexpressions, are meant to identify such forward-looking statements.Forward-looking statements contained herein include, but are notlimited to, statements relating to:

|  |              |                               |
|--|--------------|-------------------------------|
|  | •  | our future financial results; |

|  |              |                                                      |
|--|--------------|------------------------------------------------------|
|  | •  | our future growth and expansion into newmarkets; and |

|  |              |                                                 |
|--|--------------|-------------------------------------------------|
|  | •  | our future advertisingand marketing activities. |

Except as otherwise required bylaw, we undertake no obligation to update or revise any forward-lookingstatement contained in this Annual Report. The safe harbors forforward-looking statements provided by the Securities Litigation ReformAct of 1995 are unavailable to issuers not previously subject to thereporting requirements set forth under Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, and whose securities areconsidered to be a ‘‘penny stock’’ andaccordingly may not be available to us.

As used in thisReport, references to the ‘‘we,’’‘‘us,’’ ‘‘our’’refer to Creative Enterprises International, Inc. unless the contextindicates otherwise.

(a) BusinessDevelopment

Creative Enterprises International, Inc.(‘‘Creative’’) is a marketing anddistribution company of consumer products. Creative’s businessstrategy is to identify emerging consumer trends and then sourceproducts to fulfill anticipated consumer market demand. In 2004 webegan implementing our current business plan of marketing anddistributing bottled waters and dietary supplements.

Creative wasoriginally incorporated on June  20,  1984, in the State ofUtah as Parvin Energy, Inc. Our name was later changed to Sahara GoldCorporation and on July  26,  1985 we changed our corporatedomicile to the State of Nevada and on January  24,  1994we changed our name to Inland Pacific Resources, Inc. OnDecember  18,  2001, we entered into an agreement and planof reorganization with Creative Enterprises, Inc., a Delawarecorporation, and changed our name to Creative EnterprisesInternational, Inc. This agreement provided that all shares of commonstock of the Delaware corporation issued and outstanding on that datebe exchanged for shares of common stock issued by the Nevadacorporation, which changed its name after the reorganization toCreative Enterprises International, Inc. Prior to the reorganization,we had 32,659,591 shares of common stock outstanding and pursuant tothe agreement, we effected a 1 for 16.33 reverse stock split. Thisreduced the number of outstanding shares to 2,000,000. We then issuedan additional 2,500,000 post-split common shares in theacquisition.

On September  18,  2002 we filed aregistration statement on Form SB-2 with the Securities and ExchangeCommission. This registration statement was amended on five occasionsand ultimately withdrawn on September  30,  2004 prior tobeing declared effective by the SEC. The registration statement wasfiled solely on behalf of certain of our security holders and inconjunction with an 

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offering of warrants to our then-currentstockholders and did not attempt to register shares to be sold directlyby our company. This filing was withdrawn for a number of reasons.First, the shares of common stock held by the proposed selling securityholders became eligible to be resold pursuant to Rule 144(k) andaccordingly did not require us to further prosecute the registrationstatement. In addition, as we were entering into a new line of businessshortly after filing the final amendment to the registration statement,the additional expense and effort required was not justified in lightof availability of the exemption provided by Rule 144(k). We decided tochange our line of business as management subsequently determined thatit would not be cost-effective for us to continue to attempt to developa market in the United States for the products described in thatregistration statement. In 2004, management was able to negotiatelicense agreements with Jamnica, d.d. and Peace Mountain NaturalBeverage Corporation (as described below) in order to provide us withthe rights necessary to engage in our present business line.

Wehave had limited operations to date. For our 2005 fiscal year, wegenerated revenues of $514,146 (all of which has been recorded sinceMay  2005) and incurred a net loss of $3,429,846. Since ourformation and prior to 2005, our operations were devoted primarily tostartup and development activities, which include thefollowing:

|  |              |                                                         |
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|  | •  | Formation of the company andobtaining start-up capital; |

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|  | •  | Developingour corporate hierarchy, including building a sales and marketinginfrastructure and establishing a business plan; and |

|  |              |                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------|
|  | •  | Identifying and contacting suppliers anddistributors of bottled artesian waters and dietarysupplement. |

Since 2005, we have been able to devote increasingamounts of resources to marketing and sales activities regarding ourbottled waters and dietary supplement, including the procurement of anumber of purchase orders from distributors and retailers.

(b) Business of the Issuer

We operate our business inthe rapidly evolving consumer beverage industry and our principalproducts are a line of bottled artesian waters and a dietary supplementproduct. Currently, our line of bottled waters consistsof:

|  |              |                                  |
|--|--------------|----------------------------------|
|  | •  | Jana Natural Artesian Water; and |

|  |              |                                                                        |
|--|--------------|------------------------------------------------------------------------|
|  | •  | Jana Natural Flavored Artesian Water(Lemon-Lime and Strawberry-Guava). |

Currently, our line of dietarysupplements consist of:

• Jana SkinnyWater.

We intend to expand our product line to introduce thefollowing products:

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|--|--------------|----------------------------------------------------------------------------------------------------------------|
|  | •  | Jana Juicy FruitsNatural Noncarbonated Beverages (Red-Orange; Orange-Nectarine;Multivitamin and Multired); and |

|  |              |                                                                                |
|--|--------------|--------------------------------------------------------------------------------|
|  | •  | powderedand flavored Skinny Water (Lemon-Lime, Strawberry-Guava andTangerine). |

Management will determine when to introduce otherproducts at such time as it believes that market conditions areappropriate, as described in greater detail under the caption‘‘Planned Products’’ in Item 1(b)below.

Our principal products are a line of bottled waterproducts and a dietary supplement product, manufactured by Jamnica,d.d., a subsidiary of Agrokor, d.d. Agrokor is a large, privately ownedcompany based in Croatia whose primary business operations are theproduction and distribution of food and beverages, as well as retailtrade. Agrokor’s actual sales in 2004 were approximately$1.7  billion. Management believes that Jamnica is one of thelargest mineral water producers in southeast Europe, in terms of volumesold. (Source: Agrokor, d.d.). On July  21,  2004, weentered into a license and distribution agreement with Jamnica thatgrants us an exclusive license to distribute 

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Jamnica’s bottled waters in NorthAmerica. Further, on August  1,  2004, we entered into anagreement with Peace Mountain Natural Beverages Corporation in order toobtain the rights to bottle and distribute a bottled dietarysupplement, called Skinny Water®. SkinnyWater’s proprietary formula has an all-natural appetitesuppressant that helps people lose weight when taken in conjunctionwith diet and exercise.

Our license agreement with PeaceMountain Natural Beverages Corporation is for a three year term andautomatically renews for additional one year periods unless terminated.Pursuant to this agreement, we license the exclusive right to bottleand distribute Peace Mountain’s ‘‘SkinnyProducts.’’ Skinny Products include‘‘Skinny Water’’, ‘‘DietWater’’, ‘‘Skinny Tea’’,‘‘Skinny Juice’’ and ‘‘SkinnyShake’’. We are currently focusing on the distribution ofSkinny Water in connection with our relationship with Jamnica.

Inaddition, on June  7,  2004 we entered into an agreementwith InterHealth Nutraceuticals Incorporated and obtained the right tosell, market, distribute and package Super CitriMax®in bottled liquid dietary supplement products. This right was grantedby InterHealth on a non-exclusive basis. Further, we must purchasequantities of Super CitriMax® from the manufacturerand are licensed to use InterHealth’s trademarks and logos inmarketing products containing Super CitriMax®. Weutilize Super CitriMax® in Skinny Water.

Ineach case, we must satisfy applicable performance standards and adhereto certain procedures or risk termination of the agreements.

Artesian water is sourced from deep, below-ground aquifers, incontrast to spring water. Our business strategy is to employ creativemerchandising techniques to generate demand for our products and toengage our public relations firm to associate our products withathletes, celebrities, models and personal trainers. In addition, weintend to attend a number of trade shows each year to display itsproducts to retailers. Such promotions and distribution activities willinitially concentrate on the Los Angeles, New York City and Miamimarkets. Our sales team will focus on the leading supermarket chains,convenience stores, drug chains, food service operators and health clubchains in the United States.

Our current business strategy is tobuild upon the ‘‘Jana’’ brand, whichmanagement believes is a successful brand of bottled water in southeastEurope, based on the financial information provided by Agrokor. Throughits subsidiary, Jamnica, Agrokor bottles over 200,000,000 liters ofwater per annum. (Source: Agrokor, d.d.). We intend to develop andmaintain a firm focus in establishing a market for the Jana brand inthe United States and build a national sales and distribution force totake our products into mainstream markets and distribution channels. Inorder to accomplish this, we intendto:

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|  | •  | create strong distributorrelationships and key accounts; |

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|  | •  | stimulate strong consumer awareness of anddemand for our products with primary emphasis in the United States;and |

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|  | •  | develop unique alternative beveragebrands and products. |

Industry Overview

Our beveragesare classified as ‘‘New Age’’ beverages, acategory that includes natural soda, fruit juices and fruit drinks,ready-to-drink teas, sports drinks and water. Skinny Water, however, isclassified as a dietary supplement. Beverage Marketing Group has foundthat the U.S. bottled water industry is valued at $9  billion,with bottled water consumption having more than doubled in the lastdecade. Management believes that the U.S. market for weight-controlproducts and services is approximately $46.3  billion and isexpected to grow to $61  billion by 2008. (Source: MarketdataEnterprises, Inc.) However, both the bottled water and dietarysupplement industries are highly competitive and are subject tocontinuing changes with respect to the manner in which products areprovided and how products are selected. Pressures to reduce the cost ofour products because of market forces could adversely impact ourrevenues.

New Age or alternative beverages are distinguishablefrom mainstream carbonated soft drinks in that they tend to containless sugar, less carbonation, and natural ingredients. As a generalrule, three 

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criteria have been established for such aclassification: (1) relatively new introduction to the market-place;(2) a perception by consumers that consumption is healthful compared tomainstream carbonated soft drinks; and (3) the use of naturalingredients and flavors in the products. Management believes that thisbeverage category includes the following segments:

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|  | •  | Energydrinks |

|  |              |             |
|--|--------------|-------------|
|  | •  | Premiumsoda |

|  |              |                    |
|--|--------------|--------------------|
|  | •  | Ready to Drinkteas |

|  |              |                             |
|--|--------------|-----------------------------|
|  | •  | Single-serve-fruitbeverages |

|  |              |           |
|--|--------------|-----------|
|  | •  | Smoothies |

|  |              |                |
|--|--------------|----------------|
|  | •  | Sparklingwater |

|  |              |              |
|--|--------------|--------------|
|  | •  | Sportsdrinks |

|  |              |                             |
|--|--------------|-----------------------------|
|  | •  | Vegetable/fruit juiceblends |

|  |              |                        |
|--|--------------|------------------------|
|  | •  | Other New Agebeverages |

Dietary supplements are sold in a variety of formsother than liquids, including tablets, capsules, bars, etc., andconsist of vitamins, minerals, hormonal supplements, herbal productsand specialty combination formulas. Dietary supplements are alsomarketed through various channels, including health food stores andmass-market (which may include retail and grocery store chains). As aproduct, Skinny Water competes with dietary supplements in each ofproduct types mentioned above and in different distributionchannels.

Our Strategy

Our strategy is to employcreative but relatively low cost marketing and brand promotiontechniques and building a strong distributor network and presence withnational retail accounts for our products. We will attempt to developand grow a market for our products by through a distribution networkand creating consumer demand for and awareness of our products. Webelieve that the exclusive arrangements we have with our key suppliersprovides us with a competitive advantage.

OurProducts

Our line of bottled waters currently consists ofJana Natural Artesian Water and Jana Natural Flavored Artesian Watersand our line of dietary supplements currently consists of Jana SkinnyWater. Management intends to market additional Jana products in thefuture, when it believes that market conditions are favorable. Thesefuture products are Jana Juicy Fruits Natural Noncarbonated Beveragesand Flavored Skinny Water.

We entered into an exclusive licenseand distribution agreement with Jamnica, d.d., a division of theAgrokor Group in July  2004. The purpose of the agreement is toarrange for the bottling and distribution of Jana branded waterproducts in North America. Under this agreement, we purchase Jana waterfrom Jamnica and obtained the exclusive right to distribute theseproducts in North America. In connection with this appointment, Jamnicaagreed to provide us at no additional charge with promotional materialsand sales aids and to identify us on marketing materials as theexclusive distributor of the products.

The agreement is for aninitial an initial term commencing on the date we receive governmentapprovals to distribute the products in the sales territory andcontinuing for a period of one year from the date the approvals arereceived. To date, we have received approvals from the States of NewYork and California in April and June  2005, respectively. Theagreement will automatically renew for additional one year termsprovided we satisfy the following sales volumetargets:

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|       |  |                                  |  |  |  |  |
|-------|--|----------------------------------|--|--|--|--|
| Year  |  | MinimumTargets                   |
| Year1 |  | 7,500,000 liters or $4,000,000   |
| Year2 |  | 30,000,000 liters or $15,750,000 |
| Year3 |  | 60,000,000 liters or $31,500,000 |
|       |

If weare unable to satisfy these targets, Jamnica has the right to eitherterminate the agreement or to appoint additional distributors in theterritory. The occurrence of either of these contingencies may resultin a material adverse effect on our results of operations and financialcondition. Based on the revenues we have generated from sales of JanaWater and Skinny Water to date, we believe that we will need to revisethese provisions of the agreement or risk not achieving these targets.Accordingly, we have begun discussion with Jamnica to revise theagreement. No assurances can be given that we will be able to reach anagreement to modify the contract terms, in which case, Jamnica may havethe rights previously described. To date, Jamnica has not notified usthat it intends to exercise these rights.

We have also enteredinto a three year license agreement with Peace Mountain NaturalBeverages Corporation pursuant to which we license the exclusive rightto bottle and distribute the ‘‘SkinnyProducts’’ worldwide. Under this agreement, SkinnyProducts include ‘‘Skinny Water’’,‘‘Diet Water’’, ‘‘SkinnyTea’’, ‘‘Skinny Juice’’ and‘‘Skinny Shake’’. We are currently focusingon the distribution of Skinny Water in connection with our relationshipwith Jamnica. Pursuant to this agreement, we must utilize onlyingredients that are generally recognized as safe and must useconcentrate and formulations agreed to by Peace Mountain. Our agreementwith Peace Mountain will renew automatically provided that we satisfythe minimum purchase amount specified in the contract or make a $10,000monthly payment.

Pursuant to our agreement with InterHealthNutraceuticals Incorporated, we obtained the right to sell, market,distribute and package Super CitriMax in bottled liquid dietarysupplement. We use Super CitriMax® in our SkinnyWater products. This right was granted by InterHealth on anon-exclusive basis. Further, we purchase supplies of Super CitriMaxfrom the manufacturer as needed, and are licensed to useInterHealth’s trademarks and logos in marketing productscontaining Super CitriMax. Our agreement with InterHealth will continueunless terminated by either party.

Our emphasis is on quality,all natural ingredients, proprietary formulas, and the health benefitsoffered to the consumer.

Current Products

JanaSkinny Water®

Skinny Water is Janawater containing a proprietary, natural appetite suppressant, with alemon taste and a natural water appearance. We introduced SkinnyWater® after obtaining the necessary licensesfrom Peace Mountain, InterHealth and Jamnica. We worked closely withthese companies to agree upon the ingredient blend utilized in SkinnyWater. Based on these contractual arrangements, Jamnica provides uswith bottled product for distribution.

Skinny Water’smain dietary ingredient, ‘‘SuperCitrimax,’’is available for use in beverages and foods in the U.S. and a number ofother countries. Super CitriMax has been affirmed GRAS (GenerallyRecognized as Safe) for use in functional beverages by the BurdockGroup, a toxicology specialist that evaluates the safety of food andbeverage ingredients. This process involved an intensive review of allsafety and toxicology data by a panel of scientific experts. (Source:InterHealth Nutraceuticals, Inc.). Further, human clinical studies ofSuper Citrimax, conducted through Georgetown University Medical Centerresulted in findings that included, weight loss, reduction in appetite,and an increase in fat burning and metabolism when used in conjunctionwith diet and exercise. The results of their findings are published inthe peer-reviewed journal, Nutrition Research (24(1): 45-58,2004).

Skinny Water is ephedrine-free and contains no caffeine,calories, or sugar. Skinny Water’s patented formula (held by thelicensor) features the all natural, clinically tested ingredient,

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Hydroxycitric Acid (‘‘SuperCitriMax’’) plus a combination of calcium, potassium andmagnesium. Super Citrimax has been shown to suppress appetite andincrease fat burning, without stimulating the nervous system when usedin conjunction with diet and exercise.

The U.S. Food and DrugAdministration (FDA) has recently questioned our use of the term‘‘water’’ in the product name for SkinnyWater. We disagree with the position taken by FDA and are working toresolve this question with FDA so as to preserve our current productname. However, we acknowledge that the final resolution of this mattermay require a change in the product’s name and/or other changesin the product’s labeling and marketing. See the discussionbelow under the caption ‘‘GovernmentRegulation’’ for more information.

Jana NaturalArtesian Water

Jana natural artesian water comes fromCroatia, a country with extensive supplies of natural water. Managementbelieves that Jana natural artesian water has magnesium and otherminerals. Magnesium appears in Jana in the form of hydrogen carbonate,which management believes is optimal for absorption in the human body.Jana Natural Artesian Water was voted the best quality water at thisyear’s Aqua Expo 2005, held in February  2005, in Paris,France.

Jana Flavored Natural Artesian Water

Weintroduced this line of products into select U.S. locations during thequarter ended March  31,  2006. This line of productsconsists of Jana Natural Water blended with extracts. We introduced twoflavors of waters: Lemon/Lime and Strawberry/Guava. Each of thesebeverages will be non-carbonated, alcohol-free and made of naturalextracts of Lemon/Lime or Strawberry/Guava. Neither product containsfruit juices. Jana Flavored Natural Artesian Water was voted thebest-flavored water at the 2004 Aqua Expo, held in Paris, France.

Planned Products

We intend to expand our line of bottledwaters to introduce the following products at such times as managementbelieves that market conditions are appropriate, as describedbelow.

Jana Vitamin Enhanced Waters

Jana VitaminEnhanced Waters will be non-carbonated, non-alcoholic, fruit beverages,enhanced with vitamins A, B, C and E. These products will be made of 12percent fruit concentrate and natural artesian water. This product linewill be manufactured in four different flavors: red-orange,orange-nectarine, and in two different blends of multiplefruits.

Jana Flavored and Powdered SkinnyWater®

Jana Flavored Skinny Waterwill consist of Jana Skinny Water blended with fruit extracts. Theplanned product line consists of Lemon-Lime, Strawberry-Guava andTangerine. We are also planning to introduce powdered versions ofSkinny Water which need to be mixed with water to be ready toconsume.

Management will base its decision to introduce JanaVitamin Enhanced Water and Jana flavored and powdered Skinny Waters onthe rate of market acceptance of the other products we offer. We areactively assessing the market opportunities for the release of theseproducts and believes that the critical factors in this analysis arethe sales data of our other products and our cash position.

Distribution, Sales and Marketing

General

Wetarget a niche in the soft drink industry known as New Age beverages.The soft drink industry generally characterizes New Age Beverages asbeing made more naturally, with upscale packaging, and often creatingand utilizing new and unique flavors and flavor combinations. OurSkinny Water product is considered a dietary supplement and competes inthe weight-loss dietary supplement market.

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The bottled water and New Age beveragesegment is highly fragmented and competitive and includes such playersas Poland Spring, Fiji, Deer Park, SoBe (acquired by PepsiCo), Snapple(acquired by Cadbury Schweppes in 2000), Arizona, Fuze, Glaceau,Hansen’s and Jones Sodas, among others. In addition, the dietarysupplement industry is also highly fragmented and competitive andincludes providers of beverages, vitamins, and other supplements. Manycompetitors, including companies that sell beverage products, aregreater in size and financial, personnel, distribution and otherresources than we are and sell broader product lines than we do. Thesebrands have the advantage of being seen widely in the national marketand being commonly well known for years through well-funded adcampaigns.

Our channel rollout plan is to implement a two-phaseapproach. Phase one commenced in the second quarter of fiscal 2005 andwe are initially concentrating our distribution and promotion effortsin three cities: New York City, Los Angeles, and Miami, Fla. Phase twois focused on national retail accounts and national promotion andincludes retailers such as Safeway and Target. We intend to launch aEuropean rollout of Skinny Water with Jamnica in the latter half of2006. However, this plan is subject to change based on our assessmentof market conditions at that time and whether we believe we will thenbe positioned to successfully compete in that market. We expect to funda product launch in Europe through a combination of revenues derivedfrom product sales, financial contributions from strategic partners andif needed, financing arrangements. We currently do not have firmarrangements for the financing of a European product launch and noassurances can be given that we will be able to successfully introduceour products in international markets.

Marketing and SalesStrategy

We employ a category-specific project managementapproach and use creative packaging and point of purchase displays inour sales and presentations to the trade. We manage the marketing,sales and distribution of our products through different channels,including direct store delivery, direct sales to national accounts, andarrangements with local and regional distributors. Our marketing andsales personnel manage these various accounts on local, regional andnational bases. Our emphasis is to highlight the Jana brand throughoutall of our sales and marketing efforts. Management believes that propermerchandising is a key element to providing maximum exposure to anybrand and that retailers focus on effective shelf and displaymerchandising in order to yield increased revenue per shoppingcustomer. Unique ‘‘billboards’’ or hangtagshave been developed to ‘‘tell the story’’of each product to the consumer as part of their initial productpurchase. This point of purchase display strategy will give us theability to connect the consumer to our brand immediately, highlightingour points of differentiation. Outside carton packaging is also usedfor multi-pack and case sales.

Promotion is essential to anyproduct launch and we will invest the appropriate amount of capital tobuild interest around our products. We will attempt to associate theJana branded waters and dietary supplements with athletes, celebrities,models, personal trainers, and others to build a strong image andmarketing campaign. We intend to ultimately develop an integrated,multi-channel strategy of advertising, which will include nationalprint, television coverage, Internet, and sponsorship marketing. Inaddition, we will place an emphasis on targeted event-based tasting andsampling promotions. For example, we intend to distribute promotionalkits to celebrities, offer taste sampling at health spas, and providesponsorship at events, including trade shows. We have engaged Arno NAto provide advertising and promotional services.

As ofFebruary  28,  2006, we have received purchase orders fromMcLane Company, Inc. for Skinny Water in the amount of approximately$96,000 for shipment to 7-11 stores located in various markets in theUnited States as well as orders from GNC in the amount of approximately$20,000, Safeway for approximately $87,000 and Target for approximately$72,500. We have also recently been approved as a vendor forAmazon.com for Skinny Water and received product orders from otherretailers in the aggregate amount of approximately $102,000. Whilethese customers may make additional purchase orders, each order is aone-time transaction and they are not obligated to purchase aparticular amount of product or to make multiple orders. We cannotprovide any assurances as to whether these customers will purchaseadditional product in the future.

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Marketing to Distributors

Wemarket our products to distributors using a number of strategies,including direct solicitation, retaining outside representatives,telemarketing, trade advertising, and trade show exhibition. Thesedistributors, who may also have relationships with our competitors,include natural food, gourmet food and mainstream distributors.

Marketing to Retail Stores

We market to stores byutilizing trade shows, trade advertising, telemarketing, direct mailpieces, and direct contact with the store. For our direct contact, ouroutside sales representatives or brokers will visit stores to selldirectly in many regions. Sales to retail stores will be coordinatedthrough our distribution network.

Marketing toConsumers

We will utilize several marketing strategies tomarket directly to consumers. Advertising in targeted consumermagazines, in-store discounts, in-store product demonstration, consumertrade shows and event sponsoring are all among anticipatedconsumer-direct marketing devices.

DistributionStrategy

We are establishing distribution contracts withlocal beverage distributors and expect that a majority of our productswill be sold through our distributors. Distribution will targetcategory leaders in grocery, convenience, health clubs, retail drug,and health food establishments. We have rented warehousing availabilityin New Jersey from which we can store, label and ship product, based onindividual retailer’s specifications. We will contract withindependent trucking companies to have product shipped from contractpackers to independent warehouses, and then on to distributors.Distributors will then sell and deliver our products either tosub-distributors or directly to retail outlets, and such distributorsor sub-distributors stock the retailers’ shelves with theproducts. We are responsible for managing our network of distributorsand brokers and the hiring of sales managers, who are responsible fortheir respective specific channel of sales distribution.

Althoughwe have established relationships with eleven beverage distributors asof March  20,  2006, we currently do not have anylong-term, written distribution relationships for our product line withsignificant minimum purchase commitments and no assurances can be giventhat we will be able to enter into such an agreement with adistributor. These commercial relationships consist of agreements withdistributors to carry our products and to use their efforts to sellthese products in their defined territories. As most of thesedistributors are not bound by purchase commitments, we must rely onrecurring purchase orders for product sales. Accordingly, we cannotdetermine the frequency or amount of purchase orders any givendistributor will make. We also distribute our products directly tonational retail accounts based on purchase order relationships, whichare terminable by either party at-will.

As of February28,  2006, we have placed approximately $380,000 of productthrough our distributors and direct sales to retailers. In addition,during the 2005 fiscal year, we received orders for a total of $205,000of Jana Natural Artesian Water and Skinny Water from our former NewYork City distributor. These product orders were distributed in the NewYork City metropolitan area.

On December  14,  2004,we entered into an exclusive distribution arrangement with Big Geyser,Inc., an independent beverage distributor for the distribution of ourproducts in New York City and Long Island, New York. Although thisagreement was for an initial term of 5 years, we terminated thisagreement on January  9,  2006 as management believed thatthe performance under the contract was not satisfactory. We do notbelieve that the termination of our agreement with Big Geyser will havea material adverse impact on our operations as we have recently enteredinto an agreement with another New York City distributor, as describedbelow. However, as this new agreement does not include significantpurchase commitments, we cannot guarantee that this new distributionrelationship will result in meaningful revenues for us. In addition,Big Geyser has disputed our ability to terminate the agreement forcause and has filed a notice of arbitration against us with theAmerican Arbitration 

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Association seeking damages. An adverseoutcome in this matter could adversely affect our financial conditionand results of operations. For more information, see the disclosureunder the caption ‘‘Legal Proceedings,’’below.

Distribution Network

We are currentlydeveloping our distribution network in the context of our rollout plan.On March  20,  2006, we entered into an agreement withExclusive Beverage Distributors to serve the New York City and LongIsland, N.Y. markets on an exclusive basis. This market represents oneof the key markets in our rollout strategy. The initial term of thisagreement will expire December  31,  2009 and we willdistribute our Jana Natural Artesian Water, Jana Flavored Water andSkinny Water products in the designated territory pursuant to thisagreement. Although this agreement includes a minimum purchasecommitment on behalf of the distributor, we will need this distributorto exceed that volume in order to derive meaningful revenues from thisrelationship. We also intend to engage other local beveragedistributors in other markets to carry our products in other marketswhere we may introduce our products. No assurances, however, can bemade that we will be able to engage other distributors on a long-termbasis in other markets.

