UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-KSB



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

SECURITIES EXCHANGE
ACT OF 1934



For the fiscal year
ended December 31, 2004



[ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE
ACT OF 1934



Commission File Number:
001-32220



AMERICAN WATER STAR,
INC.

(Name of small
business issuer in its charter)



|Nevada                                     | 87-0636498           
|------------------------------------------ | ---------------------
|(State or
		other jurisdiction of          | (I.R.S.
		Employer   
|incorporation
		or organization)           | Identification
		No.)
|                                          
|4560 South
		Decatur Boulevard            
|Las
		Vegas, Nevada                        | 89103                
|(Address of
		principal executive offices) | (Zip
		Code)         

Issuer's telephone number including area code: (702)
740-7036

Securities registered pursuant to Section 12(b) of the Act:



Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0001 par value(Title of Class)

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
XNo _____

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

---

The issuer's revenue for its most recent fiscal year ended
December 31, 2004. $3,180,033

The aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the average bid
and ask price, as of March 31, 2005 was $19,927,130 based on a share value of
$0.46.

The number of shares of Common Stock, $0.0001 par value,
outstanding on March 31, 2005 was 80,227,858 shares.

Transitional Small Business Disclosure Format (check one):
Yes    
No X

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AMERICAN WATER STAR, INC.
FOR THE FISCAL YEAR ENDED
December 31, 2004

Index to Report
on Form 10-KSB

|PART I | Page
|------ | ----



|Item 1. | Description of Business                               | 2 
|------- | ----------------------------------------------------- | --
|Item 2. | Description of Property                               | 12
|Item 3. | Legal Proceedings                                     | 13
|Item 4. | Submission of Matters to a
		Vote of Security Holders | 15



PART II



|Item 5.  | Market for Common Equity and
		Related Stockholder Matters                              | 15
|-------- | --------------------------------------------------------------------------------------- | --
|Item 6.  | Management's
		Discussion and Analysis of Financial Condition and Results of Operations | 27
|Item 7.  | Financial Statements                                                                    | 51
|Item 8.  | Changes in and Disagreements
		With Accountants on Accounting and Financial Disclosure  | 51
|Item 8A. | Controls and Procedures                                                                 | 52



PART III



|Item 9.  | Directors, Executive
		Officers, Promoters and Control Persons; Compliance With Section 16(a)
		of the Exchange Act | 53
|-------- | ------------------------------------------------------------------------------------------------------------------- | --
|Item 10. | Executive Compensation                                                                                              | 59
|Item 11. | Security Ownership of Certain
		Beneficial Owners and Management and Related Stockholder Matters                    | 62
|Item 12. | Certain Relationships and
		Related Transactions                                                                    | 63
|Item 13. | Exhibits, Financial Statement
		Schedules and Reports on Form 8-K                                                   | 66
|Item 14. | Principle
		Accountant Fees and Services                                                                            | 68



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FORWARD-LOOKING STATEMENTS

This document contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact are "forward-looking
statements" for purposes of federal and state securities laws, including, but
not limited to, any projections of earnings, revenue or other financial items;
any statements of the plans, strategies and objections of management for future
operations; any statements concerning proposed new services or developments; any
statements regarding future economic conditions or performance; any statements
or belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words "may,"
"could," "estimate," "intend," "continue," "believe," "expect" or "anticipate"
or other similar words. These forward-looking statements present our estimates
and assumptions only as of the date of this report. Except for our ongoing
securities laws, we do not intend, and undertake no obligation, to update any
forward-looking statement.

Although we believe that the expectations reflected in any of
our forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and inherent risks and
uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:

- Unexpected delays in
	completion of bottling facilities;
- Unexpected weather
	conditions, such as hurricanes or tropical storms, that may delay
	commencement or impact operations of bottling facilities;
- Inability of co-packers to
	meet production requirements;
- Interruption of critical
	packaging materials and/or flavorings;
- Unavailability of critical
	production ingredients such as sweeteners and plastics;
- Unanticipated production
	and/or delays in fulfillment of orders;
- Unavailability of capital
	required to grow revenues;
- Slower than anticipated sales
	of our products and/or increased competition; and
- Greater than expected
	slotting fees and promotional goods.