In addition to our relationship with ourNew York City distributor, we currently have relationships with tenother beverage distributors serving the following markets across theUnitedStates:

|  |              |        |
|--|--------------|--------|
|  | •  | Alaska |

|  |              |         |
|--|--------------|---------|
|  | •  | Georgia |

|  |              |          |
|--|--------------|----------|
|  | •  | Illinois |

|  |              |      |
|--|--------------|------|
|  | •  | Iowa |

|  |              |          |
|--|--------------|----------|
|  | •  | Michigan |

|  |              |           |
|--|--------------|-----------|
|  | •  | Minnesota |

|  |              |        |
|--|--------------|--------|
|  | •  | Nevada |

|  |              |           |
|--|--------------|-----------|
|  | •  | NewMexico |

|  |              |                      |
|--|--------------|----------------------|
|  | •  | San Diego,California |

|  |              |               |
|--|--------------|---------------|
|  | •  | SouthCarolina |

|  |              |           |
|--|--------------|-----------|
|  | •  | Wisconsin |

Although weintend to sell all of our products through these distributionarrangements, we currently are only marketing Jana Skinny Water outsideof New York.

Direct Sales

We have alsoengaged a national account manager to be responsible for thedistributor relationships and larger chain accounts that requireheadquarter sales visits in addition to managing the salesrepresentatives. We intend to primarily sell to our distributors, whoin turn sell to retail stores. However, we will sell directly to retailstores as opportunities become available. Our representatives willmaintain the pipeline flow of our products from our distributors (ourdirect customers), to the retailer (our distributors’ customers)to the end customer, the individual consumer.  As ofDecember  31,  2005, we have retained five dedicated salesrepresentatives, three of whom are employees and two that are retainedon a commission basis. These representatives are working withmanagement to engage product distributors and locate retail customers.Based upon their results, we may expand the number of salesrepresentatives to work along side our mainstream distributors. Asresources become available, we intend to retain additional salesrepresentatives on a full-time basis.

GeneralStrategy

We anticipate that as consumer awareness of ourbrands develops and increases, we will expand our distributor network,which may result in a decreased dependence on any one distributor. We

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expect that we will grant other distributorsexclusive rights to other defined territories. Further, we arecurrently in negotiations with leading supermarkets and conveniencestores in order to secure shelf space for ourproducts.

Mainstream Supermarkets

Based onindustry data available to management, we believe that there are over35,000 supermarket chains in the United States, and that the leading 5chains control nearly 50% of the market. Management believesthat the grocery industry, which has embraced the premium, enhancedwater category, is actively seeking new and innovative products inorder to expand their premium, and enhanced water sections. Our grocerychannel strategy will maximize the overall presentation of the premiumwater category section in stores nationwide. Supermarkets, particularlychains and prominent local supermarkets, often impose slotting feesbefore permitting new product placements in their store or chain. Thesefees can be structured to be paid one-time only or in installments. Wemay be required to pay slotting fees for new placement, which fees arenormally assessed on a per store per new item placed.

Convenience Chains/Drug

Based on industry dataavailable to management, we believe that the leading 50 conveniencestore chains represent over 45,000 store locations nationwide. Theconvenience channel will be of strategic value to us since we canestablish paid sampling trials of our single serve product lines.

Food Service: Restaurants, Hotels, Schools

Severaloperators service the leading food service customers. The leading foodservice operators include U.S. Food Service, Sysco, Coremark andMcLane. These companies service key institutions such as hotels,restaurants, schools, hospitals, businesses and cafeterias andrepresenting millions of meal and snacking occasions daily. On-premise(restaurant) activity in commercial and non-commercial locationsis an increasing component of total beverage sales. In recognition ofthis trend, we will market aggressively to industrial cafeterias, barsand restaurants.

Health Clubs, Spa

Over thepast ten years, fitness has represented a thriving business opportunitythroughout the world. Information summarized in the 2002 U.S. FitnessIndustry Market report from Tekes estimates that the U.S. fitnessmarket was valued at approximately $5.8  billion. There are over7,000 health clubs, gyms, and spas in the U.S., which we will targetfor all of our products.

Sources and Availability of RawMaterials

Our products require bottles, labels, caps, artesianwater, and other ingredients, including Super CitriMax. We fulfillthese requirements through purchases from various sources, includingpurchases from Jamnica and InterHealth. Other than Super CitriMax, webelieve there are adequate supplies of the aforementioned products atthe present time, but cannot predict future availability or prices ofsuch products and materials. However, since our strategy is tosuccessfully introduce the Jana brand in the U.S., the termination ofour agreement with Jamnica would be likely to have a materially adverseimpact on our business and results of operations. Since Super CitriMaxis only available from InterHealth, the termination of that agreementwould also be likely to have a materially adverse impact on ourbusiness and results of operations. We also expect the above referencedsupplies to experience price fluctuations. The price and supply ofmaterials will be determined by, among other factors, demand,government regulations and legislation. We currently purchase SuperCitriMax from InterHealth Nutraceuticals.

Manufacture of OurProducts and Quality Control

We license our products from therights-holders and manufacturers: Jamnica, Peace Mountain andInterHealth. Jamnica manufactures Jana Natural Water, Jana FlavoredNatural Water and Jana 

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Vitamin Enhanced Water and granted us theexclusive distribution rights in North America. We license Skinny Waterfrom Peace Mountain on an exclusive basis and we purchase supplies ofSuper CitriMax from InterHealth on a non-exclusive basis. SuperCitriMax is utilized in Skinny Water.

Jamnica employs modern,aseptic bottling technology and provides laboratory-based ingredienttesting and tasting quality controls. We have been advised by Jamnicathat they have commenced construction on an additional bottlingfacility to add additional capacity for the products we aredistributing. We seek to utilize only ingredients that we believe areof a high quality in our products and we believe that we source andselect only those suppliers that use only quality ingredients. We seekto ensure that all of our products satisfy our quality standards.Samples of our products from each production run are analyzed andcategorized in a reference library. For every run of product, Jamnicaundertakes extensive on-line testing of product quality and packaging.This includes testing levels of sweetness, carbonation, taste, productintegrity, packaging and various regulatory cross checks. For eachproduct, they must transmit all quality control test results to us forreference following each production run. Water quality is monitoredduring production and at scheduled testing times to ensure compliancewith beverage industry standards. We are committed to an on-goingprogram of product improvement with a view toward ensuring the highquality of our product.

Competition

The beverageand dietary supplement industries are highly competitive. In order tocompete effectively in these industries, we believe that we mustconvince independent distributors that our products have the potentialto be a leading brand in the segments in which we compete. Pricing ofthe products is an important component of our competitive strategy. Wewill seek to ensure that the price for our products is competitive withthe other products with which we compete.

We compete with othercompanies not only for consumer acceptance but also for shelf space inretail outlets and for marketing focus by distributors, most of whomalso distribute other brands with which our products compete. Theprincipal methods of competition include product quality, trade andconsumer promotions, pricing, packaging and the development of newproducts. We expect our distributors to assist us in generating demandfor our products.

In addition, in light of the competition forproduct placement with independent distributors, we obtained severalnational retail accounts as an additional distribution channel for ourproducts. These accounts include GNC, 7-11 (through its distributionrelationship with McLane), Target and Safeway. We believe that thisstrategy is helpful in alleviating the risk inherent in competition forindependent distributors.

We market our Jana Natural Waters as a‘‘premium’’ water and our advertisingfocuses on aspects of purity and quality, including the artesiansourcing of Jana water. We are pricing this product to be competitivewith other bottled waters that seek to identify themselves as‘‘premium,’’ including Fiji and Evian.Accordingly, Jana Natural Artesian Waters are sold at a similar pricerange as competitive brands of premium waters. Management considers a‘‘premium’’ water to be one that is madefrom quality ingredients, giving specific attention to the source ofthe water, incorporates high-quality packaging and branding and is soldat a higher price point.

In addition, we intend to exploit therecent successes that Jana products have experienced in internationalcompetitions. For instance, Jana Natural Artesian Water was voted thebest quality water at this year’s Aqua Expo 2005, held inFebruary  2005, in Paris, France. Further, Jana Flavored NaturalArtesian Water was voted the best-flavored water at the 2004 Aqua Expo,held in Paris, France.

Our bottled waters compete generally withall liquid refreshments and in particular with numerous other New Agebeverages, including:

• Evian

• Volvic

• Fiji

• Vittel

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•  SoBe(owned by Pepsi)

•  Snapple(owned by Cadbury Schweppes)

•  Arizona

•  Knudsen &Sons

•  Jones Sodas

•  Fuze

•  Glaceau (Smart and VitaminWaters).

As opposed to our line of Jana watersin general, our Skinny Water product competes in the weight-lossdietary supplement field and therefore will compete with otherweight-loss dietary supplements, in addition to the liquid refreshmentmarket. Significant competitors for Skinny Water in the liquidrefreshment category are product lines sold by Fuze, Trimspa and SoBein the U.S. and Contrex, which is marketed in Europe.

Ingeneral, many of these brands have enjoyed broad, well-establishednational recognition for years, through well-funded ad and otherbranding campaigns. In addition, the companies manufacturing theseproducts generally are greater in size and have greater financial,personnel, distribution and other resources than we do and have greateraccess to additional financing.

We believe that oursuccess will be due in great part to our beverage recipes, creativepackaging and marketing efforts. We believe our distributionrelationships will assist us in obtaining shelf-space for theseproducts. With respect to Skinny Water, we believe our success willalso be a function of the belief of consumers that the product assistsin their weight-loss efforts.

Research andDevelopment

We undertake research and developmentactivities in order to monitor developments within the dietarysupplement industry and to identify or develop new, marketableproducts. These activities include reviewing periodicals, scientificresearch and relevant clinical studies and meeting with vendors. Wemust review the safety and efficacy of ingredients, productionstandards, labeling information, label claims and potential patent,trademark, legal or regulatory issues. Research and developmentexpenses in the last two years have not been material. Although we mayundertake research studies regarding our products, we do not expect toincur significant increases in research and development expenses in thenear term.

Proprietary Rights, Brand Names andTrademarks

We regard consumer recognition of andloyalty to all of our brand names and trademarks as extremely importantto the long-terms success of our business. We license the trademarks toour products from the manufacturers, including Jamnica, Peace Mountainand InterHealth. Management considers these licenses as material to ourbusiness. We license the trademarks ‘‘SkinnyWater,’’ ‘‘Skinny Tea,’’‘‘Skinny Juice,’’ ‘‘SkinnyShake,’’ and ‘‘Diet Water’’from Peace Mountain Natural Beverages. We license the trademark‘‘Jana’’ from Jamnica and we license thetrademark ‘‘Super CitriMax ClinicalStrength’’ from InterHealth Nutraceuticals. The terms ofour trademark licenses are discussed under the caption‘‘Our Products.’’ The proprietary rights toour products are held by the manufacturer and are licensed to us forpurposes of bottling and distribution. Since we are not theowner of these rights, our ability to continue using them is subject tothe terms and conditions of the license agreements we have entered intowith the licensors. The termination of our license agreements withJamnica, Peace Mountain and InterHealth would be likely to have amaterial adverse effect on our consolidated financial position andresults of operations. We use non-disclosure agreements withemployees and distributors to protect our rights and those of oursuppliers.

Government Regulation

The production,marketing and importation of our products are governed by the rules andregulations 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’’), the U.S. 

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Environmental Protection Agency(‘‘EPA’’), the United States Customs andBorder Protection (‘‘CBP’’) and all fiftystate Attorneys General. This regulatory regime serves to ensure thatthe product is safe, our claims are truthful and substantiated and thatour products meet defined quality standards. We have not encounteredany regulatory action as a result of our operations to date, however,since we have recently commenced operations no assurance can be giventhat 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 bottledwater, a food, and dietary supplements, while the FTC regulates theadvertising of these products. The EPA regulates tap water (alsoreferred to as municipal water or public drinking water), however, allof the Company’s products presently utilize artesian watersourced from an underground spring in Croatia. Should the Company everchoose to use municipal water in its products, then the numerousregulations of the EPA shall be applicable. The CBP regulates crossborder trade on behalf of itself, the FDA and other federal agencies.Further, many states take a large role in the regulation of bottledwater and many of these states have permit requirements to which wemust adhere. In addition, all states regulate product claims throughvarious forms of consumer protection statutes.

The FDA has broadauthority to enforce the provisions of the FFDCA applicable to bottledwater and dietary supplements, including powers to issue a public‘‘Warning Letter’’ to a company, topublicize information about illegal products, to request a voluntaryrecall of illegal products from the market, and to request theDepartment of Justice to initiate civil seizure and/or injunctionactions, and civil and criminal penalty proceedings in the UnitedStates Federal courts. The FTC exercises jurisdiction over theadvertising of dietary supplements and foods and has the authority overboth ‘‘deceptive’’ and‘‘unfair’’ advertising and other marketingpractices. In addition to its broad investigative powers, the FTC hasthe power to initiate administrative and judicial proceedings against acompany and may also seek a temporary restraining order or preliminaryinjunction against a company pending the final determination of anaction The FTC’s remedies also include consumer redress, civiland criminal penalties. Weight loss products in particular are subjectto increased regulatory scrutiny due to intensified campaigns by bothFDA, FTC and states’ attorneys general. The CBP has the power todetain products and refuse admission at the border and to order thedestruction of illegal imports. Moreover, the FDA at the border hasincreased authority over imports. Any type of investigation orenforcement action either by the FDA, FTC or any other federal, stateor local agency would likely have a material adverse effect on ourconsolidated financial position or results of operations.

We aresubject to the food labeling regulations required by the NutritionalLabeling Education Act of 1991 (‘‘NLEA’’).These regulations require all companies which offer food for sale andhave annual gross sales of more than $500,000 to place uniform labelsin specified formats disclosing the amounts of specified nutrients onall food products intended for human consumption and offered for sale.This regulation would apply to all of our products. The FFDCA containsexemptions and modifications of labeling requirements for certain typesof food products, such as in this case foods containing insignificantamounts of nutrients. The FFDCA also establishes the circumstances inwhich companies may place nutrient content claims or health claims onlabels.

Our Skinny Water product, as a dietary supplement, issubject to the Dietary Supplement Health and Education Act of 1994labeled (‘‘DSHEA’’), however a recentletter from the FDA has raised an issue with regard to whether theproduct is properly identified as a dietary supplement and its name. In1994, the FFDCA was amended by DSHEA, which establishes a new frameworkgoverning the composition and labeling of dietary supplements. Withrespect to composition, DSHEA defines ‘‘dietarysupplements’’ as ‘‘a vitamin; a mineral; anherb or other botanical; an amino acid; a dietary substance for use byman to supplement the diet by increasing total dietary intake; or aconcentrate, metabolite, constituent, extract, or combination of any ofthe above dietary ingredients.’’ The provisions of DSHEAdefine dietary supplements and dietary ingredients; establish a newframework for assuring safety; outline guidelines for literaturedisplayed where supplements are sold; provide for use of claims andnutritional support statements; require ingredient and nutritionlabeling; and grant FDA the authority to establish regulationsconcerning good manufacturing practices(‘‘GMPs’’).

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We believe that our contractmanufacturers meet the current regulations of the FDA specifically withregard to bottled water including good manufacturing practices(‘‘GMPs’’) and its classification as‘‘artesian water.’’ We have alsoimplemented registration and compliance procedures as required by theFDA Bioterrorism Act. Lastly, we have already received regulatoryapprovals for our bottled water from New York State and California andare in the process of securing necessary approvals in otherjurisdictions where we intend to introduce our products.

Government Regulation of Bottled Water

Bottled wateris regulated as food by FDA. Municipal water is regulated not as a foodby the FDA, but as a commodity by the Environmental Protection Agency(EPA) pursuant to the Safe Drinking Water Act which provides forcertain mineral/chemical content requirements so as to ensure watersafety, not product definition. In 1996, the regulation of bottledwater became more stringent with FDA’s issuance of a final rule,which included standard definitions for various terms used on labels ofbottled water, e.g. ‘‘artesian.’’ Inaddition, FDA adopted rules establishing a new definition for mineralwater and standard of quality regulations that establish allowablelevels for contaminants (chemical, physical, microbial andradiological) in bottled water. Accordingly, our bottled water productsmust meet FDA standards for manufacturing practices and chemical andbiological purity. Furthermore, these standards undergo a continuousprocess of revision. As described above, the labels affixed to bottlesand other packaging of the water is subject to FDA restrictions onhealth and nutritional claims for foods.

As the FDA regulatesour bottled water and flavored water beverages as foods, these productsmust meet FDA requirements of safety for human consumption, ofprocessing and distribution under sanitary conditions and of productionin accordance with the FDA GMPs. To assure the safety of bottled water,the FDA has established quality standards that address the substancesthat may be present in water which may be harmful to human health aswell as substances that affect the smell, color and taste of water.FDA’s quality standards for bottled water also require publicnotification whenever the microbiological, physical, chemical orradiological quality of bottled water falls below standard. We believethat we satisfy the current regulations of the FDA with regard to foodsand specifically with regard to bottled water, including theclassification as artesian water. We are also subject to periodic,unannounced inspections by the FDA. Upon inspection, we must be incompliance with all aspects of the quality standards and goodmanufacturing practices for foods and bottled water, and all otherapplicable regulations that are incorporated in the FDA qualitystandards.

Bottled water is also subject to state and localregulation. In some states, bottled water must originate from an‘‘approved source’’ in accordance withstandards prescribed by the state health department of those states.Some states require the source to be inspected and the water sampled,analyzed and found to be of safe and wholesome quality. There areannual compliance monitoring tests of both the source and the bottledwater in some states. The health departments of many individual statesalso govern water purity and safety, labeling of bottled water productsand manufacturing practices of producers.

GovernmentRegulation of Dietary Supplements

It is our intent thatSkinny Water be regulated as a dietary supplement by FDA under DSHEA,although a recent letter from the FDA has raised an issue with regardto the product’s identity and its name. Generally, under DSHEA,dietary ingredients that were on the market before October15,  1994 may be used in dietary supplements without notifyingthe FDA. However, a ‘‘new’’ dietaryingredient (i.e., a dietary ingredient that was ‘‘notmarketed in the United States before October  15,1994’’) must be the subject of a new dietary ingredientnotification submitted to the FDA, unless the ingredient has been‘‘present in the food supply as an article used forfood’’ without being ‘‘chemicallyaltered.’’ A new dietary ingredient notification mustprovide the FDA evidence of a ‘‘history of use or otherevidence of safety’’ establishing that use of the dietaryingredient ‘‘will reasonably be expected to besafe.’’ We believe that the dietary ingredient presentlyutilized 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

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marketing our dietary supplement productsthat contain such ingredient and promptly file (or have the supplier ofthis ingredient file) a new dietary ingredient notification with FDA.Under DSHEA, this notification is required to be submitted to FDA atleast 75 days before the new dietary ingredient’s initialmarketing. There can be no assurance that the FDA will accept theevidence of safety for any new dietary ingredients that we may marketnow or in the future, and the FDA’s refusal to accept suchevidence could prevent the marketing of such dietary ingredients andwould have a material adverse effect on our consolidated financialposition or results of operations.

In addition, DSHEA permits‘‘statements of nutritional support’’ to beincluded in labeling for dietary supplements without FDA pre-approval.Such statements may describe how a particular dietary ingredientaffects the structure, function or general well being of the body, orthe mechanism of action by which a dietary ingredient may affect bodystructure, function or well-being. A dietary supplement may not claimto diagnose, cure, mitigate, treat, or prevent a disease unless suchclaim has been reviewed and approved by the FDA as a‘‘health claim’’ or‘‘qualified health claim.’’ A company thatuses a statement of nutritional support in labeling must possessevidence substantiating that the statement is truthful and notmisleading. The label and labeling of Skinny Water does containstatements of nutritional support, however, and we have no assurancethat FDA will find the company’s substantiation adequate tosupport the statements of nutritional support being made for SkinnyWater. If the statement of nutritional support appears on a productlabel or labeling of a dietary supplement, there must also appear onsuch label and labeling a FDA disclaimer statement, which is asfollows: ‘‘This statement has (or these statements have)not been evaluated by the Food and Drug Administration. This product isnot intended to diagnose, treat, cure, or prevent anydisease.’’ Pursuant to DSHEA, we are also required tonotify the FDA about our use of the statement(s) within 30 days ofmarketing the product (the ‘‘30 DayLetter’’). Upon receiving the 30 Day Letter andthereafter if FDA were to determine that a particular statement ofnutritional support is an unacceptable drug claim, an unauthorizedversion of a ‘‘health claim,’’ orunsubstantiated, a company may be prevented from using the claim andmay face further regulatory action. There is no assurance that FDA willnot make any of the aforementioned determinations with regard to theclaims made for any of the company’s products and no assurancethat FDA will find the company’s substantiation evidence forSkinny Water or on any other of our products, if ever requested,adequate to support the claims being made for the company’sproducts.

FDA has already stated in a Courtesy Letter datedSeptember  22,  2005, that the use of the term‘‘water’’ in the name of our‘‘Skinny Water’’ product appears to causeour product to be a bottled water, which is a standardized,conventional food, not a dietary supplement. A ‘‘CourtesyLetter’’ is the term commonly used to describe thewritten letter sent by FDA in response to a 30 Day Letter —it is not a Warning Letter. In its letter, FDA further notes thatas a conventional food, the product must meet the regulatoryrequirements that apply to conventional food rather than thoserequirements that apply to dietary supplements, and in particular thoserequirements that apply to bottled water. We disagree with the positiontaken by FDA that Skinny Water is a ‘‘bottledwater,’’ a conventional food. In response to the CourtesyLetter, we have consulted and are actively working with FDA regulatorycounsel and began a written dialogue with FDA on this issue tohopefully reach a mutually agreeable solution. We have not yet receiveda reply from FDA to our response. Nevertheless, in the event we cannotcome to an agreement with FDA on this issue, we could 1) disagree withFDA and continue marketing until there is an enforcement action (it isalso possible that FDA might choose not to take enforcement action evenif we did not respond to the letter), 2) change our product name sothat it can continue to be marketed as a dietary supplement, or 3)change the labeling of Skinny Water so that it complies with the rulesand regulations applicable to conventional foods including beverages,which would limit the claims that would be made for the product. If theFDA were to decide to bring an enforcement action due to this issue inthe future, it could have a material adverse effect on our consolidatedfinancial position and results of operations. The effect of anenforcement action would depend on what action FDA chooses to take. IfFDA sought to publicize its concerns about our product or seekinjunctive relief (such as product recall or re-labeling), this coulddamage our relationship with our retailers and distributors and forceus to invest in new marketing materials. If we were required to changeour product name or label, it could also harm market acceptance of our

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product and increase our costs in attemptingto establish market acceptance. If our ability to sell our products isharmed, we may not be able to meet the minimum sales requirements underour agreements with Peace Mountain and Jamnica. Further, any monetarypenalties assessed against us, in addition to the costs of defending anenforcement action, would be likely to adversely affect our cashposition.

Recently, the FDA proposed GMPs specifically fordietary supplements. These new GMP regulations, if finalized, would bemore detailed than the GMPs that currently apply to dietary supplementsand may, among other things, require dietary supplements to beprepared, packaged and held in compliance with certain rules, and mightrequire quality control provisions similar to those in the GMPregulations for drugs. There can be no assurance that, if the FDAadopts GMP regulations for dietary supplements, we or our supplierswill be able to comply with the new rules without incurring substantialexpense that might have a have a material adverse effect on ourconsolidated financial position or results of operations.

Ouradvertising and sale of our dietary supplement products are subject toregulation by the FTC under the FTCA. The Federal Trade Commission Act(‘‘FTCA’’) prohibits unfair methods ofcompetition and unfair or deceptive acts or practices in or affectingcommerce. The FTCA provides that the dissemination or the causing to bedisseminated of any false advertisement pertaining to drugs or foods,which would include dietary supplements, is an unfair or deceptive actor practice. Under the FTC’s ‘‘substantiationdoctrine’’, an advertiser is required to have a‘‘reasonable basis’’ for all objectiveproduct claims before the claims are made. Failure to adequatelysubstantiate claims may be considered either deceptive or unfairpractices. Pursuant to this FTC requirement, we are required to haveadequate substantiation for all advertising claims made for ourproducts at the time such claims are made.

In recent years, theFTC has instituted numerous enforcement actions against dietarysupplement companies for failure to adequately substantiate claims madein advertising or for the use of false or misleading advertisingclaims. The FTC has specifically launched a nationwide law enforcementsweep called ‘‘Project Waistline’’ againstcompanies making false and/or unsubstantiated weight loss claims. Theinitiative was created to stop deceptive advertising, provide refundsto consumers harmed by unscrupulous weight-loss advertisers, encouragemedia outlets not to carry advertisements containing bogus weight lossclaims and to educate consumers to be on their guard against companiespromising weight loss without diet or exercise. These enforcementactions have often resulted in consent decrees and the payment ofsubstantial civil penalties and/or restitution by the companiesinvolved. Since our dietary supplement product, Skinny Water, makesweight loss claims on its label, labeling and advertising, there can beno assurance that FTC (or FDA) will not investigate our products.Should FTC choose to investigate, we have no assurance that thecompany’s substantiation evidence for the claims made on SkinnyWater or on any other of our products will be adequate and as a resultenforcement actions/remedies could ensue. In 1994, our Chairman andformer president, Michael Salaman, agreed to a FTC consent decreeresulting from past telemarketing activities and the distribution ofcustomer lists and credit card information while he was with adifferent company. We are aware of this consent decree and, as aresult, are required to maintain compliance with the same and aresubject to an injunction and substantial civil monetary penalties ifthere should be any failure to comply with such consent decree.

Mr.  Salaman as a party to the FTC consent decree, whetheracting in his capacity as an officer of our company or otherwise, isalso required to maintain compliance with the same and is subject to aninjunction and substantial civil monetary penalties if there should beany failure for him to comply. Moreover, Mr.  Salaman may besubject to penalties resulting from an FTC contempt action should he befound in violation of the decree. Civil penalty actions against usand/or against Mr.  Salaman, individually, would likely have amaterial adverse effect on our consolidated financial position andresults of operations. Any FTC action against Mr.  Salamanrelating to activities on our behalf or any of our other officers ordirectors may also result in our being made a defendant in such actionand accordingly, would also be likely to have a material adverse effecton our consolidated financial position and results of operation.Notwithstanding the existence of this FTC consent decree, unless we areengaged in telemarketing activities or certain activities relating tothe transfer of credit card and/or 

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customer information (e.g.selling/purchasing credit card account number and/or expiration dateinformation to/from any third party, using any ‘‘customerlist’’ specifically referenced in the decree), we do notexpect that the terms of the decree will affect us.

OtherRegulatory Considerations

All of our products are importedinto the United States from Croatia. The CBP works closely with FDA atports of entry to determine what products should be detained or refusedand what products should proceed. Imported products are heavilyscrutinized at the border and the CBP and the FDA may refuse admissionof any product that ‘‘appears’’ to be inviolation of federal law. Should CBP or FDA determine that our productsare not in compliance, they could detain or refuse our products at theborder, this would have a material adverse effect on our consolidatedfinancial position or results of operations.

Our products aresubject to state regulation. Under state consumer protection laws,state attorneys general, like the FTC, can bring actions against usshould they believe that the claims being made for any of our productsare not truthful, are misleading and/or if they believe that the claimsare not substantiated. In addition, there are specific state regulatoryrequirements for bottled water (in addition to the federalrequirements) in each state where the bottled water products are sold.Many of these regulations set standards for bottled water that are evenhigher than that of FDA and have separate labeling requirements aswell. A number of states have permit programs and testing requirementsto which companies that market bottled water must adhere if the bottledwater product is going to be sold in those states. In April  2005we received regulatory approval from New York State and in June2005 we received approval from the State of California. We filed forapproval with the State of New Jersey in October  2005 and intendto file for approval in two additional states. States have alsoobtained significant monetary penalties against companies that havesold products with false, misleading or unsubstantiated weight lossclaims.

We may be subject in the future to additional laws orregulations administered by federal, state, local regulatoryauthorities, the repeal or amendment of laws or regulations which weconsider favorable, such as DSHEA, or more stringent interpretations ofcurrent laws or regulations. We cannot predict the nature of futurelaws, regulations, interpretations or applications, nor can we predictwhat effect additional governmental regulations or administrativeorders, when and if promulgated, would have on our business in thefuture. Such future laws and regulations could, however, require thereformulation of products to meet new standards, the recall ordiscontinuance of product that cannot be reformulated, the impositionof additional record keeping requirements, expanded documentation ofproduct efficacy, expanded or modified labeling and scientificsubstantiation, including health warnings or restrictions on benefitsdescribed for our products. Any or all of such requirements couldnegatively impact sales of our products or increase our cost, resultingin a material adverse impact on our operations, consolidated financialposition or results of operations.

EnvironmentalProtection

We are operating within existing federal, stateand local environmental laws and regulations and are taking actionaimed at assuring compliance therewith. Compliance with such laws andregulations is not expected to materially affect our capitalexpenditures, earnings or competitive position.

Number ofEmployees

As of December  31,  2005, we had a totalof twelve employees and three independent contractors providing us withsales, managerial and administrative functions. Our independentcontractors provide services to us on an at-will basis. Our employeesare not subject to any collective bargaining agreement. We believe thatemployee relations are good.

Subsequent Events

InJanuary  2006, we issued an aggregate of 687,500 shares of ourcommon stock and 687,500 warrants to eight ‘‘accreditedinvestors’’ in reliance upon the exemption provided bySection 4(2) of 

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the Securities Act and/or Rule 506 ofRegulation D promulgated thereunder inasmuch as the securities wereissued without any form of general solicitation or general advertisingand the acquirers were accredited investors. The warrants areexercisable at a per share price of $0.75 for a period of five years.The total purchase price for these securities was $275,000 and wereceived net proceeds of $247,500, which are using for working capitaland general corporate purposes. We paid a commission of 10% ofthe gross proceeds of to a registered broker-dealer that acted as ourselling agent and issued it a warrant to purchase 68,750 shares ofcommon stock exercisable at a price of $0.44 per share for a period offive years.

Effective March  8,  2006, we electedMessrs. Christopher Durkin and James Robb to serve as members of ourboard of directors and appointed Mr.  Durkin as our new ChiefExecutive Officer and President, replacing Mr.  MichaelSalaman, who resigned from his employment and officer positions with uson such date. Mr.  Salaman, however, will continue to serve onour board of directors as Chairman and we have agreed to retain him ona consulting basis pursuant to which he will provide us with marketingand product development advice and act as an advisor to our ChiefExecutive Officer. In addition, Mr.  Scott  Perlstein, amember of our board of directors resigned from the board effectiveMarch  8,  2006.

As of March  20,  2006,we issued convertible notes in the aggregate amount of $442,000 toMichael Salaman, our Chairman and former Chief Executive Officer andthree other accredited investors. The Notes are convertible at theoption of the holder, into the securities we issue in any financingtransaction we consummate during the term of the Notes. The Notes aredue one year from the date of issuance and the principal amount of theNotes accrues interest at the rate of 10% per annum, payableupon maturity. The Notes were issued pursuant to Section 4(2) of theSecurities Act of 1933, as amended, as each of the holders is anaccredited investor with access to material information and thesecurities were issued without any form of general solicitation orgeneral advertising. The Notes are restricted securities under theterms of the Securities Act of 1933 and may not be transferred orresold for a period of one year, except pursuant to registration underthe Securities Act or an exemption thereunder.

On March20,  2006, we entered into an agreement with Exclusive BeverageDistributors to serve the New York City and Long Island, N.Y. marketson an exclusive basis. The initial term of this agreement will expireDecember  31,  2009 and we will distribute our Jana NaturalArtesian Water, Jana Flavored Water and Skinny Water products in thedesignated territory pursuant to this agreement. Although thisagreement includes a minimum purchase commitment on behalf of thedistributor, we will need this distributor to exceed that volume inorder to derive meaningful revenues from this relationship.

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RISK FACTORS

The followingdiscussion should be read together with our financial statements andrelated notes appearing elsewhere in this Annual Report. Thisdiscussion contains forward-looking statements based upon currentexpectations that involve numerous risks and uncertainties. Our actualresults could differ materially from those anticipated in theseforward-looking statements for many reasons, including but not limitedto those set forth under ‘‘Risk factors’’and elsewhere in this Annual Report. We undertake no obligation toupdate any information contained in these forward-lookingstatements.

General Risks Related to OurBusiness

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

Weonly have a limited operating history upon which potential investorsmay base an evaluation of our prospects. To date, we have only hadlimited revenues and our business model is subject to a high degree ofrisk. For the year ended December  31,  2005, we earnedrevenues of $514,146. There can be no assurance that we will be able tocontinue 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 anddifficulties frequently encountered by companies in their early stagesof development, particularly companies in a highly competitive market,such as the market in which we compete. Such risks include, but are notlimited to, our ability to obtain and retain customers and attract asignificant number of new customers, the growth of the markets weintend to pursue, our ability to implement our growth strategy,especially the sales and marketing efforts, and the introduction of newproducts by us and our competitors.

We have a historyof operating losses. If we continue to incur operating losses, weeventually may have insufficient working capital to maintainoperations. 

As of December  31,  2005, we had anaccumulated deficit of $7,995,445. For the years endedDecember 31, 2005 and 2004, we incurred losses from operationsof $3,429,846 and $1,188,936, respectively. If we are not able to beginto earn an operating profit at some point in the future, we willeventually have insufficient working capital to maintain our operationsas we presently intend to conduct them.

We have limitedworking capital and will need to raise additional capital in the futureand our independent auditors have included a ‘‘goingconcern’’ opinion in their report. 

AtDecember  31,  2005, our cash and cash equivalents wasapproximately $76,780. We have been substantially reliant on capitalraised from private placements of our securities to fund ouroperations. For instance, during the 2005 fiscal year, we raised anaggregate amount of $3,161,200 from the sale of our convertibledebentures to accredited investors in private placements pursuant toRule 506 of Regulation D under the Securities Act of 1933, as amended.This amount includes an aggregate of approximately $2.4  millionof convertible debentures that were subject to a rescission offer whichexpired on October  31,  2005 and our sale of an additional$165,000 of convertible debentures that were offered concurrently withthe rescission offer. Holders of an aggregate of $160,000 principalamount of convertible debentures elected to accept our rescissionoffer. We also received short-term loans from unaffiliatedthird-parties of approximately $175,000 during the 2005 fiscal year and$45,000 during the current year, of which the principal amount of$146,659 is outstanding. The lender agreed to extend the due date forrepayment of the entire principal amount (plus $4,353 of accrued butunpaid interest) from February  28,  2006 to August24,  2006 on the same terms as the original loan. We also raisedan additional $480,000 during the period of November  2005through February  2006 from the sale of shares of our commonstock and warrants to certain accredited investors in a privatetransaction pursuant to Rule 506 of Regulation D under the SecuritiesAct of 1933. Finally, on March  20,  2006 we received$442,000 from the sale of one year convertible notes to our Chairmanand three other accredited investors.

We believe that net cash onhand as of the date hereof and cash anticipated from operations and tobe raised in private placements of our securities will only besufficient to meet our expected cash 

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needs for working capital and capitalexpenditures for a period of 2 to 4 months. Accordingly, we have animmediate need for additional cash which we must satisfy either byimmediately developing a market for our products, selling additionalsecurities in private placements or by negotiating for an extension ofcredit from third party lenders. If we are unable to obtain additionalcapital, we will need to reduce costs and operations substantially. Ourindependent auditors have included a ‘‘goingconcern’’ explanatory paragraph in their report to ourfinancial statements for the year ended December  31,2005, citing recurring losses from operations. Our capital needs in thefuture will depend upon factors such as market acceptance of ourproducts and any other new products we launch, the success of ourindependent distributors and our production, marketing and sales costs.None of these factors can be predicted with certainty.

If we areunable to achieve sufficient levels of sales to break-even, we willneed substantial additional debt or equity financing in the future forwhich we currently have no commitments or arrangement. We cannot assureyou that any additional financing, if required, will be available or,even if it is available that it will be on terms acceptable to us. Ifwe raise additional funds by selling stock or convertible securities,the ownership of our existing shareholders will be diluted. We arecurrently negotiating with commercial lending companies for a line ofcredit or accounts receivable financing arrangement to assist us inobtaining necessary working capital. No assurances, however, can begiven that we will be able to successfully secure any such financingarrangement. Even if we are able to obtain commercial financing, theterms and conditions applicable to such arrangement may imposerestrictions on our operations.

Further, if additional funds areraised though the issuance of equity or debt securities, suchadditional securities may have powers, designations, preferences orrights senior to our currently outstanding securities and, in the caseof additional equity securities, the ownership of our existingshareholders will be diluted. Any inability to obtain requiredfinancing on sufficiently favorable terms could have a material adverseeffect on our business, results of operations and financial condition.If we are unsuccessful in raising additional capital and increasingrevenues from operations, we will need to reduce costs and operationssubstantially. Further, if expenditures required to achieve our plansare greater than projected or if revenues are less than, or aregenerated more slowly than, projected, we will need to raise a greateramount of funds than currently expected.

Issuances ofour securities are subject to federal and state securities laws andcertain holders of convertible debentures issued by us may be entitledto rescind their purchases and we may have ongoing liability to thesepurchasers under federal law.

From September  2004 toDecember  2004 and from June  2005 through August2005, we offered and sold convertible debentures to investors invarious states. These sales of convertible debentures were subject tofederal and state securities laws and by reason of our failure to fileblue sky notices in connection with the sales we elected, afterconsultation with legal counsel, to offer these purchasers theopportunity to rescind their investment. In such situations, a numberof remedies may be available to regulatory authorities and theinvestors who purchased securities in those offerings, including,without limitation, a right of rescission, civil penalties, seizure ofour assets, a restraining order or injunction, and a court order to payrestitution and costs. As of the date hereof, no state regulatoryauthority has commenced legal action against us. These investors mayhave been entitled to return their securities to us and receive from usthe full price they paid, which we estimated to be an aggregate amountof approximately $2.4  million, plus interest. The rescissionoffer was made pursuant to Section 4(2) of the Securities Act and Rule506 promulgated thereunder and in accordance with applicable statesecurities laws. We relied on these exemptions in that the investorsare accredited and we did engage in general solicitation concerning theoffering. We conducted this rescission offer through the efforts of ourmanagement. We offered to repurchase the debentures subject to ourrescission offer for the original purchase price plus interest from thedate of purchase, at the current statutory rate per year mandated bythe state in which the investors reside. This offer expired as ofOctober  31,  2005. Holders of an aggregate of $160,000 ofdebentures elected to accept this rescission offer and we repaid theseinvestors out of working capital.

We believe that aninvestor’s acceptance of the rescission offer will preclude himor her from later seeking similar relief, and we are unaware of anyfederal or state case law to the contrary. However, it 

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is unclear whether the rescission offer willterminate our liability under the Securities Act of 1933 and certainstate securities laws. The staff of the Securities and ExchangeCommission takes the position that a person’s federal right ofrescission may survive the rescission offer. Accordingly, we maycontinue to be potentially liable under the Securities Act to personsthat rejected the rescission offer for the purchase price of theirsecurities that were not issued in compliance with the Securities Actor applicable state securities laws.

Our letter of credit wassupported by a demand loan and we may be required to repay this amounton the demand of the lender.

We initially received a letter ofcredit through Wachovia Bank in the amount of $500,000. We utilized$314,000 against this facility in order to acquire product from Jamnicafor delivery into the United States. This letter of credit wassupported by a demand loan (line of credit) through Madison Bank. As ofJune  1,  2005, our obligations were transferred to MadisonBank, a division of Leesport Bank. As a demand loan, the lender has theright, at any time, to call the entire amount payable in itsdiscretion. Accordingly, the lender may seek repayment at a time whenour available capital resources are not sufficient. In such a case, ifwe are unable to negotiate alternative payment terms, we could beforced to immediately repay the outstanding balance due on the note,which would likely have a material adverse effect on our business,results of operations and financial condition.

Fluctuations inour quarterly revenue and results of operations may lead to reducedprices for our stock.

Our quarterly net revenue and results ofoperations can be expected to vary significantly in the future. Thebusiness in which we compete experiences substantial seasonality causedby the timing of customer orders and fluctuations in the size and rateof growth of consumer demand. In other particular fiscal quarters, ournet revenues may be lower and vary significantly. As a result, wecannot assure you that our results of operations will be consistent ona quarterly or annual basis. If our results of operations in a quarterfall below our expectations or those of our investors, the price of ourcommon stock will likely decrease.

Our revenues will decline andour competitive position will be adversely affected if we are unable tointroduce successful products on a timely basis.

Ourbusiness performance depends on the timely introduction of successfulproducts or enhancements of existing products. Our inability tointroduce products or enhancements, or significant delays in theirrelease, could materially and adversely affect the ultimate success ofour products and, in turn, our business, results of operations andfinancial condition. The process of introducing products or productenhancements is extremely complex, time consuming and expensive.

Our business is subject to many regulations and noncompliance iscostly.

The production, marketing and sale of our beverages anddietary supplement product, including contents, labels, caps andcontainers, and claims made for our products are subject to the rulesand regulations of various federal, provincial, state and local healthagencies, including the U.S. Food and Drug Administration and theFederal Trade Commission. If a regulatory authority or any stateattorney general were to find that a current or future product orproduction run is not in compliance with any of these regulations orthat any of the claims made for our products are false, misleading ornot adequately substantiated, we may be fined, production may bestopped or we may be forced to make significant changes to the productsor claims made for them, thus adversely affecting our financialconditions and operations. Similarly, any adverse publicity associatedwith any noncompliance may damage our reputation and our ability tosuccessfully market our products. As we have already received aCourtesy Letter from the FDA questioning the use of the term‘‘water’’ in the name of our dietarysupplement product ‘‘Skinny Water,’’ a FDAenforcement action in the future with regard to this issue is possible.If we do not make changes to the product name and labeling, or in thealternative, fail to reach an agreement with the FDA, it could increasethe likelihood of such an 

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enforcement action. Any enforcement actioncould have a material adverse effect on our consolidated financialcondition and results of operations. The effect of an enforcementaction would depend on what action FDA chooses to take. If FDA soughtto publicize its concerns about our product or seek injunctive relief(such as product recall or re-labeling), this could damage ourrelationship with our retailers and distributors and force us to investin new marketing materials. If we were required to change our productname or label, it could also harm market acceptance of our product andincrease our costs in attempting to establish market acceptance. If ourability to sell our products is harmed, we may not be able to meet theminimum sales requirements under our agreements with Peace Mountain andJamnica. Further, any monetary penalties assessed against us, inaddition to the costs of defending an enforcement action, would belikely to adversely affect our cash position. The rules and regulationsof FDA, FTC and other federal, provincial, state and local agencies aresubject to change from time to time and while we closely monitordevelopments in this area, we have no way of anticipating whetherchanges in these rules and regulations will impact our businessadversely. Additional or revised regulatory requirements, whetherlabeling, environmental, tax or otherwise, could have a materialadverse effect on our financial condition and results ofoperations.

The bottled water and dietary supplement industriesare highly regulated at both the state and federal level.

Themanufacture, packaging, labeling, advertising, promotion, distributionand sale of our products are subject to regulation by numerousgovernmental agencies which regulate our products. Our products aresubject to regulation by, among other regulatory entities, the Food andDrug Administration (‘‘FDA’’), FederalTrade Commission (‘‘FTC’’), U.S. Customsand Border Protection (‘‘CBP’’) and theEnvironmental Protection Agency (‘‘EPA’’).Advertising and other forms of promotion and methods of marketing ofour products are subject to regulation by the FTC which regulates theseactivities under the Federal Trade Commission Act(‘‘FTCA’’). The manufacture, labeling andadvertising of our products are also regulated by various state andlocal agencies as well as those of each foreign country to which wedistribute our products. If we are unable to comply with applicableregulations and standards in any jurisdiction, we might not be able tosell our products in that jurisdiction, and our business could beseriously harmed.

Regulation of Bottled Water

TheUnited States Food and Drug Administration(‘‘FDA’’) regulates bottled water as afood. Our bottled water must meet FDA requirements of safety for humanconsumption, labeling, processing and distribution under sanitaryconditions and production in accordance with the FDA‘‘good manufacturing practices.’’ To assurethe safety of bottled water, the FDA has established quality standardsthat address the substances that may be present in water which may beharmful to human health as well as substances that affect the smell,color and taste of water. FDA’s quality standards for bottledwater also require public notification whenever the microbiological,physical, chemical or radiological quality of bottled water falls belowstandard. We also must meet state regulations in a variety of areas.These regulations set standards for registration, approved watersources, water purity, safety and labeling. Failure to comply with suchlaws and regulations could result in fines against us, a temporary orpermanent shutdown of production, recalls of the product, loss of statecertification to market the product or, even in the absence ofgovernmental action, loss of revenue as a result of adverse marketreaction to negative publicity. Any such event could have a materialadverse effect on our business. We cannot assure you that we have beenor will at all times be in compliance with all regulatory requirementsor that we will not incur material costs or liabilities in connectionwith regulatory requirements.

Regulation of DietarySupplements

Our ‘‘Skinny Water’’product is regulated as a dietary supplement under the Federal Food,Drug and Cosmetic Act (’’FFDCA’’), and is,therefore, not subject to pre-market approval by the FDA. However, thisproduct is subject to extensive regulation by the FDA relating toadulteration and misbranding. For instance, we are responsible forensuring that all dietary ingredients in a supplement 

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are safe, and must notify the FDA in advanceof putting a product containing a new dietary ingredient (i.e., aningredient not present in the U.S. food supply as an article used forfood before October 15, 1994) on the market and furnish adequateinformation to provide reasonable assurance of the ingredient’ssafety. Furthermore, if we make statements about thesupplement’s effects on the structure or function of the body,we must, among other things, have adequate substantiation that thestatements are truthful and not misleading. In addition, our productlabels must bear proper ingredient and nutritional labeling and ourproducts must be manufactured in accordance with current goodmanufacturing practices or ’’GMPs’’ forfoods. The FDA has published notice of its intention to issue new GMPsspecific to dietary supplements, which, when finally adopted may bemore expensive to follow than prior GMPs. A dietary supplement productcan be removed from the market if it is shown to pose a significant orunreasonable risk of illness or injury. Moreover, if the FDA determinesthat the ‘‘intended use’’ of any of theCompany’s products is for the diagnosis, cure, mitigation,treatment or prevention of disease, the product would meet thedefinition of a drug and could not be sold as a dietary supplementuntil such time that the ‘‘intended use’’of the product is not for the diagnosis, cure, mitigation, treatment orprevention of disease. Our failure to comply with applicable FDAregulatory requirements may result in, among other things, injunctions,product withdrawals, recalls, product seizures, fines and criminalprosecutions.

As described above under the heading‘‘Government Regulation,’’ the FDA hasalready stated in a Courtesy Letter dated September  22,2005, that the use of the term ‘‘water’’ inthe name of ‘‘Skinny Water’’ appears tocause this product to be a bottled water, which is a standardized,conventional food, not a dietary supplement. FDA’s position willrequire compliance with regulatory requirements applicable toconventional food rather than those that apply to dietary supplements.We disagree with the position taken by FDA and are actively workingwith regulatory counsel to attempt to reach a mutually agreeablesolution with FDA. In the event we cannot reach an agreement with FDA,the agency could choose to bring an enforcement action against us,which could have a material adverse effect on our consolidatedfinancial position or results and operations.

Our advertising of‘‘Skinny Water’’ is subject to regulationby the FTC under the FTCA, which prohibits unfair methods ofcompetition and unfair or deceptive acts or practices in or affectingcommerce. Further, the FTCA provides that the dissemination or thecausing to be disseminated of any false or misleading advertisementpertaining to, among other things, drugs or foods, which includesdietary supplements, is an unfair or deceptive act or practice. Underthe FTC’s ‘‘substantiationdoctrine,’’ an advertiser is required to have a‘‘reasonable basis’’ for all product claimsat the time the claims are first used in advertising or otherpromotions. Failure to adequately substantiate claims may be consideredeither as a deceptive or unfair practice. Pursuant to this FTCrequirement, we are required to have adequate substantiation for alladvertising claims made about our products. The type of substantiationwill be dependent upon the product claims made. For example, a healthclaim normally would require competent and reliable scientificevidence, while a taste claim may only require competent and reliablesurvey evidence.

In recent years the FTC has initiated numerousinvestigations of dietary supplement and weight loss products andcompanies. The FTC has specifically launched a nationwide lawenforcement sweep called ‘‘ProjectWaistline’’ against companies making false and/orinadequately substantiated weight loss claims. The initiative wascreated to stop deceptive advertising, provide refunds to consumersharmed by unscrupulous weight-loss advertisers, encourage media outletsnot to carry advertisements containing bogus weight loss claims and toeducate consumers to be on their guard against companies promisingweight loss without diet or exercise. These enforcement actions haveoften resulted in consent decrees and the payment of substantial civilpenalties and/or restitution by the companies involved. If the FTC hasreason to believe the law is being violated (e.g., we do not possessadequate substantiation for product claims), it can initiateenforcement action. The FTC has a variety of processes and remediesavailable to it for enforcement, both administratively and judicially,including compulsory process authority, cease and desist orders andinjunctions. FTC enforcement could result in orders requiring, amongother things, limits on advertising, consumer redress, divestiture ofassets, rescission of contracts and such other relief as may be deemednecessary. Violation of such orders 

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could result in substantial financial orother penalties. Any such action by the FTC would materially adverselyaffect our ability to successfully market our products.

We arenot currently a party to any investigation, consent order or otherdecree of the FTC. We may be subject to investigation by the FTC in thefuture. However, in 1994 our Chairman, Michael Salaman, entered into aFTC consent decree resulting from past telemarketing activities and thedistribution of customer lists and credit card information while he waswith a different company. We are aware of this consent decree and, as aresult, are required to maintain compliance with the same and aresubject to an injunction and substantial civil monetary penalties ifthere should be any failure to comply with such consent decree. Civilpenalty actions could have a material adverse effect on ourconsolidated financial position or results of operations.

Oursuccess is dependent on the performance and integration of our newChief Executive Officer and the cooperation and performance of ourformer CEO.

Christopher Durkin joined as our new chiefexecutive officer on March  8,  2006. Our business andoperations are substantially dependent on the performance andintegration of our new CEO as well as the performance and cooperationof our former chief executive officer who is providing us with servicespursuant to a consulting arrangement and continues to serve on ourboard of directors. These persons have worked together for only a shortperiod of time. Inherent with changes in management is a change inunderstanding of the control environment, the business processes andinternal controls. If we are unable to successfully integrate newexecutives into our operations, it may adversely impact our results ofoperations and financial condition.

If we lose key personnel orfail to integrate replacement personnel successfully, our ability tomanage our business could be impaired.

Our future successdepends upon the continued service of our key management as well asupon our ability to attract, motivate and retain highly qualifiedemployees with management, marketing, sales, creative and other skills.Currently, all of our employees are at-will and we cannot assure youthat we will be able to retain them. The loss of any key employee couldresult in significant disruptions to our operations, includingadversely affecting the timeliness of product releases, the successfulimplementation and completion of company initiatives, the effectivenessof our disclosure controls and procedures and our internal control overfinancial reporting, and the results of our operations. In addition,hiring, training, and successfully integrating replacement sales andother personnel could be time consuming, may cause additionaldisruptions to our operations, and may be unsuccessful, which couldnegatively impact future revenues. Further, our business, operatingresults and financial condition could also be materially and adverselyaffected if we fail to attract additional highly qualified employees.In our industry, competition for highly skilled and creative employeesis intense and costly. We expect this competition to continue for theforeseeable future, and we may experience increased costs in order toattract and retain skilled employees. We cannot assure you that we willbe successful in attracting and retaining skilled personnel.

Significant competition in our industry could adversely affect ourbusiness.

Our market is highly competitive and relativelyfew products achieve significant market acceptance. Our competitorsinclude Evian, Contrex, Fiji, and other imported sourced bottledwaters. Further, the market for dietary supplements is also highlycompetitive and our competitors include well known brands such as Fuzeand SoBe. These current and future competitors may also gain access towider distribution channels than we do. As a result, these current andfuture competitors may be able to:

|  |              |                                                                                        |
|--|--------------|----------------------------------------------------------------------------------------|
|  | •  | respond more quickly to new or emergingtechnologies or changes in customerpreferences; |

|  |              |                          |
|--|--------------|--------------------------|
|  | •  | carry largerinventories; |

|  |              |                                                  |
|--|--------------|--------------------------------------------------|
|  | •  | undertake more extensivemarketing campaigns; and |

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | adopt moreaggressive pricing policies. |

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We may not have the resources requiredfor us to respond effectively to market or technological changes or tocompete successfully with current and future competitors. Increasedcompetition may also result in price reductions, reduced gross marginsand loss of market share, any of which could have a material adverseeffect on our business, results of operations or financial condition.We cannot assure you that we will be able to successfully competeagainst our current or future competitors or that competitive pressureswill not have a material adverse effect on our business, results ofoperations and financial condition.

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

We must engage distributorsto sell our products principally to major retailers and chainsincluding supermarkets, health clubs and convenience stores. As ofMarch  20,  2006, we have established relationships witheleven distributors in twelve markets across the United States forSkinny Water and Jana Natural Artesian Water. Other than our New Yorkdistributor, these relationships are on a purchase-order basis and noneof our distributors are subject to significant minimum purchasecommitments. Accordingly, we cannot assure any given level ofperformance. Although we have received approximately $380,000 throughpurchase orders from distribution and direct retail accounts throughFebruary  28,  2006, these are one-time orders and we donot have any assurance that these accounts will result in recurringorders.

The poor performance of our distributors, retailers orchains or our inability to collect accounts receivable from ourdistributors, retailers or chains could materially and adversely affectour results of operations and financial condition. In addition,distributors and retailers of our products offer products which competedirectly with our products for retail shelf space and consumerpurchases. Accordingly, there is a risk that distributors or retailersmay give higher priority to products of our competitors. In the future,our distributors and retailers may not continue to purchase ourproducts or provide our products with adequate levels of promotionalsupport. Accordingly, there can be no assurance that we will be ablesuccessfully to sell, market, commercialize or distribute our productsat any time in the future.