Actual future performance and results could differ from that
contained in or suggested by these forward-looking statements as a result of
factors set forth in this Form 10-KSB (including those sections hereof
incorporated by reference from other filings with the Securities and Exchange
Commission, if any), in particular as set forth in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under Item 6.

In this form 10-KSB references to "American Water Star," "the
Company", "we," "us," and "our" refer to AMERICAN WATER STAR, INC and its
subsidiaries, unless context otherwise determines.

1

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

(a) Business Development

American Water Star, Inc. was incorporated as American Career
Centers, Inc., in the State of Nevada on June 15, 1999. The purpose of the
company was to serve as a holding company for the acquisition of information
technology career training centers and related businesses. Effective December 3,
1999, American Water Star acquired 100% of the outstanding shares of Tunlaw
Capital Corporation, a publicly-held reporting company, in exchange for an
aggregate of 200,000 shares of common stock, with Tunlaw becoming a wholly-owned
subsidiary. With the completion of this acquisition, American Water Star became
the successor issuer to Tunlaw, and retained public company reporting status
under the Exchange Act. Tunlaw has had no operations to date and is inactive.

On April 2, 2002, we authorized the amendment to American
Career Centers, Inc.'s Articles of Incorporation to change its name to American
Water Star, Inc., to reflect the significant change in our character and
strategic focus relating to our water bottling and distribution business.
Subsequent to our name change we pursued the acquisition of Water Star Bottling,
Inc. as the basis of our new business plan. We later voided the acquisition and
have since filed an involuntary bankruptcy petition against Water Star Bottling.

Acquisition of New Age Packaging, Inc.

On December 23, 2002, we completed the acquisition of New Age
Packaging, Inc. (then known as American Distribution & Packaging, Inc.), a
privately-held Nevada corporation ("New Age"). Pursuant to that Agreement, New
Age exchanged 100% of its outstanding common stock for 5,200,000 newly issued
shares of our common stock, which was issued to former officers and directors of
American Water Star whom were principals of New Age pre-merger. Upon completion
of the acquisition, New Age became a wholly-owned subsidiary of American Water
Star.

Although the consideration exchanged in the New Age
acquisition was not negotiated at "arms-length," our directors and executive
officers deemed it reasonable based on certain criteria, such as the valuation
of the assets of New Age; New Age's current and historical business operations;
the potential of New Age; and the potential benefit to our stockholders. Our
directors determined that the consideration for the exchange was reasonable
under these circumstances.

New Age is developing a packaging process that will be an
alternative to traditional plastic bottles, glass containers and aluminum cans.
This process requires alternative manufacturing and distribution coordination as
compared to traditional bottling procedures.

2

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All of the original equipment owned by New Age was designed
to be used in the production of bottled beverages; accordingly, it was
transferred as a dividend to American Water Star in early 2003.

On December 31, 2003 the Board of Directors of American Water
Star, resolved to spin-off New Age to our stockholders of record as of March 15,
2004 as a stock dividend. The spin-off of New Age is anticipated to have no
effect on our historical financial statements.

Our Board of Directors believes that New Age will be better
able to achieve its corporate objectives as a stand-alone entity. As of the date
of this report the spin-off has not occurred.

Acquisition of All-Star Beverages, Inc.

On December 24, 2002, we completed the acquisition of
All-Star Beverages, Inc., a privately-held Nevada corporation ("All-Star"),
pursuant to an Acquisition Agreement dated as of September 6, 2002. Pursuant to
that Agreement, All-Star exchanged 100% of its outstanding common stock for
12,645,824 newly issued shares of our common stock. Roger Mohlman, our current
CEO and Chairman, received 11,103,433 of the shares issued in the exchange. Upon
completion of the acquisition, All-Star became a wholly-owned subsidiary of
American Water Star.

Although the consideration exchanged in the All-Star
acquisition was not negotiated at "arms-length," our directors and executive
officers deemed it reasonable based on certain criteria such as the valuation of
the assets of All-Star; All-Star's current and historical business operations;
the potential of All-Star; and the potential benefit to our stockholders. Our
directors determined that the consideration for the exchange was reasonable
under these circumstances.