As described above, we terminated ourrelationship with Big Geyser, Inc., our former New York City areadistributor in January  2006. We do not believe that thetermination of our agreement with Big Geyser will have a materialadverse impact on our operations as we recently entered into along-term agreement with a distributor in the New York City market.However, as this agreement does not include significant purchasecommitments, we cannot guarantee that this new distributionrelationship will result in meaningful revenues for us. In addition,Big Geyser has disputed our ability to terminate the agreement forcause and has filed a notice of arbitration against us with theAmerican Arbitration Association seeking damages in the amount of$175,236. An adverse outcome in this matter would be likely toadversely affect our cash flow, financial condition and results ofoperations. In such an event we would need to allocate our availablecash resources from marketing and operating purposes in order tosatisfy this obligation, which could adversely impact our futureoperating results. For more information, see the disclosure under thecaption ‘‘Legal Proceedings,’’below.

We will rely heavily on our independentdistributors, and this could affect our ability to efficiently andprofitably distribute and market our products, maintain our existingmarkets and expand our business into other geographic markets.

Our ability to establish a market for our unique brands andproducts in new geographic distribution areas, as well as maintain andexpand our existing markets, is dependent on our ability to establishand maintain successful relationships with reliable independentdistributors strategically positioned to serve those areas. Although wehave established relationships with distributors in a number of marketsacross the United States for our products, we currently do not have anylong-term, written distribution agreements with significant minimumpurchase commitments. For example, although our new agreement with ourNew York City distributor includes a minimum purchase commitment, wewill need this distributor to exceed that volume in order to derivemeaningful 

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revenues from this relationship. Further, weexpect that any distributor we engage with will sell and distributecompeting products, and our products may represent a small portion oftheir business. Further, we are actively engaged in efforts to enlistother distributors to carry our products in other markets where we mayintroduce our products. To the extent that our distributors aredistracted from selling our products or do not employ sufficientefforts in managing and selling our products, our sales andprofitability will be adversely affected. Our ability to maintain ourdistribution network and attract additional distributors will depend ona number of factors, many of which are outside our control. Some ofthese factors include:

|  |              |                                                                                  |
|--|--------------|----------------------------------------------------------------------------------|
|  | •  | the level ofdemand for our brands and products in a particular distributionarea, |

|  |              |                                                                                                     |
|--|--------------|-----------------------------------------------------------------------------------------------------|
|  | •  | our ability to price our productsat levels competitive with those offered by competing products,and |

|  |              |                                                                                         |
|--|--------------|-----------------------------------------------------------------------------------------|
|  | •  | our ability to deliver products inthe quantity and at the time ordered by distributors. |

We cannotensure that we will be able to meet all or any of these factors in anyof our current or prospective geographic areas of distribution. Ourinability to achieve any of these factors in a geographic distributionarea will have a material adverse effect on our relationships with ourdistributors in that particular geographic area, thus limiting ourability to expand our market, which will likely adversely effect ourrevenues and financial results.

We will incur significant timeand expense in attracting additional distributors for ourproducts.

Our marketing and sales strategy presently, and inthe future, will rely on the availability and performance of ourindependent distributors. We currently do not have any long-term,written distribution agreements with significant minimum purchasecommitments. We intend to enter into written agreements with keydistributors for varying terms and duration; however, many distributionrelationships may be based solely on purchase orders and terminable byeither party at will. We do not anticipate that in the future we willbe able to establish, long-term contractual commitments from many ofour distributors. In addition, we cannot provide any assurance as tothe level of performance by our distributors under such agreements,that these agreements will include minimum purchase commitments by thedistributors or that those agreements will not be terminated early.Moreover, there is the possibility that we may have to incursignificant additional expenditures or agree to additional obligationsto attract and maintain key distributors in one or more of ourgeographic distribution areas in order to profitably exploit ourgeographic markets, including the granting of exclusive rights for adefined territory or imposition of termination payments. For example,as part of our exclusive distribution agreement with our New York Citydistributor, we agreed that if we terminate the agreement withoutcause, we will pay them an amount equal to the pre-tax gross profitmultiplied by the number of cases of product purchased by them duringthe previous twelve months. There is no assurance that we will be ableto establish distribution relationships or maintain successfulrelationships with distributors in our geographic distribution areas.If we are unable to establish or maintain successful distributionrelationships, our business, financial condition, results of operationsand cash flows will be adversely affected.

We need toeffectively manage our growth and execution of our business plan. Anyfailure to do so would negatively impact our profitability.

Tomanage operations effectively and maintain profitability, we mustcontinue to improve our operational, financial and other managementprocesses and systems. Our success also depends largely on our abilityto maintain high levels of employee utilization, to manage ourproduction costs and general and administrative expense, and otherwiseto execute on our business plan. We need to maintain adequateoperational controls and focus as we add new brands and products,distribution channels, and business strategies. There are no assurancesthat we will be able to effectively and efficiently manage our growth.Any inability to do so, could increase our expenses and negativelyimpact our profit margin.

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We rely on our agreements with PeaceMountain and InterHealth Nutraceuticals for our Skinny Waterproduct.

Our Skinny Water product is available to us through ourlicense agreement with Peace Mountain. Peace Mountain holds theproprietary rights to the Skinny Water brand and grants Creative theright to distribute the Skinny Water product pursuant to the terms ofan exclusive license agreement. In addition, we purchase the keyingredient to Skinny Water, Super CitriMax, from a single provider,InterHealth Nutraceuticals, on a non-exclusive basis. Our Skinny Waterproduct is an important element of our business strategy and we expectto derive a substantial amount of business from this product. We cannotprovide assurance that we will achieve expected sales levels from thisrelationship. Further, Peace Mountain and InterHealth may eachterminate their agreements with Creative due to Creative’sfailure to comply with its contractual obligations. If either PeaceMountain or InterHealth terminates the agreement, we will not be ableto successfully market Skinny Water. In the event either Peace Mountainor InterHealth elects to terminate its relationship with Creative, ourbusiness, financial condition, results of operations and cash flowswill be significantly harmed.

We rely on our agreement withJamnica for our product lines.

We license the right to bottleand distribute our entire line of Jana products from Jamnica. Jamnicais the manufacturer of these products and has granted us the exclusiveright to distribute them in North America. The Jana product line is thekey element of our business strategy and we expect to derive asubstantial amount of business from this product. We cannot provideassurance that we will achieve expected sales levels from thisrelationship. Further, this Agreement will expire one year from thedate we obtain certain government approvals unless we satisfy minimumsales volumes, in which event, the agreement will automatically renewfor additional one year terms. Alternatively, if we are unable tosatisfy these targets, Jamnica may elect to continue the agreement butappoint additional distributors in our territory. As described above,we have begun discussions with Jamnica to modify these targets orotherwise modify the agreement. If Jamnica terminates the agreement orit is not renewed, we will not generate meaningful revenue from therelationship and will not recoup valuable time and resources expendedin negotiating and consummating the agreement and our business strategyto market and distribute this line of waters. Further, in such asituation, we will incur additional costs in developing productalternatives. This would significantly strain our cash resources andwould be likely to result in a material adverse effect on our resultsof operations and financial condition. Further, if Jamnica elects toappoint others distributors, it could adversely impact our results ofoperation and financial condition.

Since we acquire our waterfrom Croatia, we are exposed to additional risks that could increaseour expenses and adversely affect our operating results.

Weacquire our artesian water from Jamnica, which is based in Croatia.Because of this we are exposed to financial and operational risks thatmay be greater than if we sourced our artesian water in the UnitedStates. These risks include:

|  |              |                                                                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Impositionof foreign laws and other governmental controls, including traderestrictions and related laws that increase the costs of ourpurchases. |

|  |              |                                                                                                                                                              |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Fluctuations in currencyexchange rates and economic instability such as higher interest ratesand inflation, which could increase our costs of doingbusiness. |

|  |              |                                                               |
|--|--------------|---------------------------------------------------------------|
|  | •  | Seasonal reductions in businessactivity in the summer months. |

|  |              |                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------|
|  | •  | Politicalunrest, war, or terrorism, particularly in areas in which we havefacilities. |

We have limited the liability of our directors.

The General Corporation Law of Nevada permits provisions in thearticles, by-laws or resolutions approved by stockholders which limitliability of directors for breach of fiduciary duty to certainspecified circumstances, namely, breach of their duties of loyalty,acts or omissions not in good faith or 

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which involve intentional misconduct orknowing violation of law; acts involving unlawful payment of dividendsor unlawful stock purchases or redemptions, or any transaction fromwhich a director derived an improper personal benefit. Our Amended andRestated By-laws indemnify the Officers and Directors to the fullextent permitted by Nevada law. The By-laws (with these exceptions)eliminates any personal liability of a Director to the stockholders formonetary damages for breach of a Director's fiduciary duty.Therefore, a Director cannot be held liable for damages to theshareholders for gross negligence or lack of due care in carrying outhis fiduciary duties as a Director. Our Articles may provide forindemnification to the full extent permitted under law, which includesall liability, damages and costs or expenses arising from or inconnection with service for, employment by, or other affiliation withthe company to the full extent and under all circumstances permitted bylaw. Indemnification is permitted under Nevada law if a director orofficer acts in good faith in a manner reasonably believed to be in, ornot opposed to, the best interests of the corporation. A director orofficer must be indemnified as to any matter in which he successfullydefends himself. Indemnification is prohibited as to any matter inwhich the director or officer is adjudged liable to the corporation.Insofar as indemnification for liabilities arising under the SecuritiesAct may be permitted to directors, officers, and controlling personspursuant to the foregoing provisions or otherwise, management has beenadvised that in the opinion of the Commission such indemnification isagainst public policy as expressed in the Securities Act and will begoverned by the final adjudication of suchissue.

Certain Factors Relating to OurIndustry

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

Our business issubstantially dependent upon awareness and market acceptance of ourproducts and brands by our targeted consumers, between the ages of 18and 34. In addition, our business depends on acceptance by ourindependent distributors of our brands as beverage brands that have thepotential to provide incremental sales growth rather than reducedistributors’ existing beverage sales. It is too early in theproduct life cycle of our brands to determine whether our products andbrands will achieve and maintain satisfactory levels of acceptance byindependent distributors and retail consumers. We believe that thesuccess of our brands will be substantially dependent upon acceptanceof our brand by consumers, distributors and retailers. Accordingly, anyfailure of our brand to maintain or increase acceptance or marketpenetration would likely have a material adverse affect on our revenuesand financial results.

Competition from traditionalnon-alcoholic beverage manufacturers may adversely affect ourdistribution relationships and may hinder development of our existingmarkets, as well as prevent us from expanding ourmarkets.

The bottled-water and non-alcoholic beverageindustry is highly competitive. We compete with other beveragecompanies not only for consumer acceptance but also for shelf space inretail outlets and for marketing focus by our distributors, all of whoalso distribute other beverage brands. Our products compete with allnon-alcoholic beverages, most of which are marketed by companies withgreater financial resources than what we have. Some of thesecompetitors are placing severe pressure on independent distributors notto carry competitive alternative or New Age beverage brands such asours. We also compete with regional beverage producers and‘‘private label’’ soft drink suppliers.Some of our direct competitors include Poland Spring, Fiji, Evian,Cadbury Schweppes (Snapple, Stewart, Nantucket Nectar, Mystic), JonesSodas, Boylans and Hansens. Increased competitor consolidations, marketplace competition, particularly among branded beverage products, andcompetitive product and pricing pressures could impact our earnings,market share and volume growth. If, due to such pressure or othercompetitive threats, we are unable to sufficiently maintain or developour distribution channels, we may be unable to achieve our currentrevenue and financial targets. As a means of maintaining and expandingour distribution network, we intend to introduce product extensions andadditional brands. There can be no assurance that we will be able to doso or that other companies will not be more successful in this regardover the long term. Competition, 

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particularly from companies with greaterfinancial and marketing resources than us, could have a materialadverse affect on our existing markets, as well as our ability toexpand the market for our products.

We may face intellectualproperty infringement claims and other litigation which would be costlyto resolve.

We are not aware that any of our productsinfringe on the proprietary rights of third parties. However, we cannotassure you that third parties will not assert infringement claimsagainst us in the future with respect to current or future products.There has been substantial litigation in the industry regardingcopyright, trademark and other intellectual property rights. Whetherbrought by or against us, these claims can be time consuming, result incostly litigation and divert management’s attention from ourday-to-day operations, which can have a material adverse effect on ourbusiness, operating results and financial condition. Further, similarto our competitors, we will likely become subject to litigation. Suchlitigation may be costly and time consuming and may divertmanagement’s attention from our day-to-day operations. Inaddition, we cannot assure you that such litigation will be ultimatelyresolved in our favor or that an adverse outcome will not have amaterial adverse effect on our business, results of operations andfinancial condition.

We may face increased competition anddownward price pressure if we are unable to protect our intellectualproperty rights.

Our business is heavily dependent upon ourconfidential and proprietary intellectual property. We rely primarilyon a combination of confidentiality and non-disclosure agreements,patent, copyright, trademark and trade secret laws, as well as otherproprietary rights laws and legal methods, to protect our proprietaryrights. However, current U.S. and international laws afford usonly limited protection. Despite our efforts to protect our proprietaryrights, unauthorized parties may attempt to copy our products or obtainand use information that we regard as proprietary. Furthermore, thelaws of some foreign countries may not protect our proprietary rightsto as great an extent as U.S. law. Our business, results ofoperations and financial condition could be adversely affected if asignificant amount of unauthorized copying of our products were tooccur or if other parties develop products substantially similar to ourproducts. We cannot assure you that our attempts to protect ourproprietary rights will be adequate or that our competitors will notindependently develop similar or competitive products.

Ourbusiness will be adversely affected by a decline in the consumption ofproducts we sell.

Although there have been increases inconsumption of beverages in most of our product categories, there havebeen periods in the past in which there were substantial declines inthe overall per capita consumption of beverage products in the UnitedStates and other markets in which we participate. A limited or generaldecline in consumption in one or more of our product categories couldoccur in the future due to a variety of factors.

Wecompete in an industry characterized by rapid changes in consumerpreferences, so our ability to continue developing new products tosatisfy our consumers’ changing preferences will determine ourlong-term success. 

Our current market distribution andpenetration may be limited with respect to the population as a whole todetermine whether the brand has achieved initial consumer acceptance,and there can be no assurance that this acceptance will ultimately beachieved. Based on industry information and our own experience, webelieve that in general alternative or New Age beverage brands andproducts may be successfully marketed for five to nine years after theproduct is introduced in a geographic distribution area beforeconsumers’ taste preferences change, although some brands orproducts have longer lives. In light of the limited life foralternative or New Age beverage brands and products, a failure tointroduce new brands, products or product extensions into themarketplace as current ones mature could prevent us from achievinglong-term profitability. In addition, customer preferences are alsoaffected by factors other than taste, such as the recent media focus onobesity in youth. If we do not adjust to respond to these and otherchanges in customer preferences, our sales may be adverselyaffected.

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We expect our sales to be affected byseasonality.

It is typical in the beverage industry toexperience a significant impact of seasonality on sales. Some of ourcompetitors may experience over 60% of its sales between themonths of April and September in a typical year. As a result, we expectthat our working capital requirements and cash flow will varysubstantially throughout the year. Consumer demand for our products isalso affected by weather conditions. Cool, wet spring or summer weathercould result in decreased sales of our beverages and could have anadverse effect on our results of operations.

We could beexposed to product liability claims for personal injury or possiblydeath.

Although we have product liability insurance in amountswe believe are adequate, we cannot assure that the coverage will besufficient to cover any or all product liability claims. To the extentour product liability coverage is insufficient, a product liabilityclaim would likely have a material adverse affect upon our financialcondition. In addition, any product liability claim successfullybrought against us may materially damage the reputation of ourproducts, thus adversely affecting our ability to continue to marketand sell that or other products.

Certain FactorsRelated to Our Common Stock

Because ourcommon stock is traded on the Pink Sheets, a shareholder’sability to sell shares in the secondary trading market may be limited.

Our common stock is currently listed for trading in theUnited States on the Pink Sheets. As a result, an investor may find itmore difficult to dispose of or to obtain accurate quotations as to theprice of our securities than if the securities were traded on theNasdaq Stock Market or another national exchange, like The New YorkStock Exchange or American Stock Exchange. Further, although we intendto pursue listing on the Over the Counter BulletinBoard® (OTCBB®), we cannot assuresuch listing may in fact transpire given that the SEC and the NationalAssociation of Securities Dealers are collectively responsible forauthorizing such listing and such authorization may not be forthcomingdue to circumstances not under our control. In such an event, we wouldcontinue to be listed on the Pink Sheets, which may make it moredifficult for you to dispose of our securities.

Becauseour common stock is considered a ‘‘pennystock,’’ a shareholder may have difficulty selling sharesin the secondary trading market. 

In addition, our commonstock is subject to certain rules and regulations relating to‘‘penny stock’’ (generally defined as anyequity security that is not quoted on the Nasdaq Stock Market and thathas 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 salesin certain nonexempt transactions (i.e., sales to persons other thanestablished customers and institutional ‘‘accreditedinvestors’’), including requiring delivery of a riskdisclosure document relating to the penny stock market and monthlystatements disclosing recent price information for the penny stock heldin the account, and certain other restrictions. For as long as ourcommon stock is subject to the rules on penny stocks, the marketliquidity for such securities could be significantly limited. This lackof liquidity may also make it more difficult for us to raise capital inthe future through sales of equity in the public or privatemarkets.

The price of our common stock may bevolatile, and a shareholder’s investment in our common stockcould suffer a decline in value. 

There has been significantvolatility in the volume and market price of our common stock, and thisvolatility may continue in the future. In addition, there is a greaterchance for market volatility for securities that trade on the PinkSheets as opposed to a national exchange or quotation system. Thisvolatility may be caused by a variety of factors, including the lack ofreadily available quotations, the absence of consistent administrativesupervision of ‘‘bid’’ and‘‘ask’’ quotations and generally lowertrading volume. In addition, factors such as quarterly variations inour operating results, changes in financial estimates by securitiesanalysts or our failure to meet our or their projected financial and

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operating results, litigation involving us,general trends relating to the beverage industry, actions bygovernmental agencies, national economic and stock marketconsiderations as well as other events and circumstances beyond ourcontrol could have a significant impact on the future market price ofour common stock and the relative volatility of such market price. Theprice of our common stock has been and could continue to be subject towide fluctuations in response to certain factors, including, but notlimited to, the following:

|  |              |                                                       |
|--|--------------|-------------------------------------------------------|
|  | •  | quarter toquarter variations in results ofoperations; |

|  |              |                                   |
|--|--------------|-----------------------------------|
|  | •  | our announcements of newproducts; |

|  |              |                                                      |
|--|--------------|------------------------------------------------------|
|  | •  | our competitors’announcements of new products; |

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | generalconditions in the beverage industry;or |

|  |              |                                                                                                                                                   |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | investor and customer perceptions andexpectations regarding our products, plans and strategic position andthose of our competitors and customers. |

Additionally, the publicstock markets experience extreme price and trading volume volatility.This volatility has significantly affected the market prices ofsecurities of many companies for reasons often unrelated to theoperating performance of the specific companies. These broad marketfluctuations may adversely affect the market price of our commonstock.

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

As ofApril  11,  2006, of the 16,105,000 issued and outstandingshares of our Common Stock, approximately 12,103,789 shares may bedeemed ‘‘restricted shares’’ and, in thefuture, may be sold in compliance with Rule 144 under the securitiesAct of 1933, as amended. Rule 144 provides that a person holdingrestricted securities for a period of one year may sell in brokeragetransactions an amount equal to 1% of our outstanding CommonStock every three months. A person who is a‘‘non-affiliate’’ of our Company and whohas held restricted securities for over two years is not subject to theaforesaid volume limitations as long as the other conditions of theRule are met. Possible or actual sales of our Common Stock by certainof our present shareholders under Rule 144 may, in the future, have adepressive effect on the price of our Common Stock in any market whichmay develop for such shares. Such sales at that time may have adepressive effect on the price of our Common Stock in the openmarket.

There are a significant number of outstandingsecurities convertible or exercisable into shares of common stock, theconversion or exercise of which may have a dilutive effect on the priceof our common stock. 

As of December  31,  2005,there were outstanding and immediately exercisable options to purchase160,000 shares of Common Stock and other warrants to purchase 2,950,500shares of Common Stock. In addition, we sold an aggregate amount of$3,161,200 of convertible debentures in recently completed privateplacements, including convertible debentures that were subject to therescission offer and our sale of an additional $165,000 of convertibledebentures which were concurrently offered. As of December31,  2005, there was outstanding $2,636,000 of convertibledebentures due to the decision by certain holders to convert theirdebentures into common stock and warrants. As of December31,  2005, the holders of our outstanding convertible debentureshave the right to convert their convertible debentures into anaggregate of 6,590,000 shares of Common Stock and an additional6,590,000 warrants. The shares underlying our outstanding convertibledebentures represent approximately 30.2% of our common stock,the shares underlying warrants (including the warrants that areissuable upon conversion of the debentures) represent approximately29.9% of our common stock, and the shares underlying ourcurrently outstanding options represents less that 1% of ourcommon stock. The conversion or exercise of these securities will causedilution to our shareholders and the sale of the underlying CommonStock (or even the potential of such exercise or sale) may have adepressive effect on the market price of our securities. Moreover, theterms upon which we will be able to obtain additional equity capitalmay be adversely affected, since the holders of the outstanding optionsand 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 morefavorable to us than the exercise terms provided by the outstandingoptions and warrants.

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Our Board of Directors has theability to issue ‘‘blank check’’ PreferredStock.

Our Certificate of Incorporation authorizes theissuance of up to 1,000,000 shares of ‘‘blankcheck’’ preferred stock, with such designation rights andpreferences as may be determined from time to time by the Board ofDirectors. Currently, there are no shares of preferred stock are issuedand outstanding. The Board of Directors is empowered, however, withoutshareholder approval, to issue shares of preferred stock with dividend,liquidation, conversion, voting or other rights which could adverselyaffect the voting power or other rights of the holders of our commonstock. In the event of such issuances, the preferred stock could beutilized, under certain circumstances, as a method of discouraging,delaying or preventing a change in control of Creative. Although wehave no present intention to issue any additional shares of ourpreferred stock, there can be no assurance that we will not do so inthe future.

Item 2.    Description of Property.

Ourcorporate offices are located in New York City and we rent office spaceunder a two year lease for an annual rent of $66,000 during the firstyear of the term and $69,300 for the second year. The lease termcommenced October  1,  2005 and provides us withapproximately 2,400 square feet of office space. The address is 461Park Avenue South, New York, New York 10016 and our telephone number is(212) 868-5262. We rent warehouse space in South Plainfield, N.J. wherewe pay $7.50 per pallet per month for storage on an as needed basis andin Stockton, California where the price of storage is $4.00 per palletper month on an as needed basis.

Item 3.    LegalProceedings.

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

On January  19,  2006 we received a demand forarbitration filed by Big Geyser, Inc. arising out of our determinationto terminate the distribution agreement with Big Geyser. In its demand,Big Geyser has claimed that Creative Enterprises wrongfully terminatedthe distribution agreement and is obligated to pay Big Geyser atermination fee and is seeking additional costs, includingattorneys’ fees. The total damages being sought by claimant is$175,236. The arbitration demand was filed with the AmericanArbitration Association in New York, New York. Although we have heldsettlement negotiations with Big Geyser in an effort to resolve thismatter, we have not yet been served with any pleadings in this matterand have not yet responded to this notification. Management intends tovigorously defend this claim but is currently unable to determine atthis time whether this claim will have a material adverse impact on ourfinancial condition, results of operations or cash flow. However, anadverse outcome in this matter could adversely affect our financialcondition, cash flow and results of operations.

We are currentlythe co-defendant along with our Chairman in a civil suit filed inMiami-Dade County Circuit Court under the caption Swan v. Salamanand Creative Enterprises International, Inc. Plaintiff claims thatwe breached an oral agreement of employment and is seeking compensatorydamages. A motion to dismiss filed by the co-defendants was rejected inpart and is pending in part. We will vigorously defend this matter ifour motion to dismiss is denied. Based on the facts of which we arecurrently aware, management believes that the resolution of this claimwill not have a materially adverse effect on our financial condition.However, no assurances can be given that such belief will ultimatelyprove to be accurate or that other facts adverse to our positioncurrently not known to management will not be uncovered, in which casethe ultimate resolution of this claim could potentially have a materialadverse effect on our financial condition.

In addition, we may besubject to other claims and litigation arising in the ordinary courseof business. Our management considers that any liability from anyreasonably foreseeable disposition of such other claims and litigation,individually or in the aggregate, would not have a material adverseeffect on our consolidated financial position, results of operations orcash flows.

Item 4.    Submission of Matters to a Vote ofSecurityHolders.

None.

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PARTII

Item 5.  Market for Common Equity and RelatedStockholder Matters.

Our common stock trades on the OTC PinkSheets under the symbol CEII.PK. The table set forth below showsthe 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 notrepresent actual transactions. These quarterly trade and quote dataprovided by Pink Sheets, LLC. In January  2002 quotations of ourcommon stock began on the Pink Sheets due to our consummation of theAgreement and Plan of Reorganization with Inland Pacific Resources,Inc. According to our stock transfer agent records, we hadapproximately 411 shareholders of our common stock as ofDecember  31, 2005 holding 15,115,500 common shares.

CommonStock

|                      |  |         |        |         |  |        |        |        |  |  |
|----------------------|--|---------|--------|---------|--|--------|--------|--------|--|--|
|                 |  | HighBid |        | Low Bid |
| Fiscal2006           |  |    |   |    |  |   |   |   |
| Through March31,2006 |  | $       | 0.65   |    |  | $      | 0.34   |   |
| Fiscal2005           |  |    |   |    |  |   |   |   |
| March  31,2005       |  | $       | 0.73   |    |  | $      | 0.55   |   |
| June30,2005          |  | $       | 1.25   |    |  | $      | 1.01   |   |
| September30,2005     |  | $       | 1.55   |    |  | $      | 0.70   |   |
| December31,2005      |  | $       | 1.04   |    |  | $      | 0.65   |   |
| Fiscal2004           |  |    |   |    |  |   |   |   |
| March  31,2004       |  | $       | 0.50   |    |  | $      | 0.18   |   |
| June30,2004          |  | $       | 0.75   |    |  | $      | 0.29   |   |
| September30,2004     |  | $       | 0.70   |    |  | $      | 0.21   |   |
| December31,2004      |  | $       | 0.78   |    |  | $      | 0.47   |   |
|                      |

Dividends andDividend Policy

There are no restrictions imposed onus that limits our ability to declare or pay dividends on ourcommon stock, except as limited by state corporate law. During the yearended December  31,  2005, no cash or stock dividends were  declared  or  paid  and none  are  expected to be paid in the foreseeablefuture. We expect to continue to retain all earnings generated by ourfuture operations for the development and growth of our business. Theboard of directors will determine whether or not to pay dividends inthe future in light of our earnings, financial condition, capitalrequirements and other factors.

Transfer Agent

Thetransfer for our Common Stock is InterWest Transfer Agency, Salt LakeCity, UT.

Securities authorized for issuance under equitycompensation plans

The following table provides informationabout our common stock that may be issued upon the exercise of optionsand rights under all of our existing equity compensation plans as ofDecember  31,  2005, which consists of our Stock OptionPlan.

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| PlanCategory                                          |  | Number of Securities to be Issued uponExercise of Outstanding Options and Rights (a) |         | WeightedAverage Exercise Price of Outstanding Options(b) |  | Number of Securities Remaining Availablefor Future Issuance Under Equity Compensation PlansExcluding Securities Reflected in Column (a)(c) |
| Equity Compensation Plans Approved byStockholders     |  |                                                                                 | 160,000 |                                                     |  | $                                                                                                                                          | 0.534 |   |  |   | 840,000 |   |
| EquityCompensation Plans Not Approved by Stockholders |  |                                                                                 | N/A     |                                                     |  |                                                                                                                                       | N/A   |   |  |   | N/A     |   |
| Total                                                 |  |                                                                                 | 160,000 |                                                     |  | $                                                                                                                                          | 0.534 |   |  |   | 840,000 |   |
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RecentSales of Unregistered Securities

The following discussiondescribes all the unregistered securities we have sold during thefiscal year ended December  31,  2005.

FromJanuary  4,  2005 through May  5,  2005, weissued an aggregate principal amount of $816,200 of convertibledebentures to eight accredited investors in reliance upon the exemptionprovided by Section 4(2) of the Securities Act and Rule 506 ofRegulation D promulgated thereunder inasmuch as the securities wereissued without any form of general solicitation or general advertisingand the acquirers were accredited investors. Each $40,000 debenture isconvertible into 100,000 shares of our common stock and warrants topurchase 100,000 shares of common stock. The proceeds derived fromthese issuances were used for working capital and general corporatepurposes.

From June  2005 through August  2005, weissued an aggregate of $1,898,000 of convertible debentures toaccredited investors in reliance upon the exemption provided by Section4(2) of the Securities Act and Rule 506 of Regulation D promulgatedthereunder inasmuch as the securities were issued without any form ofgeneral solicitation or general advertising and the acquirers wereaccredited investors. The convertible debentures issued to such personsare on the same terms as described in the immediately precedingparagraph. In August  2005, we commenced a rescission offerrelating to these sales and an additional $507,750 of convertibledebentures sold during 2004. The rescission offer was made pursuant toSection 4(2) of the Securities Act and Rule 506 promulgated thereunderand in accordance with applicable state securities laws. We relied onthese exemptions in that the investors are accredited and we did notengage in general solicitation concerning the offering. The rescissionoffer expired October  31,  2005. Holders of an aggregateprincipal amount of $160,000 of convertible debentures accepted therescission offer and the holders of the remaining convertibledebentures confirmed their investment in our company. The proceedsderived from these issuances are being used for working capital andgeneral corporate purposes.

Contemporaneously with therescission offer, we conducted a private offering of an additional$1,000,000 of convertible debentures on the same terms as describedabove to accredited investors only in reliance upon the exemptionprovided by Section 4(2) of the Securities Act and Rule 506 ofRegulation D promulgated thereunder. We relied on these exemptions inthat the investors are accredited and we did not engage in generalsolicitation concerning the offering. We issued an aggregate principalamount of $165,000 of such additional debentures. The proceeds derivedfrom these issuances will be used for working capital and generalcorporate purposes.

In February  2005, we issued warrantsto purchase a total of 100,000 shares of common stock to Big Geyser,Inc. as additional consideration pursuant to the distribution agreementwe entered into with them. The issuance of these securities was exemptfrom registration under the Securities Act of 1933, as amended, underSection 4(2) thereof inasmuch as the securities were issued without anyform of general solicitation or general advertising and the acquirerwas provided with access to material information about thecompany.

On August  1,  2005, we issued an option topurchase 10,000 shares of common stock to Ms.  Sarah  Velarin consideration of services provided to us pursuant to her employmentagreement 

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with our company. The issuance of thesesecurities was exempt from registration under the Securities Act of1933, as amended, under Section 4(2) thereof inasmuch as the securitieswere issued without any form of general solicitation or generaladvertising and the acquirer was provided with access to materialinformation concerning the company.

In June and July2005, we issued an aggregate of 177,000 shares of our common stock toseven individuals as additional consideration for services previouslyrendered to us by such persons. The issuance of these securities wasexempt from registration under the Securities Act of 1933, as amended,under Section 4(2) thereof inasmuch as the securities were issuedwithout any form of general solicitation or general advertising and theacquirers were accredited investors.

In December  2005, weissued 110,000 shares of our common stock to a consultant inconsideration for services previously rendered to us. The issuance ofthese securities was exempt from registration under the Securities Actof 1933, as amended, under Section 4(2) thereof inasmuch as thesecurities were issued without any form of general solicitation orgeneral advertising and the acquirer is an accreditedinvestor.

In November and December  2005, we issued anaggregate of 512,500 shares of our common stock and 512,500 warrants toseven ‘‘accredited investors’’ in relianceupon the exemption provided by Section 4(2) of the Securities Actand/or Rule 506 of Regulation D promulgated thereunder inasmuch as thesecurities were issued without any form of general solicitation orgeneral advertising and the acquirers were accredited investors. Thewarrants are exercisable at a per share price of $0.75 for a period offive years. We received proceeds of $205,000 from these issuances,which we will use for working capital and general corporatepurposes.

During the month of December  2005 the holders ofan aggregate amount of $535,200 of convertible debentureselected to convert their debentures into shares of common stockand warrants. Pursuant to this conversion, we issued an aggregateamount of 1,338,000 shares of common stock and warrants topurchase an additional 1,338,000 shares of common stock to theseholders pursuant to the terms of the debentures. The warrants issuedupon conversion are exercisable for a period of three years at a pershare exercise price of $0.75. The conversion price of the debentureswas $0.40 per share. The conversion of the debentures was exemptfrom the registration requirements of the Securities Act of1933, as amended, pursuant to Section 3(a)(9) under theAct.

The securities issued in each of the above transactions wererestricted securities and cannot be offered or sole except pursuant toan effective registration statement under the Securities Act orpursuant to an available exemption from the registration requirementsof the Securities Act and applicable state law.

CurrentFiscal Year

In January  2006, we issued an aggregateof 687,500 shares of our common stock and 687,500 warrants to eight‘‘accredited investors’’ in reliance uponthe exemption provided by Section 4(2) of the Securities Act and/orRule 506 of Regulation D promulgated thereunder inasmuch as thesecurities were issued without any form of general solicitation orgeneral advertising and the acquirers were accredited investors. Thewarrants are exercisable at a per share price of $0.75 for a period offive years. The total purchase price for these securities was $275,000and we received net proceeds of $247,500, which we will use for workingcapital and general corporate purposes. We paid a commission of10% of the gross proceeds of to a registered broker-dealer thatacted as our selling agent and issued it a warrant to purchase 68,750shares of common stock exercisable at a price of $0.44 per share for aperiod of five years.

During the month of January  2006 theholders of an aggregate amount of $121,000 of convertibledebentures elected to convert their debentures into shares ofcommon stock and warrants. Pursuant to this conversion, weissued an aggregate amount of 302,500 shares of common stock andwarrants to purchase an additional 302,500 shares ofcommon stock to these holders pursuant to the terms of thedebentures. The warrants issued upon conversion are exercisable for aperiod of three years at a per share exercise price of $0.75. Theconversion price of the debentures was $0.40 per share. The

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conversion of the debentures was exempt fromthe registration requirements of the Securities Act of 1933, asamended, pursuant to Section 3(a)(9) under the Act.

As ofMarch  20,  2006, we issued convertible notes in theaggregate amount of $442,000 to Michael Salaman, our Chairman andformer Chief Executive Officer and three other accredited investors.The notes are convertible at the option of the holder, into thesecurities we issue in any financing transaction we consummate duringthe term of the Notes. The Notes will be due one year from the date ofissuance and the principal amount of the Notes shall accrue interest atthe rate of 10% per annum, payable upon maturity. The Notes wereissued pursuant to Section 4(2) of the Securities Act of 1933, asamended, as each of the holders is an accredited investor with accessto material information and the securities were issued without any formof general solicitation or general advertising. The Notes arerestricted securities under the terms of the Securities Act of 1933 andmay not be transferred or resold for a period of one year, exceptpursuant to registration under the Securities Act or an exemptionthereunder.

Stock Repurchases

During 2005, we didnot repurchase any shares of our common stock.

Item6.   Management’s Discussion and Analysisor Plan of Operation.

Overview

Thismanagement’s discussion and analysis of financial condition andresults of operations contains forward-looking statements that involverisks and uncertainties. Please see ‘‘Item 1 —Business — Forward-Looking Statements’’ for adiscussion of the uncertainties, risks and assumptions associated withthese statements. You should read the following discussion inconjunction with our audited consolidated financial statements and thenotes to our audited consolidated financial statements includedelsewhere in this report. Our actual results may differ materially fromthose discussed in the forward-looking statements as a result ofvarious factors, including but not limited to those listed under‘‘Item 1 — Business — RiskFactors’’ and included in other portions of thisreport.

Nature of Operations

We were originallyincorporated in the State of Utah on June  20,  1984 asParvin Energy, Inc. Our name was later changed to Sahara GoldCorporation and on July  26,  1985 we changed our corporatedomicile to the State of Nevada and on January  24,  1994we changed our name to Inland Pacific Resources, Inc. OnDecember  18,  2001, we entered into an agreement and planof reorganization with Creative Enterprises, Inc. and changed our nameto Creative Enterprises International, Inc. This discussion relatessolely to the operations of Creative Enterprises International,Inc.

We have had limited operations to date and until 2005, ourefforts were focused primarily on the development and implementation ofour business plan. Since the middle of 2005 we have engaged insignificant marketing and sales activities related to our business planof selling bottled waters and dietary supplements. We have generatedrevenues of $514,146 for fiscal 2005 (all of which has been recordedsince May  2005) and incurred a net loss of $3,429,846. The netloss for 2005 included general and administrative expenses related tothe costs of start-up operations and a significant amount of marketingexpenses related to establishing our brand in the market.  Sincethe date of the merger and reorganization, we have raised capitalthrough private sales of our common equity and debtsecurities.

We operate our business in the rapidly evolvingconsumer beverage industry and our principal products are an exclusiveline of bottled artesian waters and a dietary supplement. Our businessstrategy is to employ innovative merchandising to highlight the uniquepoints of our products and to associate our products with athletes,celebrities, models and personal trainers. Our sales team will focus onthe leading distributors, supermarket chains, convenience stores, drugchains, food service operators and health club chains in the UnitedStates.

Our principal products are bottled water products whichwe market as ‘‘premium’’ and a dietarysupplement, manufactured by Jamnica, d.d. Our line of bottled waterspresently consists of Jana 

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Natural Artesian Water and Jana NaturalFlavored Artesian Water (Lemon-Lime and Strawberry-Guava) and ourdietary supplement product is Jana Skinny Water.

As describedabove, we expect to introduce the following additional bottled waterproducts when management determines that market conditionswarrant:

|  |              |                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------|
|  | •  | Jana Juicy Fruits NaturalNoncarbonated Beverages (Red-Orange; Orange-Nectarine; Multivitamin andMultired); and |

|  |              |                                                                                 |
|--|--------------|---------------------------------------------------------------------------------|
|  | •  | powdered and flavoredSkinny Water (Lemon-Lime, Strawberry-Guava and Tangerine). |

Wehave entered into a license and distribution agreement with Jamnicathat grants us an exclusive license to distribute Jamnica’sbottled waters in North America. Jamnica, under our license agreement,manufactures the products on our behalf. Our agreement with Jamnica hasan initial term of one year from the date that government approvals aresecured. Thereafter, this agreement will automatically renew subject tothe performance criteria described above. If we are unable to satisfythe performance targets, Jamnica has the right to either terminate theagreement or to appoint additional distributors in the territory. Theoccurrence of either of these contingencies may result in a materialadverse effect on our results of operations and financialcondition.

We have also obtained the rights from Peace MountainNatural Beverages Corporation to bottle and distribute a dietarysupplement called Skinny Water®. SkinnyWater’s proprietary formula has an all-natural appetitesuppressant that helps people maintain and lose weight when taken inconjunction with diet and exercise. We are focusing on the distributionof Skinny Water in connection with our relationship with Jamnica. Ouragreement with Peace Mountain will renew automatically provided that wesatisfy the minimum purchase amount specified in the contract or make a$10,000 monthly payment.

We will principally generate revenues,income and cash by introducing, marketing, selling and distributingfinished beverage products. We generally sell these products tonational retailers and distributors. We have been focused on, and willcontinue in 2006 to increase our existing product lines and furtherdevelop our markets.

Our primary operating expenses include thefollowing: direct operating expenses, such as transportation,warehousing and storage, overhead, fees and royalties to our suppliersand licensors and marketing costs. We have and will continue to incursignificant marketing expenditures to support our brands includingadvertising costs, sponsorship fees and special promotional events. Wefocus on developing brand awareness and trial through sampling both instores and at events. Retailers and distributors may receive rebates,promotions, point of sale materials and merchandise displays. We seekto use in-store promotions and in-store placement of point-of-salematerials and racks, price promotions, sponsorship and productendorsements. The intent of these marketing expenditures is to enhancedistribution and availability of our products as well as awareness andincrease consumer preference for our brand. Greater distribution andavailability, awareness and preference promotes long term growth.

Going Concern and Management Plans

We have an immediate needfor cash to fund our working capital requirements and business modelobjectives and we intend to either undertake private placements of oursecurities, either as a self-offering or with the assistance ofregistered broker-dealers, or negotiate a private sale of oursecurities to one or more institutional investors. However, except asdiscussed below under the caption ‘‘Satisfaction of CashRequirements’’ we currently have no firm agreements withany third-parties for such transactions and no assurances can be giventhat we will be successful in raising sufficient capital from any ofthese proposed financings. Generating sales in the next six to 12months is important to support our business. However, we cannotguarantee that we will generate such growth.  If we do notgenerate sufficient cash flow to support our operations during thattime frame, we will need to raise additional capital and may need to doso sooner than currently anticipated. Our independent auditors haveincluded a ‘‘going concern’’ explanatoryparagraph in their report to our financial statements for the yearended December  31,  2005, citing recurring losses andnegative cash flows from operations. 

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We can not assure you that any financing canbe obtained or, if obtained, that it will be on reasonable terms.Without realization of additional capital, it would be unlikely for usto continue as a going concern.

We raised an additional $205,000during December  2005 from the sale of 512,500 shares of ourcommon stock and 512,500 warrants to certain accredited investors in aprivate transaction pursuant to Rule 506 of Regulation D under theSecurities Act of 1933. In addition, we have raised an additional$275,000 during the current fiscal year from the sale of 687,500 sharesof our common stock and 687,500 warrants to certain accreditedinvestors in a private transaction pursuant to Rule 506 of Regulation Dunder the Securities Act of 1933.

As of March  20,2006, we issued convertible notes in the aggregate amount of $442,000to Michael Salaman, our Chairman and former Chief Executive Officer andthree other accredited investors. The notes are convertible at theoption of the holder, into the securities we issue in any financingtransaction we consummate during the term of the Notes. The Notes aredue one year from the date of issuance and the principal amount of theNotes shall accrue interest at the rate of 10% per annum,payable upon maturity.

From September  2004 toDecember  2004 and from June  2005 through August2005, we offered and sold convertible debentures to investors invarious states. These sales of convertible debentures were subject tofederal and state securities laws and by reason of our failure to fileblue sky notices in connection with the sales, we concluded (afterconsultation with counsel) that these investors may have been entitledto return their securities to us and receive from us the full pricethey paid, which we estimate to be an aggregate amount of approximately$2.4  million, plus interest. As a result, we conducted arescission offer, which expired October  31,  2005, to allthose persons who purchased convertible debentures during the affectedperiods. Investors holding affected convertible debentures in theaggregate principal amount of $160,000 elected to accept the rescissionoffer. The full amount of the debentures rescinded was repaid onOctober  7,  2005.

We believe that aninvestor’s acceptance of the rescission offer will preclude himor her from later seeking similar relief, and we are unaware of anyfederal or state case law to the contrary. However, it is unclearwhether the rescission offer will terminate our liability under theSecurities Act of 1933 and certain state securities laws. The staff ofthe Securities and Exchange Commission takes the position that aperson’s federal right of rescission may survive the rescissionoffer. Accordingly, we may continue to be potentially liable under theSecurities Act to investors that declined the rescission offer for thepurchase price they paid for their debentures, plus interest.

Critical Accounting Policies

The application of thefollowing accounting policies, which are important to our financialposition and results of operations, requires significant judgments andestimates on the part of management. For a summary of all of ouraccounting policies, including the accounting policies discussed below,see note 3 to our audited consolidated financialstatements.

Revenue Recognition

We sellproducts through multiple distribution channels including resellers anddistributors. Revenue is recognized when the product is shipped to thecustomer and is recognized net of discounts and returns. Revenuesgenerated up to December 31, 2004 are related to product lines thathave been discontinued.

Use of Estimates in thePreparation of Financial Statements

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amount of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from thoseestimates.

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Management Discussion andAnalysis:

We did not have any sales prior to the fiscal yearended December  31,  2005, except for nominal revenues notattributable to our current product lines. Beginning in 2005, ourefforts have focused primarily on the development and implementation ofour business plan, including our recent marketing and sales activities.We generated revenues of $514,146 for the fiscal year endedDecember  31,  2005 (all of which has been recorded sinceMay  2005) and incurred a net loss of $3,429,846. The 2005 netloss included general and administrative expenses related to the costsof start-up operations ($1,950,320) and a significant amount ofmarketing expenses ($1,307,186) related to establishing our brand inthe market.

Plan of operation for the next twelvemonths:

Our current business strategy is to build upon the‘‘Jana’’ brand of bottled water products.We intend to develop and maintain a market for the Jana brand and builda national sales and distribution force to take our products intomainstream markets and distribution channels. In order to accomplishthis, we intend to:

|  |              |                                                          |
|--|--------------|----------------------------------------------------------|
|  | •  | create strongdistributor relationships and key accounts; |

|  |              |                                                                                                                  |
|--|--------------|------------------------------------------------------------------------------------------------------------------|
|  | •  | stimulate strong consumer awareness of anddemand for our products with primary emphasis in the United States;and |

|  |              |                                                         |
|--|--------------|---------------------------------------------------------|
|  | •  | develop unique alternative beveragebrands and products. |

We have signed an exclusive license anddistributor agreement with Jamnica, d.d. to distribute a line ofartesian bottled water products marketed as‘‘premium’’ throughout North America. Wewill market the brand ‘‘Jana’’ which wonthe prestigious 2005 Eauscar Award for ‘‘highestquality’’ at the Aqua-Expo in Paris France. Our JanaStrawberry-Guava flavored water won the 2004 Eauscar award for bestflavored water.

In addition, we have obtained the exclusivelicensing rights from Peace Mountain Natural Beverages Corporation tobottle and distribute a dietary supplement called Skinny Water®.Skinny Water’s proprietary formula has an all-natural appetitesuppressant that helps people lose weight when taken in conjunctionwith diet and exercise. As part of our agreement with Agrokor, we havegranted European distribution rights for Skinny Water to Jamnica.

Our agreement with Jamnica is for an initial term commencing on thedate we receive government approvals to distribute the products in thesales territory and continues for a period of one year from the datethe approvals are received. We received approval from the State of NewYork in April  2005 and the State of California in June2005. The agreement will automatically renew for additional one yearterms provided we satisfy sales volume targets as described above. Ifwe are unable to satisfy these targets, Jamnica has the right to eitherterminate the agreement or to appoint additional distributors in theterritory. As described above, we are seeking to modify these targets.Further, our agreement with Peace Mountain will renew automaticallyprovided that we satisfy the minimum purchase amounts specified in thecontract or make a $10,000 monthly payment.

In December2004, 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 January2006. We do not believe that the termination of our agreement with BigGeyser will have a material adverse impact on our operations as werecently established a relationship with a new distributor in the NewYork City market. However, as this agreement does not includesignificant purchase commitments, we cannot guarantee that this newdistribution relationship will result in meaningful revenues for us. Inaddition, as described in greater detail below, Big Geyser is disputingour ability to terminate the agreement for cause and has filed a noticeof arbitration against us with the American Arbitration Associationseeking damages. An adverse outcome in this matter could adverselyaffect our financial condition and results of operations.

OnMarch  20,  2006, we entered into an agreement withExclusive Beverage Distributors to serve the New York City and LongIsland, N.Y. markets on an exclusive basis. The initial term of this

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agreement will expire December31,  2009 and we will distribute our Jana Natural Artesian Water,Jana Flavored Water and Skinny Water products in the designatedterritory pursuant to this agreement. Although this agreement includesa minimum purchase commitment on behalf of the distributor, we willneed this distributor to exceed that volume in order to derivemeaningful revenues from this relationship. As described above, we haveestablished relationships with eleven beverage distributors servingtwelve markets as well as with national retailers, including GNC,Safeway and Target. However, as these distributors and retailers arenot bound by significant minimum purchase commitments, we must rely onrecurring purchase orders for product sales. Accordingly, we cannotdetermine the frequency or amount of orders any retailer or distributormay make.

Marketing/Advertising

In connectionwith our recent marketing campaign, we have invested over $900,000 ofour working capital during the 2005 fiscal year to fund variousadvertising and marketing programs to introduce our products tonumerous distribution channels and retail outlets in the U.S.,including McLane, Safeway, GNC and Target. These programs have includeddeveloping marketing strategies and collateral material, conductingadvertising initiatives and investing in initial store placements. Inaddition, in December  2005, Jamnica provided us with a $100,000capital commitment towards our marketing and advertisingefforts.

Satisfaction of Cash Requirements

We havehistorically primarily been funded through the issuance of commonstock, debt securities and external borrowings.

We have animmediate need for cash to fund our working capital requirements andbusiness model objectives. As of December  31,  2005, wehad approximately $878,891 in working capital deficit and our cashbalance was approximately $76,780. To provide for additional workingcapital, during the 2005 fiscal year, we raised approximately$2.6  million through private placement of convertible debenturesand we have raised an additional $205,000 from the private sale ofshares of common stock and warrants to accredited investors. We havealso received short-term loans from unaffiliated third-parties ofapproximately $175,000 during the 2005 fiscal year, of which theprincipal amount of approximately $100,000 was outstanding as ofDecember  31,  2005. This loan bears interest at the rateof 15% per annum. The lender made an additional loan of $45,000during the first quarter in 2006 and has agreed to extend the due datefor repayment from February  28,  2006 to August24,  2006 on the same terms as the original loan. In addition tothe principal amount of the loan, accrued but unpaid interest in theamount of $4,353 will continue to bear interest at the stated rate andbe repayable with the principal amount. In 2006, we have raised anadditional $275,000 from the private sale of shares of common stock andwarrants to accredited investors, receiving net proceeds of $247,500after payment of commissions to a registered broker-dealer, which wewill use for working capital and general corporate purposes. Inaddition, as of March  20,  2006, we received an aggregateamount of $442,000 in loans made by our former Chief Executive Officerand three additional accredited investors. The principal amount ofthese loans will be convertible into securities we may issue in anyfinancing transaction that we consummate during the term of the Notes.The Notes will be due one year from the date of issuance and shallaccrue interest at the rate of 10% per annum, payable uponmaturity.

We believe that net cash on hand as of the date of thisAnnual Report and to be raised in private placements of our securitieswill only be sufficient to meet our expected cash needs for workingcapital and capital expenditures for a period of 2 to 4 months. If weare able to meet our operating targets, however, we believe that wewill be able to satisfy our working capital requirements.

Wehave developed operating plans (forecasts) that project profitabilitybased on known assumptions of units sold, retail and wholesale pricing,cost of goods sold, operating expenses as well as the investment inadvertising and marketing. These operating plans are adjusted monthlybased on actual results for the current period and projected into thefuture and include statement of operations, balance sheets and sourcesand uses of cash. No assurances can be given that our operating plansare accurate nor can any assurances be provided that we will attain anysuch targets that we may develop.

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In August  2005 we commenced anoffering to sell an additional $3.4  million of convertibledebentures to additional accredited investors under Rule 506,promulgated under the Securities Act of 1933. The convertibledebentures subject to this offering are identical to the debentures wesold in a private placement that we commenced in January  2005.Up to $2.4  million of this amount was subject to a rescissionoffer to certain investors that previously purchased convertibledebentures. In the rescission offer, we offered to repurchase thesedebentures for the original purchase price plus interest from the dateof purchase at the current statutory rate per year mandated by thestate in which the investor resides. This offer expired as ofOctober  31,  2005. Holders of an aggregate of $160,000 ofdebentures elected to accept this rescission offer, with the balanceconfirming their prior investment. We repaid these investors out ofworking capital.

In addition, we had obtained a $500,000 letterof credit with Wachovia bank to secure our purchase orders withAgrokor. This letter of credit was secured by personal assets of ourChairman and bore interest at a rate of 7.5% per annum. Weborrowed $314,000 against this letter of credit in placing our initialorder with Agrokor for 1,200,000 bottles of product. These bottles havebeen shipped into the U.S. The letter of credit was originallysupported by a $500,000 demand note (line of credit) issued to Wachoviathrough Madison Bank. On June  1,  2005, our obligationswere transferred to Madison Bank. The interest on the demand note isone percent above the prime rate and the outstanding balance is due onthe bank’s demand.

To raise additional funds, we intend toeither undertake private placements of our securities, either as aself-offering or with the assistance of registered broker-dealers, ornegotiate a private sale of our securities to one or more institutionalinvestors. We currently have no firm agreements with any third-partiesfor additional transactions and no assurances can be given that we willbe successful in raising sufficient capital from any of these proposedfinancings. Further, we cannot assure you that any additional financingwill be available or, even if it is available that it will be on termsacceptable to us. Any inability to obtain required financing onsufficiently favorable terms could have a material adverse effect onour business, results of operations and financial condition. If we areunsuccessful in raising additional capital and increasing revenues fromoperations, we will need to reduce costs and operations substantially.Further, if expenditures required to achieve our plans are greater thanprojected or if revenues are less than, or are generated more slowlythan, projected, we will need to raise a greater amount of funds thancurrently expected. Without realization of additional capital, it wouldbe unlikely for us to continue as a going concern.

Break Evenand Profitability

As of December  31,  2005, ourfinancial plan showed that based on current wholesale prices and costsof its products, will require sales of approximately 54,000 cases permonth to break even, excluding marketing and sales expenses which areconsidered investments and classified separately on our financialstatements. Based on our current business arrangements, we expect tomeet that goal by the end of the fourth quarter of fiscal 2006.However, our expectations may not be correct, our expenses mayincrease, our business arrangements may not result in the level ofsales that we anticipate and we cannot offer any assurance that we willbe able to achieve sufficient sales to realize this target during thisyear.

Product Research and Development

We intendto expand our line of products, as described in the‘‘Overview’’ section of thisManagement’s Discussion and Analysis, at such time as managementbelieves that market conditions are appropriate. Management will basethis determination on the rate of market acceptance of the products wecurrently offer. We do not engage in material product research anddevelopment activities. New products are formulated based on ourlicense arrangements with our suppliers andlicensors.