The majority of our operations are conducted through
All-Star. We have contractual relationships with various independent
distributors, brokers, both single and multi-location retail operations, and
governmental agencies throughout the United States.

As a result of the All-Star and New Age acquisitions, the
former stockholders of All-Star and New Age became the controlling stockholders
of American Water Star.

Acquisition of Colorado River Distributors ("C.R.D"), Nevada
Division:

Subsequent to December 31, 2004, we entered into an agreement
to purchase from Colorado River Distributors, LLC, the distribution rights of
their Nevada Division. In addition to purchasing the distribution rights, we
purchased the existing inventory of their Nevada Division. Colorado River
Distributors has distributing agreements for the paper products of Arrowhead
Water, Coca Cola, Gatorade, and Tropicana. Upon this acquisition, we established
a new subsidiary; C.R.D. of Nevada, in which we incorporated the operations of
Colorado River Distributors' Nevada Division and consolidated the business with
our current operations in Las Vegas, Nevada. This agreement allows us to expand
our operations to distributing and we will now supply beverage products to over
450 new accounts, including; CVS Pharmacy, Walgreens, Savon Drugs, Vons Food &
Drug and a number of other major retailers in the Las Vegas, Nevada area.

3

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Additional Subsidiaries of American Water Star, Inc.

With the purchase and completion of the three plants in the
United States, separate Nevada corporations were incorporated for each plant.
These corporations only hold the physical assets of each plant. The following is
a list of all subsidiaries of American Water Star.

|Name of Subsidiary             | Date of Incorporation | Operating Status
|------------------------------ | --------------------- | ----------------
|All Star Beverages, Arizona    | March 5, 2004         | Active          
|All Star Beverages JAX         | January 1, 2004       | Active          
|All Star Beverages Mississippi | August 26, 2004       | Active          
|Hawaiian Tropicals             | March 5, 2004         | Active          
|C.R.D. of Nevada               | March 6, 2005         | Active          
|Tunlaw Capital Corporation     | Pre 1999              | Inactive        

(b) Business of Issuer

American Water Star, Inc., with its administrative offices
located in Las Vegas, Nevada, operates as a holding company of entities and
brands engaged in the beverage industry. Our products and brands are licensed
and developed in-house. Our intentions for the future are to be able to provide
the branding and bottling of our beverages as well as the distribution and
transportation of all our products in-house.

Our main objective has been to position American Water Star
to sell products directly to major national chains and food service channels,
which has resulted in our relationship with Wal-Mart and other large retailers.
We have been actively developing the systems and national production capability
to service these types of accounts with the purchase and leasing of our new
bottling facilities located in the southwest (Arizona), south (Mississippi) and
southeast (Florida).

Our beverage products are sold by the truckload, principally
to distributors, who, in turn sell to retail stores, corner grocery stores,
convenience stores, schools and other outlets. A truckload consists of 20
pallets holding 72 cases per pallet. Each case holds 24 16.9-ounce bottles. Each
truckload carries 1440 cases.

Principal Products and Their Markets

In addition to bottled water, our product line consists of
four branded beverages; (i) Geyser Sport, (ii) Geyser Fruit, (iii) Geyser Fruta/Fresca,
(iv) Hawaiian Tropic. Geyser Sport is a sugar-free, calorie-free, carb-free
fruit flavored beverage fortified with vitamins and calcium, offered in eight
different fruit flavored waters. Geyser Fruit is a non-carbonated water with a
low sugar content, also offered in eight different flavors. Geyser Fruta and
Geyser Fresca are targeted to the Hispanic market and include authentic Latin
flavored beverages, with Geyser Fresca being the first sugar free Hispanic line.
Our Hawaiian Tropic products feature sugar-free, no carbohydrate, caffeine-free,
sodium-free tropical drinks offered in four flavors. With the completion of the
new plants, we expect to package both our own products, as well as co-pack for
existing and new clients and customers.

4

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During fiscal 2005, we anticipate the launch of several new
product lines expanding our product base. We are currently developing the
Fling's Miami Beach line, which will include sugar-free, calorie-free teas,
energy drinks, mixers and flavored waters. In addition, we plan on expanding our
water products to include a new brand titled Vegas Ice and Desert Ice. We are
also currently exploring a line of energy drink products as a possible line.

We believe our products take advantage of major trends in the
beverage industry because consumers increasingly want healthy, refreshing
drinks. Additionally, with the passage of SB-19 (Pupil Nutrition, Health, and
Achievement Act of 2001) in California, elementary schools must meet nutrient
standards, which prohibit the sale of carbonated, sugary beverages. This may
position us to capture a large share of the California market by offering
healthy, no-sugar, and no-calorie beverages.

Market and Competition

The beverage industry is highly competitive, although it may
be undergoing a substantial change with regards to consumers and U.S. regulatory
bodies that are increasingly recommending health conscious diets. Our beverage
products compete not only with other similar beverages, but also with other
types of beverages, including soft drinks, coffee, beer, wine, and fruit juices.
The principal areas of competition are pricing, packaging, development of new
products and flavors, and marketing campaigns. Our products compete with a wide
range of drinks produced by a relatively large number of manufacturers, most of
which have substantially greater financial, marketing, and distribution
resources than we do. However, we do intend to continue to address this new and
growing market of children and adults emphasizing the no sugar, no carbohydrate
products.

We believe the market for our products is substantial. Our
products and formulations developed for the school market, mass merchandising
and active adult markets are being well received by our customers. However,
important factors affecting our ability to compete successfully include taste
and flavor of products, trade and consumer promotions, rapid and effective
development of new, unique cutting edge products, attractive and different
packaging, branded product advertising and pricing. We also compete for
distributors who will concentrate on marketing our products in favor of those of
our competitors, provide stable and reliable distribution, and secure adequate
shelf space in retail outlets. Competitive pressures in the alternative, energy,
and functional beverage categories could cause our products to be unable to gain
market share, to lose market share, or we could experience price erosion, any of
which of these events could have a material adverse affect on our business and
results.

5

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Sources and Availability of Raw Materials

We purchase beverage flavors and the raw materials used in
our packaging and labeling from independent suppliers located in the United
States. We are dependent on the ability of our suppliers to provide products on
a timely basis and on favorable pricing terms. Our goal is to ensure that the
raw materials used in the manufacture and packaging of our products, including
flavors, bottles, caps, labels, and boxes are readily available from two or more
sources. Accordingly, we have engaged in developing strategic partnerships in
these critical supply areas, although, as of the date of this report, we have
not yet entered into any material strategic partnerships.

The principal raw materials used by our business are
nutritive, non-nutritive sweeteners and flavors. The principal nutritive
sweetener is high-fructose corn syrup, a form of sugar, which is available from
numerous domestic sources and is historically subject to fluctuations in its
market price. American Water Star generally has not experienced any difficulties
in obtaining these requirements for sweeteners.

Generally, raw materials utilized by American Water Star are
readily available from various sources. However, Splenda® a non-nutritive
sweetener, which American Water Star had originally used alone or in combination
with other non-nutritive sweeteners is no longer available directly from the
licensor. American Water Star was required to reformulate its beverages to use
aspartame as a substitute non-nutritive sweetener for its no-calorie beverages
and a sugar-blend for its low-calorie beverages.

Copyrights, Trademarks and Licenses

On January 1, 2003, we entered into a Trademark and Design
License Agreement with Tanning Research Laboratories, Inc. ("Tanning"), granting
us authorization to use the trademarked name, "Hawaiian Tropic." Under the
Agreement, Tanning licensed us to produce, market, and sell, on an exclusive
basis in the United States and Canada, items that bear the Hawaiian Tropic
trademark for a period of three years. In consideration, we agreed to pay
Tanning a royalty of four percent (4%) of invoice sales, net of shipping and
sales taxes, payable each quarter. The Agreement calls for guaranteed minimum
royalties in the amounts of $40,000 for the first year, $120,000 for the second
year, and $200,000 for the third year. The Agreement has a three-year renewal
option, contingent on our meeting minimum sales amounts under the Agreement and
if renewed, the minimum royalties will be $200,000 a year. We have either
licensed, trademarked, or sub-licensed brand names and/or products so as to
protect our future business activities.