Purchase or sale of plant or significantequipment

As of the date of this Annual Report, we do nothave any plans to purchase plant or significant equipment.

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Expected changes in the number ofemployees

As of December  31,  2005 we havetwelve employees including, our Chief Executive Officer. Three of ouremployees are dedicated sales representatives. We have retained twoadditional sales representatives in order to assist us in implementingour sales, marketing, and distribution program to introduce ourproducts into the North American markets. Our sales representatives areretained on a consultancy basis and are entitled to a monthly fee of$2,500, plus commissions. Our agreements with these persons areterminable on 30 days notice. We have engaged our Chief FinancialOfficer on an at-will basis and he currently provides accounting andfinancial reporting services on a part-time basis. We compensate ourChief Financial Officer at the rate of $5,000 per month and have notentered into a written agreement with him.

Off-Balance SheetArrangements

We have not created, and are not party to, anyspecial-purpose or off-balance sheet entities for the purpose ofraising capital, incurring debt or operating parts of our business thatare not consolidated into our financial statements and do not have anyarrangements or relationships with entities that are not consolidatedinto our financial statements that are reasonably likely to materiallyaffect our liquidity or the availability of our capital resources.

We have entered into various agreements by which we may be obligatedto indemnify the other party with respect to certain matters.Generally, these indemnification provisions are included in contractsarising in the normal course of business under which we customarilyagree to hold the indemnified party harmless against losses arisingfrom a breach of the contract terms. Payments by us under suchindemnification clauses are generally conditioned on the other partymaking a claim. Such claims are generally subject to challenge by usand to dispute resolution procedures specified in the particularcontract. Further, our obligations under these arrangements may belimited in terms of time and/or amount and, in some instances, we mayhave recourse against third parties for certain payments made by us. Itis not possible to predict the maximum potential amount of futurepayments under these indemnification agreements due to the conditionalnature of our obligations and the unique facts of each particularagreement. Historically, we have not made any payments under theseagreements that have been material individually or in the aggregate. Asof December  31,  2005, we were not aware of anyobligations under such indemnification agreements that would requirematerial payments.

Recent AccountingPronouncements

FASB Statement No. 123 (Revised 2004),Share-Based Payment, is effective for periods after June15,  2005. The revision to FAS 123 requires financial statementcost recognition for certain share-based payment transactions that aremade after the effective date in return for goods and services.Additionally, the revision requires financial statement costrecognition for certain share-based payment transactions that have beenmade prior to the effective date but for which the requisite service isprovided after the effective date. We have adopted FASB No. 123 and theresults are reflected in the current financial statements.

FASBStatement No. 151, Inventory Costs, an amendment to ARB No. 43, Chapter4, sets forth certain costs related to inventory that must be includedas current period costs. This statement became effective for periodsbeginning after June 15, 2005 and is not expected to materially impactus.

FASB Statement No. 153, Exchanges of Nonmonetary Assets, anamendment of APB Opinion No. 29 became effective for periods beginningafter June 15, 2005 and is not expected to materially impact us.

FASB Interpretation No. 46, Accounting for Conditional AssetRetirement Obligations was issued in March 2005 and is not expected tomaterially impact us. Through December 31, 2005, no assets acquired byus fall within this interpretation.

In March 2005, the FASBissued FASB Interpretation No. 47, "Accounting forConditional Asset Retirement Obligations." ThisInterpretation clarifies that the term conditional asset retirement

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obligation as used in FASB Statement No.143, Accounting for Asset Retirement Obligations, refers to a legalobligation to perform an asset retirement activity in which the timingand(or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. The obligation toperform the asset retirement activity is unconditional even thoughuncertainty exists about the timing and (or) method of settlement.Thus, the timing and (or) method of settlement may be conditional on afuture event. Accordingly, an entity is required to recognize aliability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonablyestimated. The fair value of a liability for the conditional assetretirement obligation should be recognized when incurred-generally uponacquisition, construction, or development and (or) through the normaloperation of the asset. Uncertainty about the timing and (or) method ofsettlement of a conditional asset retirement obligation should befactored into the measurement of the liability when sufficientinformation exists. Statement 143 acknowledges that in some cases,sufficient information may not be available to reasonably estimate thefair value of an asset retirement obligation. This Interpretation alsoclarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation.This Interpretation shall be effective no later than the end of fiscalyears ending after December 15, 2005. The adoption of thisInterpretation is not expected to have a material impact on ourfinancial statements.

In May 2005, the FASB issued SFAS No. 154Accounting Changes and Error Corrections", a replacementof APB Opinion No. 20, "Accounting Changes",and FASB Statement No. 3, "Reporting Accounting Changes inInterim Financial Statements". This Statement applies toall voluntary changes in accounting principle. It also applies tochanges required by an accounting pronouncement in the unusual instancethat the pronouncement does not include specific transition provisions.When a pronouncement includes specific transition provisions, thoseprovisions should be followed. Opinion 20 previously required that mostvoluntary changes in accounting principle be recognized by including innet income of the period of the change the cumulative effect ofchanging to the new accounting principle. This Statement requiresretrospective application to prior periods' financial statementsof changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effectof the change. When it is impracticable to determine theperiod-specific effects of an accounting change on one or moreindividual prior periods presented, this Statement requires that thenew accounting principle be applied to the balances of assets andliabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a correspondingadjustment be made to the opening balance of retained earnings (orother appropriate components of equity or net assets in the statementof financial position) for that period rather than being reported in anincome statement. When it is impracticable to determine the cumulativeeffect of applying a change in accounting principle to all priorperiods, this Statement requires that the new accounting principle beapplied to all other periods, this Statement requires that the newaccounting principal be applied as if it were adopted prospectivelyfrom the earliest date practicable. This Statement definesretrospective application as the application of a different accountingprinciple to prior accounting periods as if that principle had alwaysbeen used or as the adjustment of previously issued financialstatements to reflect a change in the reporting entity. This Statementalso redefines restatement as the revising of previously issuedfinancial statements to reflect the correction of an error. ThisStatement requires that retrospective application of a change inaccounting principle be limited to the direct effects of the change.Indirect effects of a change in accounting principle, such as a changein nondiscretionary profit-sharing payments resulting from anaccounting change, should be recognized in the period of the accountingchange. This Statement also requires that a change in depreciation,amortization, or depletion method for long-lived, nonfinancial assetsbe accounted for as a change in accounting estimate affected by achange in accounting principle. This Statement carries forward withoutchange the guidance contained in Opinion 20 for reporting thecorrection of an error in previously issued financial statements and achange in accounting estimate. This Statement also carries forward theguidance in Opinion 20 requiring justification of a change inaccounting principle on the basis of preferability. This Statementshall be effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 31, 2005. Early adoptionis permitted for accounting changes and corrections of errors

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made in fiscal years beginning after thedate this Statement is issued. The adoption of this Statement is notexpected to have a material impact on our financialstatements.

Item 7.  FinancialStatements.

Our audited financial statements for the fiscalyears ended December  31,  2005 and December31,  2004 follow Item 14 of this Annual Report on Form 10-KSB,beginning at page F-1.

Item 8.  Changes In andDisagreements with Accountants on Accounting and FinancialDisclosure.

None.

Item8A.  Controls and Procedures.

DisclosureControls

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with theparticipation of our management, including the chief executive officerand chief financial officer, of the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 13a-15(e). Indesigning and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required toapply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

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

InternalControls

In connection with the effectiveness of ourRegistration Statement on Form 10-SB, we first became subject to thereporting obligations of Section 13 of the Exchange Act inDecember  2005. Accordingly, we have begun to adopt and implementvarious measures in order to improve control processes and corporategovernance. As a non-reporting company, we were not required to adoptthe types of internal control procedures that a public company mustadopt and maintain. Accordingly, we have recently taken numerous stepsto enhance existing policies, or implement new ones, so as to have aneffective system of internal controls over financial reporting. Thesemeasures, which either have materially affected, or are reasonablylikely to materially affect, our internal controls over financialreporting, include thefollowing:

|  |              |                                                                                                                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We increased themembership of the board of directors to consist of three persons, oneof whom is independent, as such term is defined in the MarketplaceRules of the Nasdaq Stock Market. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We have retained a consultant toassist us in identifying and implementing improvements to our internalcontrols over financial reporting and we have made changes in theorganizational structure to provide a clearer segregation ofresponsibilities in connection with account reconciliations, manualjournal entries, and the preparation and review of documentation tosupport the preparation of quarterly and annual financialstatements. |

|  |              |                                                                                                                                                                                                                                                                 |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We have adoptedand implemented standard financial policies and procedures on acomprehensive basis. These policies provide finance and accountingguidance and include process documentation designed to ensureconsistent application of policies and procedures. |

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We continue to implement additionalmeasures in response to specific accounting and reporting weaknesses,including personnel and organizational changes to improve supervisionand increased training for finance and accounting personnel. We willcontinue to develop new policies and procedures and educate and trainemployees on existing policies and procedures in an effort tocontinuously improve internal controls and the controlenvironment.

Except for the improvements described above, therehave been no other changes in the internal control over financialreporting during the year ended December  31,  2005 thathave materially affected, or are reasonably likely to materiallyaffect, internal controls over financial reporting.

We do notexpect that disclosure controls or internal controls over financialreporting will prevent all errors or all instances of fraud. A controlsystem, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’sobjectives will be met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefitsof controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances offraud, if any, within its company have been detected. These inherentlimitations include the realities that judgments in decision-making canbe faulty, and that breakdowns can occur because of simple error ormistake. Controls can also be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by managementoverride of the controls. The design of any system of controls is basedin part upon certain assumptions about the likelihood of future events,and any design may not succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequatebecause of changes in conditions or deterioration in the degree ofcompliance with policies or procedures. Because of the inherentlimitation of a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

Item8B.  OtherInformation.

None.

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PARTIII

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

The following table summarizes the name, age andtitle of each of our current directors and executive officers.Directors are elected annually by our stockholders and hold officeuntil their successors are elected and qualified, or until theirearlier resignation or removal. Our Board of Directors currentlyconsists of three members. There are no family relationships among ourcurrent executive officers and directors. Effective March8,  2006, Mr.  Christopher  Durkin was elected to ourboard of directors and was appointed as our Chief Executive Officer andPresident, Mr.  James  Robb was elected to our board,Mr.  Michael  Salaman resigned as Chief Executive Officerand President (while remaining as Chairman) and Mr.  ScottPerlstein resigned from our board. Officers are elected by and serve atthe discretion of the Board of Directors. Board members hold officeuntil their successors are chosen and qualified, or until they resignor have been removed from office. Our directors and officers are asfollows:

|                   |  |        |    |          |  |                                                |  |  |  |  |
|-------------------|--|--------|----|----------|--|------------------------------------------------|--|--|--|--|
| Name              |  | Age    |    | Position |
| ChristopherDurkin |  |   | 42 |     |  | ChiefExecutive Officer, President and Director |
| MichaelSalaman    |  |   | 43 |     |  | Chairman of theBoard                           |
| JamesRobb         |  |   | 48 |     |  | Director                                       |
| KennethBrice      |  |   | 59 |     |  | Chief FinancialOfficer                         |
|                   |

Business Experience

ChristopherDurkin. Prior to joining us on March  8,  2006as Chief Executive Officer, President and a director, Mr.  Durkinserved as the founder and president of Durkin Capital Group, LLC, afinancial consulting firm. Prior to that, Mr.  Durkin was a GroupDirector at LaBranche & Co. from March  2001 toSeptember  2004 and was Senior Vice President — Corporateand Business Development for Robb Peck McCooey Specialist Corp. fromAugust  1994 to March  2001. Prior to that, fromNovember  1980 to July  1994, Mr.  Durkin worked forapproximately fourteen years at the New York Stock Exchange, Inc. invarious capacities, including Market Surveillance Analyst and MarketSurveillance Manager, responsible for performance evaluation ofspecialists and rule and policy development.

JamesRobb. Prior to joining us an independent director onMarch  8,  2006, Mr.  Robb was a former partner atRobb, Peck, McCooey Financial Services, Inc., and private investor forthe past 5 years following the sale of Robb, Peck, McCooey to LaBranchein 2001. Mr.  Robb served in various capacities at Robb Peck,McCooey from 1977 until its sale to LaBranche. Robb, Peck, McCooeyFinancial was the sixth-largest New York Stock Exchange specialist firmby listings and the seventh-largest by trading volume. It served asspecialist for 137 NYSE-listed companies.

MichaelSalaman. Michael Salaman has served as our Chairman sinceJanuary  2002 and was our Chief Executive Officer from that dateuntil March  8,  2006. Mr.  Salaman has over 20 yearsexperience in the area of new product development and mass marketing.Mr.  Salaman began his business career as Vice President ofBusiness Development for National Media Corp., an infomercial marketingCompany 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 distributioncompany.

Kenneth Brice. Kenneth P. Brice is ourchief financial officer and has been associated with us sinceJune  2005. Mr.  Brice is currently president of CFOResources, Inc., a New Jersey based firm that he founded inJanuary  1994 that provides accounting services to small andmedium sized companies. From February  1995 to May  2003,Mr.  Brice, through CFO Resources, also served as interim ChiefFinancial Officer of F. Brinn and Associates, a New York based firmthat specializes in finding employment opportunities for individuals onwelfare and public assistance. Prior to that, Mr.  Brice workedin senior financial roles at Automatic Data Processing, Inc., where hewas Group Controller 

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for Employer Services; Interim Services,Inc., where he was Corporate Controller; Digital Solutions, Inc. andHydromer, Inc. where he was Chief Financial Officer. Mr.  Bricegraduated from the University of Miami in 1973 with a Bachelors degreein accounting.

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

|  |              |                                                                                                                                                                                             |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | A general partner or executiveofficer of a business that had a bankruptcy petition filed by oragainst it either at the time of the bankruptcy or within the two yearsbefore the bankruptcy; |

|  |              |                                                                                                                                            |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Convicted in a criminalproceeding or been subject to a pending criminal proceeding (excludingtraffic violations and other minor offenses); |

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

|  |              |                                                                                                                                                                                                                                                                                 |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Found by a court of competentjurisdiction (in a civil action), the Securities and ExchangeCommission or the Commodity Futures Trading Commission to have violateda federal or state securities or commodities law, and the judgment hasnot been reversed, suspended or vacated. |

As described in moredetail above, in 1994 our Chairman, Michael Salaman, entered into a FTCconsent decree resulting from past telemarketing activities and thedistribution of customer lists and credit card information while he waswith a different company. Mr.  Salaman as a party to the FTCconsent decree, whether acting in his capacity as an officer of ourcompany or otherwise, is also required to maintain compliance with thesame and is subject to an injunction and substantial civil monetarypenalties if there should be any failure for him to comply.

Significant Employee

Domenico DeLuca. Domenico F. De Luca is our Vice President of Sales andhas been associated with us since August  2005. Mr.De  Luca is the founder of Affinity Products, Inc. and has servedas its President and CEO since its inception in January  1992.Affinity Products, Inc. is a company specializing in sales, marketingand distribution of health care, vitamins and nutritionaland general merchandise products. Mr.  De  Luca also servesas President of Affinity Packaging, a contract packaging company.Mr.  De  Luca is also currently the Vice President ofDDAGCO, Inc., a Canadian corporation in the business of manufacturingoral film strips, IE breath strips and cough and cold strips. Prior toforming Affinity Products Inc., Mr.  De Luca was the VicePresident of Cardinal Laboratories, a national manufacturer ofdental appliances, from 1982 to 1992.

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

OurBoard of Directors currently consists of three individuals. James Robbis the only member of our Board of Directors that is independent asdefined in the Marketplace Rules of The Nasdaq Stock Market.

During the fiscal year ended December  31,  2005, ourboard of directors did not meet in person, but acted by unanimouswritten consent on five occasions. During the 2005 fiscal year, ourBoard consisted of two persons, Michael Salaman and Scott Perlstein.Mr.  Salaman is the brother in law of Mr.Perlstein.

Due to the fact that our Board currently consists ofthree persons, only one of whom is independent, we have not formallyconstituted any Board committees, including an audit committee. None ofour current directors qualifies as an ‘‘audit committeefinancial expert’’ as defined in Item 401 underRegulation S-B of the Securities Act of 1933. In connection with ourtransition to being a reporting company we are actively seeking toexpand our Board membership to include a majority of independentdirectors, including at least one person that satisfies the definitionof ‘‘financial expert.’’

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The board did not adopt any modificationsto the procedures by which security holders may recommend nominees toits board of directors.

Compliance with Section 16(a) of theSecurities Exchange Act

Section 16(a) of the Securities ExchangeAct of 1933, as amended, requires our directors and executive officers,and persons who own more than 10% of our outstanding CommonStock (collectively, ‘‘Reporting Persons’’)to file with the Securities and Exchange Commission initial reports ofownership and reports of changes in ownership of our Common Stock.Reporting Persons are also required by SEC regulations to furnish uswith copies of all such ownership reports they file. Based solely onour review of the copies of such reports received or writtencommunications from certain Reporting Persons, we believe that, duringthe 2005 fiscal year, all Reporting Persons complied with all Section16(a) filing requirements.

Code of Ethics

Due to thefact that we recently became a reporting company and are currentlyseeking to expand our board of directors so that our independentdirectors comprise a majority of our board members, we have notcurrently adopted a Code of Ethics. We intend to adopt a Code ofEthics, as defined by Rule 406 of Regulation S-B, promptly upon theelection of additional independent members to our board ofdirectors.

Item 10.  Executivecompensation.

Summary of Cash and Certain OtherCompensation

The following table provides certain informationconcerning all Plan and Non-Plan (as defined in Item 402 (a)(ii) ofRegulation S-B) compensation awarded to, earned by, paid or accrued byus during the years ended December  31,  2005, 2004 and2003 to each of our named executive officers.

SUMMARYCOMPENSATIONTABLE

|                            |  |        |  |                    |  |           |  |                            |  |                          |  |                                      |  |                  |  |                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|----------------------------|--|--------|--|--------------------|--|-----------|--|----------------------------|--|--------------------------|--|--------------------------------------|--|------------------|--|-------------------------|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|--|
|                       |  |   |  |               |  |      |  |                       |  | LongTermCompensation     |
|                       |  |   |  | Annualcompensation |  | Awards    |  | Payouts                    |
| Nameand Principal Position |  | Year   |  | Salary($)          |  | Bonus ($) |  | OtherAnnualCompensation($) |  | RestrictedStockAwards($) |  | SecuritiesUnderlyingOptions/ SARs(#) |  | LTIP Payouts ($) |  | AllOtherCompensation($) |
| Michael Salaman,           |  | 2005   |  | $209,000           |  | $0        |  | $0                         |  | $0                       |  | 0                                    |  | $0               |  | $0                      |
| Presidentand               |  | 2004   |  | $10,000            |  | $0        |  | $0                         |  | $0                       |  | 0                                    |  | $0               |  | $0                      |
| ChiefExecutiveOfficer*     |  | 2003   |  | $0                 |  | $0        |  | $0                         |  | $0                       |  | 0                                    |  | $0               |  | $0                      |
|                            |

|  |
|--|
|  |  |
|  |

|  |                                                                                                                                                                                                                                                     |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | *Effective as of March  8,  2006, Mr.  Salaman nolonger serves as our Chief Executive Officer or President. Mr.Salaman held these positions with us, however, for each of the threefull fiscal years required to be disclosed in this AnnualReport. |

Director Compensation

We do not pay anycompensation to our non-employee director for his attendance at boardmeetings. We have not adopted any retirement, pension, profit sharing,or other similar programs.

Employment Agreements

We havenot entered into written employment agreements with any of ourexecutive officers. We have agreed to retain Michael Salaman, ourChairman and former Chief Executive Officer, on a consultancy basis inorder to secure his services on our behalf. We are, however, continuingto negotiate the terms of this arrangement and have not yet enteredinto a definitive agreement with him.

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Option/SAR Grants and Exercises

During fiscal 2005, no stock options or stock appreciation rights,or SARs, were granted to or exercised by our executive officers.

AGGREGATED OPTION/SAR EXERCISES IN LASTFISCAL YEAR AND FY-ENDOPTION/SAR VALUES

The following table contains information withrespect to the named executive officers concerning options held as ofthe year ended December  31,2005.

|                |  |                           |   |               |  |                                                                                |   |                                                                                            |  |           |  |   |          |        |  |  |  |  |
|----------------|--|---------------------------|---|---------------|--|--------------------------------------------------------------------------------|---|--------------------------------------------------------------------------------------------|--|-----------|--|---|----------|--------|--|--|--|--|
| Name           |  | SharesAcquired onExercise |   | ValueRealized |  | Numberof Unexercised Options as of December  31,2005 Exercisable/Unexercisable |   | Value ofUnexercised In-the-Money Options at December31,  2005 (1)Exercisable/Unexercisable |
| MichaelSalaman |  |                      | 0 |          |  |                                                                           | 0 |                                                                                       |  | 150,000/0 |  | $ | 18,000/0 |   |
|                |

|  |
|--|
|  |  |
|  |

|  |                                                                                                                                                                               |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (1)Based upon the closing price ($0.62 per share) of our common stock onDecember  30,  2005 less the exercise price for theaggregate number of shares subject to the options. |

StockOption Plans

In January  2002, we adopted our Stock OptionPlan. Under our stock option plan, we may grant incentive(‘‘ISOs’’) and non-statutory(‘‘Non-ISOs’’) options to employees, nonemployee members of the Board of Directors and consultants and otherindependent advisors who provide services to us. The maximum shares ofcommon stock which may be issued over the term of the plan shall notexceed 1,000,000 shares. The maximum number of shares that may begranted under the plan to any one individual in any one year is100,000.

Options under the plan are to be issued at the marketprice of the stock on the day of the grant except to those issued to10% or more stockholders which shall be issued at 110% ofthe fair market value on the day of the grant. Each option exercisableat such time or times, during such period and for such numbers ofshares shall be determined by the Plan Administrator. However, nooption shall have a term in excess of 10 years from the date of thegrant. The aggregate fair market value of shares subject to optionsgranted to a participant which are designated as ISOs which becomeexercisable in any calendar year shall not exceed $100,000. The‘‘fair market value’’ will be the closingprice of our common stock, as reported by the Pink Sheets, LLC, or amarket maker of our common stock, or if the common stock is not quotedby any of the above, by the Board of Directors acting in goodfaith.

Awards under this plan are made by the Board of Directorsor a committee of the Board. The Board (or the committee) shall havefull authority to interpret the Stock Option Plan and to establish andamend rules and regulations relating thereto and has the discretionto:

|  |              |                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------|
|  | •  | determine the eligibleemployees to whom, and the times and the price at which, options willbe granted; |

|  |              |                                                |
|--|--------------|------------------------------------------------|
|  | •  | whether suchoptions shall be ISOs or Non-ISOs; |

|  |              |                                                              |
|--|--------------|--------------------------------------------------------------|
|  | •  | the periods during which eachoption will be exercisable; and |

|  |              |                                             |
|--|--------------|---------------------------------------------|
|  | •  | the number of shares subject toeach option. |

As of December  31,  2005, 160,000options were issued andoutstanding.

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Item 11.    SecurityOwnership

The following table sets forth the beneficialownership of our Common Stock as of April  11,  2006, by(i) each director and each executive officer, (ii) and all directorsand executive officers as a group, and (iii) persons (including any‘‘group’’ as that term is used in Section13(d)(3) of the Securities Exchange Act of l934), known by us to be thebeneficial owner of more than five percent of its common stock. Sharesof Common Stock subject to options exercisable within 60 days from thedate of this table are deemed to be outstanding and beneficially ownedfor purposes of computing the percentage ownership of such person butare not treated as outstanding for purposes of computing the percentageownership of others. Unless otherwise stated, the address of eachperson in the table is 461 Park Avenue South, Suite 303, New York, NY10016.

|             |  |                                                                                  |  |                                         |           |                       |  |        |      |         |  |  |  |  |
|-------------|--|----------------------------------------------------------------------------------|--|-----------------------------------------|-----------|-----------------------|--|--------|------|---------|--|--|--|--|
| TypeofClass |  | Nameand Address of BeneficialHolder                                              |  | Amountand Nature of BeneficialOwnership |           | Percentageof Class(#) |
| Common      |  | MichaelSalaman                                                                   |  |                                    | 2,383,333 | (1)              |  |   | 14.7 | %  |
| Common      |  | ChristopherDurkin                                                                |  |                                    | 0         |                  |  |   | 0    | %  |
| Common      |  | JamesRobb                                                                        |  |                                    | 853,775   |                  |  |   | 5.3  | %  |
| Common      |  | KennethBrice (2) c/o CFO Resources, Inc. 521 Executive DrivePrinceton, N.J.08450 |  |                                    | 0         |                  |  |   | 0    | %  |
| Common      |  | ArnoNA 500 West 37th StreetNew York, NY 10018(3)                                 |  |                                    | 1,000,000 |                  |  |   | 6.2  | %  |
| Common      |  | Alldirectors and executive officers as a group (4 persons)                       |  |                                    | 3,237,108 | (1)              |  |   | 20.0 | %  |
|             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------|
| (1) | Includesan option to purchase 150,000 shares of our common stock granted onJanuary  18,  2002 under our Stock Option Plan. |

|     |                                                                             |
|-----|-----------------------------------------------------------------------------|
| (2) | Mr.  Brice is serving as our ChiefFinancial Officer in a part-timecapacity. |

|     |                                                                                                          |
|-----|----------------------------------------------------------------------------------------------------------|
| (3) | Arno NA is controlledby Mr.  Michael Wahl, who has the power to dispose of, sell andvote the securities. |

|   |                                                                                         |
|---|-----------------------------------------------------------------------------------------|
| # | Percentagesare based on 16,105,000 shares issued and outstanding as ofApril  11,  2006. |

Item 12.    CertainRelationships and Related Transactions.

For informationconcerning employment agreements with, and compensation of, ourexecutive officers and directors, see the disclosure in the section ofthis Annual Report on Form 10-KSB captioned ‘‘ExecutiveCompensation.’’

As of March  20,  2006,our Chairman and former Chief Executive Officer and three separateunaffiliated accredited investors provided us with a loan in theaggregate principal amount of $442,000, of which $242,000 was providedby our Chairman. We issued these investors a convertible promissorynote which is convertible into securities we may issue in any financingtransaction that we consummate during the term of the Notes. The Notesare due one year from the date of issuance and accrue interest at therate of 10% per annum, payable upon maturity. The Notes wereissued pursuant to Section 4(2) of the Securities Act of 1933, asamended, as the investors are accredited investors with access tomaterial information about the company and we did not use any form ofgeneral solicitation. The Notes are restricted securities under theterms of the Securities Act of 1933 and may not be transferred orresold for a period of one year, except pursuant to registration underthe Securities Act or an exemption thereunder.

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We have agreed to retain Michael Salaman,our Chairman and former Chief Executive Officer, on a consultancy basispursuant to which he will provide us with marketing and productdevelopment advice and act as an advisor to our Chief ExecutiveOfficer. We are, however, continuing to negotiate the terms of thisarrangement and have not yet entered into a definitive agreement withhim.

In February  2004, we issued a total of 1,000,000shares of our common stock to our former Chief Executive Officer inconsideration of his agreement to convert a total amount of $270,000 ofoutstanding indebtedness we had to him and his agreement to pay anadditional amount of $25,329, which was repaid during the quarter endedMarch  31,  2005. This note bears interest at 4.0 percentper annum and the interest expense net of interest income for the yearended December  31,  2004 was $1,745.

In addition, weobtained a $500,000 letter of credit with Wachovia bank to secure ourpurchase orders with Agrokor. This letter of credit was secured bypersonal assets of our former Chief Executive Officer and bore interestat a rate of 7.5% per annum. As described above, this letter ofcredit was supported by a demand loan with Madison Bank and ourobligations have been transferred directly to this bank.

Wecompensate our Chief Financial Officer at the rate of $5,000 per monthbased on a consulting arrangement. We have not entered into a writtenagreement with our Chief Financial Officer.

Item13.    Exhibits

The exhibits designated with an asterisk (*)are filed herewith. Certain portions of exhibits marked with the symbol(#) have been omitted and are subject to our request for confidentialtreatment by the Securities and Exchange Commission. Such portions havebeen omitted and filed separately with the Commission. All otherexhibits have been previously filed with the Commission and, pursuantto 17 C.F.R. §230.411, are incorporated by reference to thedocument referenced in brackets following the descriptions of suchexhibits.

|            |  |                                                                                                                                                                                                                |  |  |  |  |
|------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description                                                                                                                                                                                                    |
| 3.1        |  | Certificateof Incorporation, as amended (filed as Exhibit 3.1 to RegistrationStatement on Form SB-2 filed with the Commission on September18,2002)                                                             |
| 3.2        |  | By-laws(filed as Exhibit 3.2 to Registration Statement on Form SB-2 filed withthe Commission on September  18,2002).                                                                                           |
| 4.1        |  | Specimen of Common StockCertificate (filed as Exhibit 4.1 to Registration Statement on FormSB-2 filed with the Commission on September  18,2002).                                                              |
| 4.2        |  | Form of Warrants IssuedMarch  30,  2004 (filed as Exhibit 4.2 to RegistrationStatement on Form 10-SB filed with the Commission on May13,  2005).                                                               |
| 4.3        |  | Form of ConvertibleDebentures issued during 2005 fiscal year (filed as Exhibit 4.3 toRegistration Statement on Form 10-SB filed with the Commission onOctober  19,  2005).                                     |
| 4.4        |  | Form ofWarrant issuable upon conversion of Convertible Debentures (filed asExhibit 4.4 to Registration Statement on Form 10-SB filed with theCommission on October  19,2005).                                  |
| 4.5        |  | Form of Warrant issued in PrivateSales of Securities (filed as Exhibit 4.5 to Registration Statement onForm 10-SB/A filed with the Commission on February  8,2006).                                            |
| 4.6        |  | Form of Convertible Note issuedto our Chairman and certain other individuals as of March20,  2006 (filed as Exhibit 4.6 to Registration Statement on Form10-SB/A filed with the Commission on March  23,2006). |
|            |

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|         |  |                                                                                                                                                                                                                |  |  |  |  |
|---------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 10.1    |  | Agreement and Plan ofReorganization with Inland Pacific Resources, Inc. (filed as Exhibit10.2 to Registration Statement on Form SB-2/A filed with the Commissionon January  29,2003).                          |
| 10.2#   |  | Agreement with Jamnica, d.d.,as amended, dated July  21,  2004 (filed as Exhibit 10.2 toRegistration Statement on Form 10-SB/A filed with the Commission onFebruary  8,2006).                                  |
| 10.3#   |  | Agreement with Peace MountainNatural Beverages Corporation, dated August  1,  2004(filed as Exhibit 10.3 to Registration Statement on Form 10-SB/A filedwith the Commission on February  8,2006).              |
| 10.4#   |  | Agreement with InterHealthNutraceuticals, Inc., dated June  9,  2004 (filed asExhibit 10.4 to Registration Statement on Form 10-SB/A filed with theCommission on February  8,2006).                            |
| 10.5#   |  | Agreement with Big Geyser,Inc., dated December  14,  2004 (filed as Exhibit 10.5 toRegistration Statement on Form 10-SB/A filed with the Commission onFebruary  8,2006).                                       |
| 10.6(1) |  | 2002 Stock Option Plan andForm of Option Award (filed as Exhibit 10.6 to Registration Statementon Form 10-SB filed with the Commission on May  13,2005).                                                       |
| 10.7    |  | Demand Note held by Madison Bank(filed as Exhibit 10.7 to Registration Statement on Form 10-SB/A filedwith the Commission on December  16,2005).                                                               |
| 10.8    |  | Lease Agreement datedSeptember  12,  2005 between the Company and Rose HillProperty Assoc., Inc. (filed as Exhibit 10.8 to Registration Statementon Form 10-SB filed with the Commission on October  19,2005). |
| 10.9*#  |  | Agreement with ExclusiveBeverage Distributors dated March  20,  2006..                                                                                                                                         |
| 21*     |  | Subsidiaries of Small BusinessIssuer.                                                                                                                                                                          |
| 31.1*   |  | Certification of ChiefExecutive Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d)-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002                                             |
| 31.2*   |  | Certification of Chief FinancialOfficer pursuant to Exchange Act Rules 13a-14(a) and 15(d) -14(a),adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002                                             |
| 32.1*   |  | Certification of Chief ExecutiveOfficer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.                                       |
|         |

|  |
|--|
|  |  |
|  |

|     |                                         |
|-----|-----------------------------------------|
| (1) | Indicatesa management plan or contract. |

Item 14.    PrincipalAccountant Fees and Services.

We have selected Connolly, Grady& Cha, PC, as our independent accountants for the current fiscalyear. The audit services to be provided by Connolly, Grady & Chaconsist of examination of financial statements, services relative tofilings with the Securities and Exchange Commission, and consultationin regard to various accounting matters. The financial statementsincluded with this Annual Report have been audited by Connolly, Grady& Cha. The following table presents fees for professional auditservices rendered by Connolly, Grady & Cha for each of the twofiscal years set forth below, and fees billed for other servicesperformed for the years ended December  31,  2005 and 2004.Fees for professional services by our independent auditors for thefiscal years 2005 and 2004 in each of the following categories are asfollows:

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|                   |  |                             |        |                             |  |        |       |        |  |  |
|-------------------|--|-----------------------------|--------|-----------------------------|--|--------|-------|--------|--|--|
|              |  | YearEnded December 31, 2005 |        | Year Ended December 31,2004 |
| Audit Fees(1)     |  | $                           | 25,000 |                        |  | $      | 9,030 |   |
| Audit-RelatedFees |  |                        | 0      |                        |  |   | 0     |   |
| Tax Fees(3)       |  |                        | 0      |                        |  |   | 0     |   |
| All Other Fees(4) |  |                        | 0      |                        |  |   | 0     |   |
| Total             |  | $                           | 25,000 |                        |  | $      | 9,030 |   |
|                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Auditservices consist of audit work performed in the preparation offinancial statements for the fiscal year and for the review offinancial statements included in Quarterly Reports on Form 10-Q duringthe fiscal year, as well as work that generally only the independentauditor can reasonably be expected to provide, including consents forregistration statement flings and responding to SEC comment letters onannual and quarterlyfilings. |

|     |                                                                                                                                                                                                                                                                  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Audit-related servicesconsist of assurance and related services that are traditionallyperformed by the independent auditor, including due diligence relatedto mergers and acquisitions, agreed upon procedures report andaccounting and regulatoryconsultations. |

|     |                                                                                                                                                                                                                                                                  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Tax servicesconsist of all services performed by the independent auditor’stax personnel, except those services specifically related to the auditof the financial statements, and includes fees in the areas of taxcompliance, tax planning, and taxadvice. |

|     |                                                                              |
|-----|------------------------------------------------------------------------------|
| (4) | Other services consistof those service not captured in the other categories. |

Wehave determined that the services provided by our independent auditorsand the fees paid to them for such services has not compromised theindependence of our independent auditors.

As our Board ofDirectors currently consists solely of three individuals, only one ofwhom is independent, the engagement of our independent accountants andauditors is approved by our Board of Directors acting as the auditcommittee. Accordingly, our entire Board, he has responsibility forappointing, setting compensation and overseeing the work of theindependent auditor.

Pursuant to Section 10A (i) (2) ofthe Securities Exchange Act of 1934, we are responsible for listing thenon-audit services approved by our Board (acting as the AuditCommittee) to be performed by our independent registered publicaccounting firm. During the fourth quarter of fiscal 2005, we did notpre-approve the performance of any non-audit services by ourindependent registered public accountingfirm.

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CreativeEnterprises International Inc.andSubsidiary

Consolidated FinancialStatements

December  31,2005

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Creative Enterprises International,Inc. and SubsidiaryDecember  31,2005

Contents

|                                                                                                        |  |        |  |  |  |  |
|--------------------------------------------------------------------------------------------------------|--|--------|--|--|--|--|
|                                                                                                   |  | Page   |
| IndependentAuditor'sReport                                                                             |  | F-3    |
| FinancialStatements                                                                                    |  |   |
| ConsolidatedBalance Sheet, December  31,  2005 and2004                                                 |  | F-4    |
| Consolidated Statements ofOperationsFor the Years Ended December  31,  2005 and2004                    |  | F-6    |
| Consolidated Statements ofStockholders' Equity (Deficit)For the Years EndedDecember  31,  2005 and2004 |  | F-7    |
| Consolidated Statements of CashFlowsFor the Years Ended December  31,  2005 and2004                    |  | F-9    |
| Notes to Consolidated FinancialStatements                                                              |  | F-11   |
|                                                                                                        |

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Table of Contents

INDEPENDENT AUDITOR’SREPORT

To the Board of Directors and StockholdersofCreative Enterprises International, Inc. and Subsidiary461Park Avenue SouthNew York, NY 10016

We have audited theaccompanying consolidated balance sheet of Creative EnterprisesInternational, Inc. (a Nevada Corporation) and Subsidiary as ofDecember  31,  2005 and 2004 and the related consolidatedstatements of operations, stockholders’ equity (deficit) andcash flows for each of the years in the three year period endedDecember  31,  2005. These consolidated financialstatements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

We conducted our auditin accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amountsand disclosures in the consolidated financial statements. An audit alsoincludes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, inall material respects, the financial position of Creative EnterprisesInternational, Inc. and Subsidiary as of December  31,2005 and 2004 and the results of their operations and their cash flowsfor each of the years in the three year period ended December31,  2005 in conformity with accounting principles generallyaccepted in the United States of America.

The accompanyingfinancial statements have been prepared assuming the Company willcontinue as a going concern. As discussed in Note 2 to the financialstatements, the Company has incurred losses since inception and has notyet been successful in establishing profitable operations. Further, theCompany has current liabilities in excess of current assets. Thesefactors raise substantial doubt about the ability of the Company tocontinue as a going concern. Management’s plans in regards tothese matters are also described in Note 2. The financial statements donot include any adjustments that might result from the outcome of theseuncertainties.

|  | /s/ Connolly, Grady & Cha,P.C.Certified PublicAccountants |
|--|---------------------------------------------------------------|

Philadelphia,Pennsylvania

April  6,2006

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CreativeEnterprises International, Inc. and SubsidiaryConsolidated BalanceSheet

ASSETS

|                          |  |             |         |         |  |        |                                                  |         |  |  |
|--------------------------|--|-------------|---------|---------|--|--------|--------------------------------------------------|---------|--|--|
|                     |  | December31, |
|                     |  | 2005        |         | 2004    |
| CURRENTASSETS            |  |        |    |    |  |   |                                             |    |
| Cash and cashequivalents |  | $           | 76,780  |    |  | $      | 3,326                                            |    |
| Accountsreceivable       |  |        | 71,877  |    |  |   |                                             |    |
| Inventory                |  |        | 193,082 |    |  |   |                                             |    |
| Prepaidexpenses          |  |        | 97,878  |    |  |   |          |    |
| Totalcurrentassets       |  |        | 439,617 |    |  |   | 3,326                                            |    |
| FIXEDASSETS              |  |        |    |    |  |   |                                             |    |
| Fixedassets              |  |        | 138,833 |    |  |   | 17,491                                           |    |
| Accumulateddepreciation  |  |        | (18,439 | )  |  |   | (4,535                                           | )  |
| Totalfixedassets         |  |        | 120,394 |    |  |   | 12,956                                           |    |
| OTHERASSETS              |  |        | 11,790  |    |  |   |          |    |
| TOTALASSETS              |  | $           | 571,801 |    |  | $      | 16,282                                           |    |
|                          |

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Table of Contents

Creative Enterprises International, Inc.and SubsidiaryConsolidated Balance Sheet

LIABILITIES ANDSTOCKHOLDERS’DEFICIT

|                                                                                                                                                                                     |  |             |            |         |  |        |                          |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|------------|---------|--|--------|--------------------------|---------|--|--|
|                                                                                                                                                                                |  | December31, |
|                                                                                                                                                                                |  | 2005        |            | 2004    |
| CURRENTLIABILITIES                                                                                                                                                                  |  |        |       |    |  |   |                     |    |
| Current maturities oflong-termdebt                                                                                                                                                  |  | $           | 106,216    |    |  | $      | 62,500                   |    |
| Accountspayable                                                                                                                                                                     |  |        | 516,255    |    |  |   | 173,667                  |    |
| Accruedinterestpayable                                                                                                                                                              |  |        | 204,504    |    |  |   | 2,370                    |    |
| Lineofcredit                                                                                                                                                                        |  |        | 314,533    |    |  |   |                     |    |
| Advances                                                                                                                                                                            |  |        |       |    |  |   | 507,750                  |    |
| Currentportion of convertiblenotes                                                                                                                                                  |  |        | 177,000    |    |  |   |      |    |
| Totalcurrentliabilities                                                                                                                                                             |  |        | 1,318,508  |    |  |   | 746,287                  |    |
| LONGTERM LIABILITIES                                                                                                                                                                |  |        |       |    |  |   |                     |    |
| Long-term debt, net of currentportion                                                                                                                                               |  |        | 20,320     |    |  |   |                     |    |
| Convertible notes payable,net of currentportion                                                                                                                                     |  |        | 2,459,000  |    |  |   |      |    |
| Totallong termliabilities                                                                                                                                                           |  |        | 2,479,320  |    |  |   |                     |    |
| STOCKHOLDERS’DEFICIT                                                                                                                                                          |  |        |       |    |  |   |                     |    |
| Preferred stock, $.001 par value, 1,000,000shares authorized, none issued and outstanding                                                                                           |  |        |       |    |  |   |                     |    |
| Common stock, $.001 par value, 50,000,000 sharesauthorized, 15,115,000 shares issued and outstanding at December31,  2005 and 12,977,500 issued and outstanding atDecember  31,2004 |  |        | 15,115     |    |  |   | 12,977                   |    |
| Stocksubscriptionsreceivable                                                                                                                                                        |  |        |       |    |  |   | (25,324                  | )  |
| Additionalpaid-incapital                                                                                                                                                            |  |        | 4,754,303  |    |  |   | 3,847,941                |    |
| (Deficit)accumulated during the developmentstage                                                                                                                                    |  |        | (7,995,445 | )  |  |   | (4,565,599               | )  |
| Totalstockholders’deficit                                                                                                                                                     |  |        | (3,226,027 | )  |  |   | (730,005                 | )  |
| TOTALLIABILITIES AND STOCKHOLDERS’DEFICIT                                                                                                                                     |  | $           | 571,801    |    |  | $      | 16,282                   |    |
|                                                                                                                                                                                     |

Seeaccompanying notes and accountant’sreport.

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Creative Enterprises International, Inc.and SubsidiaryConsolidated Statements ofOperations

|                                    |  |                                |            |         |  |        |            |         |  |        |          |         |  |  |
|------------------------------------|--|--------------------------------|------------|---------|--|--------|------------|---------|--|--------|----------|---------|--|--|
|                               |  | Forthe Years Ended December31, |
|                               |  | 2005                           |            | 2004*   |  | 2003   |
| Revenue–net                  |  | $                              | 514,146    |    |  | $      | 11,704     |    |  | $      | 26,276   |    |
| Costof goodssold                   |  |                           | 456,270    |    |  |   | 49,484     |    |  |   | 26,276   |    |
| Grossprofit                        |  |                           | 57,876     |    |  |   | (37,780    | )  |  |   |     |    |
| Expenses                           |  |                           |       |    |  |   |       |    |  |   |     |    |
| Marketingandadvertising            |  |                           | 1,307,186  |    |  |   | 604,490    |    |  |   | 309,076  |    |
| Generalandadministrative           |  |                           | 1,950,320  |    |  |   | 506,046    |    |  |   | 387,173  |    |
| Totalexpenses                      |  |                           | 3,257,506  |    |  |   | 1,110,536  |    |  |   | 696,249  |    |
| Net(loss) fromoperations           |  |                           | (3,199,630 | )  |  |   | (1,148,316 | )  |  |   | (696,249 | )  |
| Otherincome (expense)              |  |                           |       |    |  |   |       |    |  |   |     |    |
| Loss ondisposition of fixed assets |  |                           |       |    |  |   |       |    |  |   |     |    |
| Interestexpense                    |  |                           | (230,216   | )  |  |   | (40,620    | )  |  |   | (4,962   | )  |
| Interestincome                     |  |                           |       |    |  |   |       |    |  |   |     |    |
| Total otherexpense                 |  |                           | (230,216   | )  |  |   | (40,620    | )  |  |   | (4,962   | )  |
| IncomeTaxes                        |  |                           |       |    |  |   |       |    |  |   |     |    |
| Current                            |  |                           | -0-        |    |  |   | -0-        |    |  |   | -0-      |    |
| Deferred                           |  |                           | -0-        |    |  |   | -0-        |    |  |   | -0-      |    |
| Totalincometaxes                   |  |                           | -0-        |    |  |   | -0-        |    |  |   | -0-      |    |
| Net(Loss)                          |  | $                              | (3,429,846 | )  |  | $      | (1,188,936 | )  |  | $      | (701,211 | )  |
| (Loss)per commonshare              |  | $                              | (.26       | )  |  | $      | (.10       | )  |  | $      | (.08     | )  |
|                                    |

|  |                                          |
|--|------------------------------------------|
|  | * Restatedfor comparative purposes. |

See accompanying notes andaccountant’s report.

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CreativeEnterprises International, Inc. and SubsidiaryStatement ofStockholders’ Equity (Deficit)For The Years EndedDecember  31,  2005 and2004

|                                                                      |  |             |            |                          |  |                             |        |                    |  |        |           |        |  |        |         |         |  |        |            |         |  |  |
|----------------------------------------------------------------------|--|-------------|------------|--------------------------|--|-----------------------------|--------|--------------------|--|--------|-----------|--------|--|--------|---------|---------|--|--------|------------|---------|--|--|
|                                                                 |  | CommonStock |            | AdditionalPaid-InCapital |  | StockSubscriptionReceivable |        | AccumulatedDeficit |
|                                                                 |  | Shares      |            | Amount                   |
| Balance,December  31,2003                                            |  |        | 8,817,500  |                     |  | $                           | 8,817  |               |  | $      | 2,924,101 |   |  | $      |         |    |  | $      | (3,376,663 | )  |
| Issuanceof common stock forcash at $.27 pershare                     |  |        | 906,189    |                     |  |                        | 906    |               |  |   | 243,765   |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for subscription receivable at $.27 pershare |  |        | 93,811     |                     |  |                        | 94     |               |  |   | 25,235    |   |  |   | (25,329 | )  |  |   |       |    |
| Issuanceof common stock for cash at $.20 pershare                    |  |        | 205,000    |                     |  |                        | 205    |               |  |   | 40,795    |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for cash at $.10 pershare                    |  |        | 1,100,000  |                     |  |                        | 1,100  |               |  |   | 108,900   |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for cash at $.15 pershare                    |  |        | 200,000    |                     |  |                        | 200    |               |  |   | 29,800    |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for cash at $.20 pershare                    |  |        | 230,000    |                     |  |                        | 230    |               |  |   | 45,770    |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for services rendered at $.25 pershare       |  |        | 1,000,000  |                     |  |                        | 1,000  |               |  |   | 249,000   |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for services rendered at $.42 pershare       |  |        | 200,000    |                     |  |                        | 200    |               |  |   | 83,800    |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for cash at $.20 pershare                    |  |        | 125,000    |                     |  |                        | 125    |               |  |   | 24,875    |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for services rendered at $.72 pershare       |  |        | 100,000    |                     |  |                        | 100    |               |  |   | 71,900    |   |  |   |    |    |  |   |       |    |
| Netloss for the year ended December31,2004                           |  |        |       |                     |  |                        |   |               |  |   |      |   |  |   |    |    |  |   | (1,188,936 | )  |
| Balance,December  31,2004                                            |  |        | 12,977,500 |                     |  | $                           | 12,977 |               |  | $      | 3,847,941 |   |  | $      | (25,329 | )  |  | $      | (4,565,599 | )  |
|                                                                      |

(Continued)

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Creative Enterprises International, Inc.and SubsidiaryStatement of Stockholders’ Equity(Deficit)For The Years Ended December  31,  2005 and2004

|                                                                   |  |             |            |                          |  |                             |        |                    |  |        |           |        |  |        |         |         |  |        |            |         |  |  |
|-------------------------------------------------------------------|--|-------------|------------|--------------------------|--|-----------------------------|--------|--------------------|--|--------|-----------|--------|--|--------|---------|---------|--|--------|------------|---------|--|--|
|                                                              |  | CommonStock |            | AdditionalPaid-InCapital |  | StockSubscriptionReceivable |        | AccumulatedDeficit |
|                                                              |  | Shares      |            | Amount                   |
| Balance, December  31,2004                                        |  |        | 12,977,500 |                     |  | $                           | 12,977 |               |  | $      | 3,847,941 |   |  | $      | (25,329 | )  |  | $      | (4,565,599 | )  |
| Issuance of common stock for services rendered at $.20 pershare   |  |        | 125,000    |                     |  |                        | 125    |               |  |   | 24,875    |   |  |   |    |    |  |   |       |    |
| Repaymentof stocksubscription                                     |  |        |       |                     |  |                        |   |               |  |   |      |   |  |   | 25,329  |    |  |   |       |    |
| Issuanceof shares as incentive for bridge at $1,00 pershare       |  |        | 52,000     |                     |  |                        | 52     |               |  |   | 51,948    |   |  |   |    |    |  |   |       |    |
| Conversionof convertible debt into common shares at $.40 pershare |  |        | 1,338,000  |                     |  |                        | 1,338  |               |  |   | 533,862   |   |  |   |    |    |  |   |       |    |
| Stockissued for consulting services at $.83 pershare              |  |        | 110,000    |                     |  |                        | 110    |               |  |   | 91,190    |   |  |   |    |    |  |   |       |    |
| Issuanceof common stock for cash at $.40 pershare                 |  |        | 512,500    |                     |  |                        | 513    |               |  |   | 204,487   |   |  |   |    |    |  |   |       |    |
| Netloss for the 12 months ended December  31,2005                 |  |        |       |                     |  |                        |   |               |  |   |      |   |  |   |    |    |  |   | (3,429,846 | )  |
| Balance,December  31,2005                                         |  |        | 15,115,000 |                     |  | $                           | 15,115 |               |  | $      | 4,754,303 |   |  | $      | 0       |    |  | $      | (7,995,445 | )  |
|                                                                   |

Seeaccompanying notes and accountant'sreport.

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Creative Enterprises International, Inc.and SubsidiaryStatements of Cash FlowsIncrease (Decrease) inCash and CashEquivalents

|                                                                           |  |                                |            |         |  |        |            |         |  |        |          |         |  |  |
|---------------------------------------------------------------------------|--|--------------------------------|------------|---------|--|--------|------------|---------|--|--------|----------|---------|--|--|
|                                                                      |  | Forthe Years Ended December31, |
|                                                                      |  | 2005                           |            | 2004    |  | 2003   |
| CASHFLOWS FROM OPERATINGACTIVITIES                                        |  |                           |
| NetLoss                                                                   |  | $                              | (3,429,846 | )  |  | $      | (1,188,936 | )  |  | $      | (701,211 | )  |
| Lossfrom disposition of fixedassets                                       |  |                           |
| Adjustmentsto reconcile net loss to net cash used by operatingactivities: |  |                           |
| Stock issued forservices                                                  |  |                           |       |    |  |   | 406,000    |    |  |   | 187,500  |    |
| Changesin operating assets andliabilities:                                |  |                           |
| Depreciation                                                              |  |                           | 13,904     |    |  |   | 2,392      |    |  |   | 2,143    |    |
| (Increase)decrease in:                                                    |  |                           |
| Accountsreceivable                                                        |  |                           | (71,877    | )  |  |   |       |    |  |   | 8,644    |    |
| Inventories                                                               |  |                           | (193,082   | )  |  |   | 14,517     |    |  |   | 122,406  |    |
| Prepaidexpenses                                                           |  |                           | (97,878    | )  |  |   |       |    |  |   |     |    |
| Otherassets                                                               |  |                           | (11,790    | )  |  |   |       |    |  |   |     |    |
| Increase(decrease) in:                                                    |  |                           |
| Accountspayable                                                           |  |                           | 342,588    |    |  |   | (35,018    | )  |  |   | 100,685  |    |
| Accruedinterest                                                           |  |                           | 202,134    |    |  |   |       |    |  |   |     |    |
| Netcash used in operatingactivities                                       |  |                           | (3,245,847 | )  |  |   | (801,045   | )  |  |   | (279,833 | )  |
| CASHFLOWS FROM INVESTINGACTIVITIES                                        |  |                           |
| Purchase offurniture andfixtures                                          |  |                           | (121,342   | )  |  |   | (2,490     | )  |  |   | (15,000  | )  |
| Netcash used in investingactivities                                       |  |                           | (121,342   | )  |  |   | (2,490     | )  |  |   | (15,000  | )  |
|                                                                           |

(Continued)

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Table of Contents

Creative Enterprises International, Inc.and SubsidiaryStatements of Cash FlowsIncrease (Decrease) inCash and CashEquivalents

|                                                       |  |                                |           |         |  |        |          |         |  |        |         |        |  |  |
|-------------------------------------------------------|--|--------------------------------|-----------|---------|--|--------|----------|---------|--|--------|---------|--------|--|--|
|                                                  |  | Forthe Years Ended December31, |
|                                                  |  | 2005                           |           | 2004    |  | 2003   |
| CASHFLOWS FROM FINANCINGACTIVITIES                    |  |                           |
| Proceeds(payments) from stockholders loans(net)       |  | $                              | 25,324    |    |  | $      | (287,052 | )  |  | $      | 148,996 |   |
| Issuanceof commonstock                                |  |                           | 1,830     |    |  |   | 522,000  |    |  |   | 125,000 |   |
| Contributedcapital                                    |  |                           | 906,670   |    |  |   |     |    |  |   | 22,500  |   |
| Proceedsfrom convertible debenture, net ofconversions |  |                           | 2,636,000 |    |  |   |     |    |  |   |    |   |
| Proceeds(payments) fromadvances                       |  |                           | (507,750  | )  |  |   | 507,750  |    |  |   |    |   |
| Proceedsfrom line ofcredit                            |  |                           | 314,533   |    |  |   |     |    |  |   |    |   |
| Proceedsfrom long-termdebt                            |  |                           | 64,036    |    |  |   | 62,500   |    |  |   |    |   |
| Netcash provided in financingactivities               |  |                           | 3,440,643 |    |  |   | 805,198  |    |  |   | 296,496 |   |
| NETINCREASE INCASH                                    |  |                           | 73,454    |    |  |   | 1,663    |    |  |   | 1,663   |   |
| Cashand cash equivalents, beginning ofperiod          |  |                           | 3,326     |    |  |   | 1,663    |    |  |   | 0       |   |
| CASHAND CASH EQUIVALENTS, END OFPERIOD                |  | $                              | 76,780    |    |  | $      | 3,326    |    |  | $      | 1,663   |   |
|                                                       |

SUPPLEMENTALSCHEDULE OF NONCASH

INVESTING AND FINANCINGACTIVITIES

For the year ended December  31,2005

None

For the year endedDecember  31,  2004

None

Forthe year ended December  31,2003

None

See accompanyingnotes and accountant's report.