We have entered into a Trademark and Design License Agreement
with New Age Packaging, Inc., one of our wholly owned subsidiaries, whereas New
Age may create, produce, market, advertise, and sell beverages in flexible
packaging bearing American Water Star's trademarks in certain licensed
territories. New Age has agreed to pay American Water Star a royalty of four
percent (4%) of invoice sales (net of shipping and sales tax) of the licensed
goods, which are said to accrue from the first date of sale by New Age and to be
paid to American Water Star within 30 days from the end of the quarter in which
the licensed goods are shipped. New Age will also be required to meet the annual
minimum sales requirement of one hundred thousand dollars ($100,000.00). The
term of the license is for five years or so long as American Water Star
continues to promote its special branded beverages, whichever comes first.
Furthermore, the parties agree that New Age shall have the right to renew the
license agreement for another five years upon expiration of the initial
agreement. In December of 2003, our Board of Directors declared a dividend to
stockholders of record on March 15, 2004, in the form of all of the common stock
of New Age. As of the date of this report, the dividend has not been paid and
New Age is continuing to be run as one of our wholly-owned subsidiaries. The
Company anticipates completing the New Age spin-off in fiscal 2005.

6

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Classifications of Bottled Water

The following is a detailed list explaining the variations of
bottled water and their characteristics.

Bottled Water means water that is intended for human
consumption and that is sealed in bottles or other containers with no added
ingredients except that it may optionally contain safe and suitable
antimicrobial agents. Fluoride may be optionally added within the limitations
established in 21 CFR Section 165.110(b)(4)(ii). Firms may manufacture
nonstandardized bottled water products with ingredients such as minerals for
flavor. The common or usual name of the resultant product must reflect these
additions. Bottled water may be used as an ingredient in beverages. It does not
include those food ingredients that are declared in ingredient labeling as
"water", "carbonated water," "disinfected water," "filtered water," "seltzer
water," "soda water," "sparkling water," and "tonic water."

Sparkling Bottled Water means bottled water that, after
treatment and possible replacement of carbon dioxide, contains the same amount
of carbon dioxide that it had at the emergence from the source. Manufacturers
may add carbonation to previously noncarbonated bottled water products and label
such water appropriately.

Ground Water means water from a subsurface saturated zone
that is under a pressure equal to or greater than atmospheric pressure. Ground
water must not be under the direct influence of surface water.

Mineral Water means water containing not less than 250 parts
per million (ppm) total dissolved solids (TDS), coming from a source tapped at
one or more boreholes or springs, originating from a geologically and physically
protected underground water source. Mineral water shall be distinguished from
other types of water by its constant level and relative proportions of minerals
and trace elements at the point of emergence from the source, due account being
taken of the cycles of natural fluctuations. No minerals may be added to this
water.

Natural Water means bottled spring, mineral, artesian, or
well water which is derived from an underground formation or water from surface
water that only requires minimal processing, is not derived from a municipal
system or public water supply, and is unmodified except for limited treatment
(e.g., filtration, ozonation or equivalent disinfection process).

7

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Purified Water means bottled water produced by distillation,
deionization, reverse osmosis, or other suitable process and that meets the
definition of purified water.

Spring Water means water derived from an underground
formation from which water flows naturally to the surface of the earth. Spring
water must comply with the FDA standard of identity in 21 CFR 165.110(a)(2)(vi).
Spring water shall be collected only at the spring or through a borehole tapping
the underground formation feeding the spring. There shall be a natural force
causing the water to flow to the surface through a natural orifice. The location
of the spring shall be identified and such identification shall be maintained in
the company's records.

Spring water collected with the use of an external force
shall be from the same underground striation as the spring, as shown by a
measurable hydraulic connection using a hydrogeologically valid method between
the bore hole and the natural spring, and shall have all the physical
properties, before treatment, and be of the same composition and quality, as the
water that flows naturally to the surface of the earth. If spring water is
collected with the use of an external force, water must continue to flow
naturally to the surface of the earth through the spring's natural orifice

Well Water means water from a hole bored, drilled, or
otherwise constructed in the ground, which taps the water of an aquifer.