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Table of Contents

CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|          |                            |
|----------|----------------------------|
| 1.  | ORGANIZATIONAND OPERATIONS |

Creative Enterprises International, Inc. (the‘‘Company’’), formerly Inland PacificResources, Inc. Sahara Gold Corporation and Parvin Energy, Inc. wasorganized June  20,  1984 as a Utah Corporation. OnJuly  26,  1985, the Company changed its domicile to aNevada Corporation.

On December  18,  2001 theCompany entered into an agreement and plan of reorganization withCreative Enterprises, Inc. where Creative Enterprises, Inc.stockholders acquired 7,500,000 shares of voting common stock ofCreative Enterprise International, Inc. in exchange for 7,500,000shares of voting common stock of Creative Enterprises, Inc. The7,500,000 shares of Creative Enterprise International, Inc. shares wereto be issued as follows: 2,500,000 shares at closing, 2,500,000 sharesif Creative Enterprises International, Inc. revenues reached 7.5million for the year ended December  31,  2002 and thefinal 2,500,000 shares to be issued if Creative EnterprisesInternational, Inc. revenues reached 15  million for the yearended December  31,  2003. These goals were not achievedand the 5,000,000 shares to be issued were retired. The effect of thisagreement and reorganization was to make Creative Enterprises, Inc. awholly-owned subsidiary of Creative Enterprises International,Inc.

The Company has one wholly owned subsidiary, CreativeEnterprises, Inc. formed in fiscal 2001. Creative Enterprises, Inc.owns Creative Partners International, LLC formed in fiscal 2001. TheCompany is a marketing company that promotes and wholesales uniqueconsumer products including brands such as Jana, a premium artesianbottled water product which recently won the prestigious 2005 EauscarAward for ‘‘highest quality’’ at theAqua-Expo in Paris, France; Skinny Water which is a bottled waterenhanced with all-natural appetite suppressant that helps peoplemaintain and loose weight; and others. The Company has secured anexclusive North American license and distributor agreement withJamnica, d.d. for Jana water and has obtained the exclusive licensingrights to Skinny Water. The term of the agreement with Jamnica is foran initial term of one year from the date the Company receives certaingovernment approvals; this agreement automatically renews thereaftersubject to the Company’s achievement of revenue targets. Theterm of the agreement with Peace Mountain for the licensing rights ofSkinny Water is for three years and self renews each year unlessterminated. The Company has an agreement with InterHealthNeutraceuticals, on a non-exclusive basis to sell, market, distributeand package Super Citrimax, the active ingredient in Skinny Water. Theterm of this agreement is into perpetuity unless canceled by eitherparty.

|          |               |
|----------|---------------|
| 2.  | GOING CONCERN |

Theaccompanying financial statements have been prepared in conformity withgenerally accepted accounting principles, which contemplatecontinuation of the Company as a going concern. However, the Companyhas incurred losses since its inception and has not yet been successfulin establishing profitable operations. Further, the Company has currentliabilities in excess of current assets. These factors raisesubstantial doubt about the ability of the Company to continue as agoing concern. In this regard, management is proposing to raise anynecessary additional funds through sales of its common stock or throughloans from shareholders. There is no assurance that the Company will besuccessful in raising additional capital or achieving profitableoperations. The financial statements do not include any adjustmentsthat might result from the outcome of theseuncertainties.

|          |                                           |
|----------|-------------------------------------------|
| 3.  | SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES |

AccountingMethod

The Company’s financial statements areprepared on the accrual method of accounting.

Basis ofConsolidation

The consolidated financial statements includethe accounts of Creative Enterprises International, Inc. and CreativeEnterprises, Inc. All intercompany accounts and transactions have beeneliminated in consolidation.

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|          |                                                            |
|----------|------------------------------------------------------------|
| 3.  | SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued) |

Revenue Recognition

TheCompany sells products through multiple distribution channels includingresellers and distributors. Revenue is recognized when the product isshipped to the customer and is recognized net of discounts and returns.Revenues generated up to December  31,  2004 are related toproduct lines that have been discontinued.

Cash and CashEquivalents

For purposes of reporting the statement of cashflows, the Company includes all cash accounts, which are not subject towithdrawal restrictions or penalties, and all highly liquid debtinstruments purchased with a maturity of three months or less as cashand cash equivalents. The carrying amount of financial instrumentsincluded in cash and cash equivalents approximates fair value becauseof the short maturities for the instrumentsheld.

Depreciation

Property and equipment arerecorded at cost and depreciated over the estimated useful lives of therelated assets, which range from five to seven years. Depreciation iscomputed on the straight line method for financial reporting and incometax purposes.

Accounts Receivable

The Companyconsiders accounts receivable to be fully collectable; accordingly, noallowance for doubtful accounts is required. If amounts becomeuncollectible, they will be charged to operations when thatdetermination is made. No such charges were recorded for the yearsended December  31,  2005 and2004.

Inventories

Inventory consist of finishedgoods and are stated at the lower of cost or market determined by thefirst-in, first-out method.

Loss Per Share

Basicnet loss per share is computed by dividing net loss available forcommon stock by the weighted average number of common sharesoutstanding during the period.

Use of Estimates in thePreparation of Financial Statements

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amount of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from thoseestimates.

|          |                                 |
|----------|---------------------------------|
| 4.  | RECENTACCOUNTING PRONOUNCEMENTS |

FASB Statement No. 123 (Revised2004), Share-Based Payment, became effective for periods afterJune  15,  2005. The revision to FAS 123 requires financialstatement cost recognition for certain share-based payment transactionsthat are made after the effective date in return for goods andservices. Additionally, the revision requires financial statement costrecognition for certain share-based payment transactions that have beenmade prior to the effective date but for which the requisite service isprovided after the effective date. The Company has adopted FASB No. 123and the results are reflected in the current financialstatements.

FASB Statement No. 151, Inventory Costs, an amendmentto ARB No. 43, Chapter 4, sets forth certain costs related to inventorythat must be included as current period costs. This statement becameeffective for periods beginning after June  15,  2005 andis not expected to materially impact the Company.

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|          |                                                  |
|----------|--------------------------------------------------|
| 4.  | RECENTACCOUNTING PRONOUNCEMENTS (Continued) |

FASB Statement No. 153, Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29 became effectivefor periods beginning after June  15,  2005 and is notexpected to materially impact the Company.

FASB InterpretationNo. 46, Accounting for Conditional Asset Retirement Obligations wasissued in March  2005 and is not expected to materially impactthe Company. Through December  31,  2005, no assetsacquired by the Company fall within this interpretation.

InMarch  2005, the FASB issued FASB Interpretation No. 47,‘‘Accounting for Conditional Asset RetirementObligations.’’ This Interpretation clarifies that theterm conditional asset retirement obligation as used in FASB StatementNo. 143, Accounting for Asset Retirement Obligations, refers to a legalobligation to perform an asset retirement activity in which the timingand(or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. The obligation toperform the asset retirement activity is unconditional even thoughuncertainty exists about the timing and (or) method of settlement.Thus, the timing and (or) method of settlement may be conditional on afuture event. Accordingly, an entity is required to recognize aliability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonablyestimated. The fair value of a liability for the conditional assetretirement obligation should be recognized when incurred-generally uponacquisition, construction, or development and (or) through the normaloperation of the asset. Uncertainty about the timing and (or) method ofsettlement of a conditional asset retirement obligation should befactored into the measurement of the liability when sufficientinformation exists. Statement 143 acknowledges that in some cases,sufficient information may not be available to reasonably estimate thefair value of an asset retirement obligation. This Interpretation alsoclarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation.This Interpretation shall be effective no later than the end of fiscalyears ending after December  15,  2005. The adoption ofthis Interpretation is not expected to have a material impact on theCompany’s financial statements.

In May  2005, theFASB issued SFAS No. 154 "Accounting Changes and ErrorCorrections’’, a replacement of APB Opinion No. 20,‘‘Accounting Changes’’, and FASB StatementNo. 3, ‘‘Reporting Accounting Changes in InterimFinancial Statements’’. This Statement applies to allvoluntary changes in accounting principle. It also applies to changesrequired by an accounting pronouncement in the unusual instance thatthe pronouncement does not include specific transition provisions. Whena pronouncement includes specific transition provisions, thoseprovisions should be followed. Opinion 20 previously required that mostvoluntary changes in accounting principle be recognized by including innet income of the period of the change the cumulative effect ofchanging to the new accounting principle. This Statement requiresretrospective application to prior periods’ financial statementsof changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effectof the change. When it is impracticable to determine theperiod-specific effects of an accounting change on one or moreindividual prior periods presented, this Statement requires that thenew accounting principle be applied to the balances of assets andliabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a correspondingadjustment be made to the opening balance of retained earnings (orother appropriate components of equity or net assets in the statementof financial position) for that period rather than being reported in anincome statement. When it is impracticable to determine the cumulativeeffect of applying a change in accounting principle to all priorperiods, this Statement requires that the new accounting principle beapplied to all other periods, this Statement requires that the newaccounting principal be applied as if it were adopted prospectivelyfrom the earliest date practicable. This Statement definesretrospective application as the application of a different accountingprinciple to prior accounting periods as if that principle had alwaysbeen used or as the adjustment of previously issued financialstatements to reflect a change in the reporting entity. This

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|          |                                                  |
|----------|--------------------------------------------------|
| 4.  | RECENTACCOUNTING PRONOUNCEMENTS (Continued) |

Statement also redefines restatement as therevising of previously issued financial statements to reflect thecorrection of an error. This Statement requires that retrospectiveapplication of a change in accounting principle be limited to thedirect effects of the change. Indirect effects of a change inaccounting principle, such as a change in nondiscretionaryprofit-sharing payments resulting from an accounting change, should berecognized in the period of the accounting change. This Statement alsorequires that a change in depreciation, amortization, or depletionmethod for long-lived, nonfinancial assets be accounted for as a changein accounting estimate affected by a change in accounting principle.This Statement carries forward without change the guidance contained inOpinion 20 for reporting the correction of an error in previouslyissued financial statements and a change in accounting estimate. ThisStatement also carries forward the guidance in Opinion 20 requiringjustification of a change in accounting principle on the basis ofpreferability. This Statement shall be effective for accounting changesand corrections of errors made in fiscal years beginning afterDecember  31,  2005. Early adoption is permitted foraccounting changes and corrections of errors made in fiscal yearsbeginning after the date this Statement is issued. The adoption of thisStatement is not expected to have a material impact on theCompany’s financial statements.

|          |          |
|----------|----------|
| 5.  | ADVANCES |

Advances consist of moniesreceived from unrelated parties for the purpose of purchasingconvertible debentures. The convertible debentures were issuedJanuary  3,  2005.

|          |                            |
|----------|----------------------------|
| 6.  | RELATED PARTY TRANSACTIONS |

InFebruary  2004, an officer and shareholder purchased 1,000,000shares of stock by converting 244,671 of shareholders loans owed fromthe Company and creating a $25,239 stock subscriptions receivable tothe Company. This amount was paid in full on September30,  2005.

|          |                        |
|----------|------------------------|
| 7.  | CONVERTIBLE DEBENTURES |

ThroughDecember  31,  2005, the Company raised an aggregate amountof $3,171,200 ($2,663,450 was raised this fiscal year, $507,750 wasraised during fiscal year 2004) from the sale of our convertibledebentures to accredited investors in a private placement pursuant toRule 506 of Regulation D under the Securities Act of 1933, as amended.Each $40,000 debenture is convertible into a Conversion Unit consistingof 100,000 shares of our common stock and 100,000 common stock purchasewarrants. Both the common stock and the warrants are issued only uponthe conversion of the convertible debenture into the appropriate numberof common shares. Accordingly, APB 14 does not apply. The initialconversion price is $0.40 per share. The conversion price is subject toadjustment in the event we subdivide, combine or reclassify our commonstock into a greater or lesser number of shares (as the case may be) ormake a dividend or distribution to stockholders in shares of commonstock. Each debenture will mature two years from the date of issuanceunless previously converted. Interest is earned on each debenture atthe rate of 10% per annum. Interest shall be paid in full at thematurity date or such earlier date on which the principal is paid tothe holder or on which the debenture is converted or exchanged pursuantto its terms. The accrued but unpaid interest on each debenture shallbe payable in cash or in interest shares, at the option of the Company,so long as there is an effective registration statement providing forthe 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 prepaymentprice equal to the principal amount of the debentures to be prepaid,together with accrued and unpaid interest thereon through the date ofprepayment.

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|          |                                         |
|----------|-----------------------------------------|
| 7.  | CONVERTIBLE DEBENTURES (Continued) |

The raise includes an aggregate ofapproximately $2.4  million of convertible debentures that weresubject to a rescission offer which expired on October31,  2005 and our sale of an additional $165,000 of convertibledebentures that were offered concurrently with the rescission offer.Holders of an aggregate of $160,000 of convertible debentures principalamount of convertible debentures elected to accept our rescissionoffer. These rescissions were paid on October  7,2005.

At December  31,  2005, holders of $535,200 ofthese debentures converted to 1,338,000 shares of the Company’scommon stock.

Should the investors not convert their remainingdebentures, the Company would have to pay the holders asfollows:

|       |  |   |           |        |  |  |
|-------|--|---|-----------|--------|--|--|
| Year1 |  | $ | 177,000   |   |
| Year2 |  | $ | 2,459,000 |   |
|       |

|          |                   |
|----------|-------------------|
| 8.  | SALEOF SECURITIES |

The Company raised a total of $205,000 during thequarter ended December  31,  2005 to accredited investorsfrom the sale of 512,5000 shares of its common stock at $.40 per share.These shares also included a 5 year warrant attached for each share, atotal of 512,500 warrants.

|          |               |
|----------|---------------|
| 9.  | LINEOF CREDIT |

The Company obtained a $500,000 letter of credit withWachovia bank to secure our purchase orders with Agrokor. This letterof credit was secured by personal assets of our chairman and boreinterest at a rate of 7.5% per annum. The Company borrowed$314,000 against this letter of credit in placing our initial orderwith Agrokor for 1,200,000 bottles of product. These bottles have beenshipped into the U.S. The letter of credit was originally supported bya $500,000 demand note (line of credit) issued to Wachovia throughMadison Bank. On June  1,  2005, our obligations weretransferred to Madison Bank. The interest on the demand note is onepercent above the prime rate and the outstanding balance is due on thebank’sdemand.

|           |               |
|-----------|---------------|
| 10.  | LONG-TERMDEBT |

Long-term debt consisted of the following atDecember  31,  2005 and 2004.

|                                                                                                                                              |  |        |         |        |  |        |        |        |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------|--|--------|---------|--------|--|--------|--------|--------|--|--|
|                                                                                                                                         |  | 2005   |         | 2004   |
| Notepayable to an individual unsecured, payable on demand, includinginterest at 15% due August2006.                                          |  | $      | 100,000 |   |  | $      | 62,500 |   |
| Notespayable to GMAC, secured by equipment payable in 60 monthly payments of$418.40, including interest at 6.09% payable throughOctober2009. |  |   | 26,536  |   |  |   | -0-    |   |
|                                                                                                                                         |  |   | 126,536 |   |  |   | 62,500 |   |
| Lesscurrent                                                                                                                                  |  |   | 106,216 |   |  |   |   |   |
|                                                                                                                                         |  | $      | 20,320  |   |  | $      | 62,500 |   |
|                                                                                                                                              |

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|           |                                |
|-----------|--------------------------------|
| 10.  | LONG-TERMDEBT (Continued) |

Future maturities of long-term debt forthe years ending December  31 are asfollows:

|                       |  |        |        |        |  |  |
|-----------------------|--|--------|--------|--------|--|--|
| YearEndingDecember31, |  | Amount |
| 2006                  |  | $      | 5,021  |   |
| 2007                  |  |   | 5,021  |   |
| 2008                  |  |   | 5,021  |   |
| 2009                  |  |   | 5,257  |   |
|                  |  | $      | 20,320 |   |
|                       |

CreativeEnterprises International, Inc. and Subsidiary paid interest of $9,925and $5,264 for the years ended December  31,  2005 and2004, respectively.

|           |                                         |
|-----------|-----------------------------------------|
| 11.  | CASHDEPOSITED IN FINANCIAL INSTITUTIONS |

The Company maintains itscash in bank deposit accounts and financial institutions. Accounts ateach institution are insured by the Federal Deposit InsuranceCorporation up to $100,000. The bank accounts at times exceed federallyinsured limits. The Company has not experienced any losses on suchaccounts.

|           |             |
|-----------|-------------|
| 12.  | INCOMETAXES |

The Company accounts for income taxes in accordance withStatement of Financial Accounting Standards (SFAS) No. 109"Accounting for Income Taxes’’. SFAS 109requires the Company to provide a net deferred tax asset/liabilityequal to the expected future tax benefit/expense of temporary reportingdifferences between book and tax accounting methods and any availableoperating loss or tax credit carryforwards. At December31,  2004, the Company has available unused operating losscarryforwards on which may be applied against future taxable income andwhich expire in various years through 2020.

The amount of andultimate realization of the benefits from the operating losscarryforwards for income tax purposes is dependent, in part, upon thetax laws in effect, the future earnings of the Company, and otherfuture events, the effects of which cannot be determined because of theuncertainty surrounding the realization of the loss carryforwards theCompany has established a valuation allowance equal to the tax effectof the loss carryforwards and, therefore, no deferred tax asset hasbeen recognized for the loss carryforwards The net deferred tax assetsand the offsetting valuation allowance of the same amount isundeterminable for the 12 months ended December  31,2005.

|           |                     |
|-----------|---------------------|
| 13.  | STOCKHOLDERS'EQUITY |

At December  31,  2002, the Company had1,000,000 shares of preferred stock with a $.001 par value, with suchrights, preferences and designations to be issued in such series asdetermined by the board of directors. No shares are issued andoutstanding at December  31,  2005.

InDecember  2001 the Company's board of directors declared a1 to 16.33 reverse stock split.

In December  2001, theCompany acquired 100% of the issued and outstanding shares ofCreative Enterprises Inc. It was a stock for stock exchange.

AtDecember  31,  2005, the Company had 50,000,000 shares ofcommon stock authorized par value $.001. Shares outstandingDecember  31,  2005 was15,115,000.

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|           |              |
|-----------|--------------|
| 14.  | STOCKOPTIONS |

Under the Company's stock option plan the Companymay grant incentive and non statutory options to employees, nonemployee members of the Board and consultants and other independentadvisors who provide services to the Corporation. The maximum shares ofcommon stock which may be issued over the term of the plan shall notexceed 1,000,000 shares. The maximum number of shares that may begranted under the plan to any one individual in any one year is100,000. Awards under this plan are made by the Board of Directors or acommittee of the Board.

Options under the plan are to be issuedat the market price of the stock on the day of the grant except tothose issued to 10% or more stockholders which shall be issuedat 110% of the fair market value on the day of the grant. Eachoption exercisable at such time or times, during such period and forsuch numbers of shares shall be determined by the Plan Administrator.However, no option shall have a term in excess of 10 years from thedate of the grant.

On January  18,  2002, the Companyissued options exercisable for 450,000 shares of its common stock.These options were issued without cash consideration. All the optionswere exercisable immediately at $.50 per share. 300,000 options werelater returned to the Company and cancelled. As of December31,  2004 only 150,000 options wereoutstanding.

|           |                        |
|-----------|------------------------|
| 15.  | STOCK PURCHASEWARRANTS |

In March  2004, the Company granted 1,000,000warrants to purchase its common stock for a purchase price of $.20 pershare to an investor in connection with an investment in the Company.The warrants grant the holder the right to purchase common stock fromthe date of the grant to March  2012. Subsequently, inFebruary  2005, an additional 100,000 warrants were granted todistributor for a purchase prince of $.40 per share as an incentive toenter into an exclusive marketing agreement for New York. The warrantscan be exercised at the purchase price of $.40 any time from the dateof grant through February  2013.

During the quarter endedDecember  31,  2005, the Company issued 1,338,000 warrantsto investors who converted their convertible debentures into shares ofcommon stock. These warrants have an exercise price of $0.75each.

|           |                         |
|-----------|-------------------------|
| 16.  | STOCK-BASEDCOMPENSATION |

As more fully described in Note 10, StockOptions and Note 11, Stock Purchase Warrants, Creative EnterprisesInternational, Inc. has stock options and stock warrants awards thatmay be granted to employees and non employees. Creative EnterprisesInternational, Inc. applies APB Opinion 25 ‘‘Accountingfor Stock Issued to Employees’’ and relatedinterpretations in accounting for its long-term incentive plans. Theexercise of stock options and warrants is set on the grant date and maynot be less then the fair market value per share on that date and notless than 110% of the fair market value for 10% or morestockholders. Stock options have a term of up to 10 years and stockwarrants have a term of up to 8years.

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|           |                                          |
|-----------|------------------------------------------|
| 16.  | STOCK-BASEDCOMPENSATION (Continued) |

The following table represents the effecton net income and earnings per share if the Company had applied thefair value based method and recognition provisions of Statement ofFinancial Accounting Standards (SFAS) No. 123‘‘Accounting for Stock-basedCompensation’’, to stock based employeescompensation:

|                                                                                                                                         |  |        |            |         |  |        |          |         |  |        |        |        |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|----------|---------|--|--------|--------|--------|--|--|
|                                                                                                                                    |  | 2004   |            | 2003    |  |   |
| Netloss, asreported                                                                                                                     |  | $      | (1,188,936 | )  |  | $      | (701,211 | )  |  |   |   |   |
| Deduct:Stock-based employee compensation Expense determined under fair valuebased Methods for stock options, net of related taxEffects. |  |   | 315,611    |    |  |   |     |    |  |   |   |   |
| Proforma,netincome                                                                                                                      |  |   | (1,504,547 | )  |  |   | (701,211 | )  |  |   |   |   |
| Netloss per share                                                                                                                       |  |   |       |    |  |   |     |    |  |   |   |   |
| Basic, asreported                                                                                                                       |  |   | (.10       | )  |  |   | (.08     | )  |  |   |   |   |
| Basic,pro forma                                                                                                                         |  |   | (.13       | )  |  |   | (.08     | )  |  |   |   |   |
|                                                                                                                                         |

Dilutiveloss per share was not presented, as the Company as of December31,  2004 and 2003 issued options and as of December31,  2004 issued warrants which would have had an antidilutiveeffect on earnings.

|           |               |
|-----------|---------------|
| 17.  | LOSS PERSHARE |

Loss per share is based on the weighted average number ofcommon shares. Dilutive loss per share was not presented, as theCompany as of December  31,  2005 and 2004 issued 150,000options and 1,100,000 options which would had an antidilutive effect onearnings.

|                                                                                         |  |        |            |         |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                    |  | 2004   |            | 2003    |
| Lossfrom continuing operations available to common stockholders                         |  | $      | (3,429,846 | )  |  | $      | (1,188,936 | )  |
| Weightedaverage of common shares outstanding used in earnings per share duringtheperiod |  |   | 13,178,000 |    |  |   | 11,401,251 |    |
| Lossper commonshares                                                                    |  |   | (.26       | )  |  |   | (.10       | )  |
|                                                                                         |

|           |                   |
|-----------|-------------------|
| 18.  | STOCKCOMPENSATION |

In December  2002 an officer and stockholderconverted $200,000 of debt into 400,000 shares of the Company'sstock. The Company's stock was trading at 3.60 at the date ofconversion but the officer and stockholder paid $.50 per share creatingstock compensation to the officer and stockholder of$1,240,000.

In February  2004, an officer and stockholderconverted 270,000 of debt into 1,000,000 shares of the Company’sstock. This transaction created an amount due to the Company fromshareholder of $25,329 which was subsequently paid back onSeptember  30,2005.

|           |                  |
|-----------|------------------|
| 19.  | SUBSEQUENTEVENTS |

On January  19,  2006, the Companyreceived a demand for arbitration filed by our New York distributor.The demand is seeking damages of $179,236 including all fees. TheCompany is rigorously fighting this demand and does not feel it hasmerit.

During the quarter ending March  31,  2006,the Company has raised an additional $275,000 through the sale of687,500 shares of its common stock of $0.40 per share to accreditedinvestors.

F-18

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CreativeEnterprises International, Inc. and SubsidiaryNotes toConsolidated Financial StatementsDecember  31,2005

|           |                                   |
|-----------|-----------------------------------|
| 19.  | SUBSEQUENTEVENTS (Continued) |

As of March  20,  2006, theCompany’s chairman and former chief executive officer and threeseparate unaffiliated accredited investors provided the Company with aloan in the aggregate principal amount of $442,000, of which $242,000was provided by our chairman. The Company issued these investors aconvertible promissory note which is convertible into securities theCompany may issue in any financing transaction that we consummateduring the term of the notes. The notes are due one year from the dateof issuance and accrue interest at the rate of 10% per annum,payable upon maturity.

F-19

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Table of Contents

SIGNATURES

Inaccordance with Section 13 or 15(d) of the Exchange Act, CreativeEnterprises International, Inc. has caused this Report to be signed onits behalf by the undersigned, thereunto dulyauthorized.

Date: April 14,2006

|  | CREATIVE ENTERPRISESINTERNATIONAL, INC. |
|--|-----------------------------------------|

By:   /s/ ChristopherDurkin

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

|  | ChristopherDurkin President and Chief Executive Officer |
|--|---------------------------------------------------------|

In accordancewith the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities andon the datesindicated.

|                       |  |                                                        |  |                |
|-----------------------|--|--------------------------------------------------------|--|----------------|
| Name                  |  | Title                                                  |  | Date           |
|                       |
| /s/Christopher Durkin |  | Chief Executive Officer, President andDirector         |  | April  14,2006 |
|                       |
| ChristopherDurkin     |
|                       |
| /s/ MichaelSalaman    |  | Chairman of theBoard of Directors                      |  | April  14,2006 |
|                       |
| Michael Salaman       |
|                       |
| /s/ JamesRobb         |  | Director                                               |  | April  14,2006 |
|                       |
| JamesRobb             |
|                       |
| /s/ KennethBrice      |  | Chief FinancialOfficer and PrincipalAccounting Officer |  | April  14,2006 |
|                       |
| Kenneth Brice         |
|                       |

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