Governmental Regulation

We are required to comply, and it is our policy to comply,
with applicable laws in the United States. Flavored waters are subject to a
number of strict federal, state and industry regulations. These serve to ensure
that the product is consistent in public safety and quality. The United States
Food and Drug Administration (FDA) regulate flavored waters as a packaged food
product. Flavored waters also must meet state regulations that, in some cases,
are more stringent than the prevailing FDA and EPA standards. The FDA also
regulates the labeling of our products. We have not encountered any regulatory
action as a result of our operations, and no such action is anticipated.

The production, distribution, and sale in the United States
of many of American Water Star's products are subject to the Federal Food, Drug
and Cosmetic Act; the Occupational Safety and Health Act; the Lanham Act;
various environmental statutes; and advertising, labeling and ingredients of
such products.

Government Regulation of Bottled Water

Prior to 1996, bottled water was regulated in the same
fashion as municipal water. Municipal water is regulated not as a food by the
FDA, but as a commodity by the Environmental Protection Agency (EPA) pursuant to
the Safe Drinking Water Act which only provided for certain mineral/chemical
content requirements so as to ensure water safety, not product definition.

8

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In 1996, the United States enacted statutes and regulations
to regulate bottled water as a food. Accordingly, the Company's bottled water
must meet FDA standards for manufacturing practices and chemical and biological
purity. Furthermore, these standards undergo a continuous process of revision.
The labels affixed to bottles and other packaging of the water is subject to FDA
restrictions on health and nutritional claims for foods.

As of 1996, bottled water is fully regulated as a food by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FFDCA") 21 U.S.C. 301. The
FFDCA defines food as "articles used for food or drink for man or other
animals." This includes bottled water sold in containers at retail outlets as
well as containers distributed to the home and office market. This legislation
was designed to ensure that bottled water companies clearly and accurately
define the type of water that was being bottled and sold to the public. The FDA
adopted the basic mineral/chemical guidelines employed by the EPA, while making
some aspects more stringent.

In addition, all drinking water must meet EPA standards
established under the Safe Drinking Water Act ("SDWA") for mineral and chemical
concentration. The 1986 amendments to the SDWA mandated the establishment of new
drinking water quality and treatment regulations. Most municipalities meet or
exceed EPA drinking water regulations, many of which reflect recent public
awareness of the issue of contaminated water.

The United States government also enacted Safe Drinking Water
Reauthorization Act of 1996. This law requires all local water utilities to
issue annual reports to their consumers disclosing all chemicals and bacteria in
their water.

Bottled water is also subject to state and local regulation.
Bottled water must originate from an "approved source" in accordance with
standards prescribed by the state health department in each of the states in
which the Company's products will be sold. The source must be inspected and the
water sampled, analyzed and found to be of safe and wholesome quality. There are
annual compliance monitoring tests of both the source and the bottled water. The
health departments of the individual states also govern water purity and safety,
labeling of bottled water products and manufacturing practices of producers.

Government Regulation of Enhanced Beverages

Enhanced beverages are regulated in similar fashion to
bottled water, with the primary exception being the wording on the label as the
determinant factor as to the type of product the beverage is perceived to be. In
the event structure or function claims are made on the packaging or advertising
(i.e. "helps to lose weight" or "helps to prevent cancer"), the product must
then be treated and packaged as a nutritional supplement, which is regulated
under the Dietary Supplement Health and Education Act (DSHEA).

For decades, the Food and Drug Administration regulated
dietary supplements as foods, in most circumstances, to ensure that they were
safe and wholesome, and that their labeling was truthful and not misleading. An
important facet of ensuring safety was FDA's evaluation of the safety of all new
ingredients, including those used in dietary supplements, under the 1958 Food
Additive Amendments to the Federal Food, Drug, and Cosmetic Act (FD&C Act).
However, with passage of the Dietary Supplements Health and Education Act of
1994 (DSHEA), Congress amended the FD&C Act to include several provisions that
apply only to dietary supplements and dietary ingredients of dietary
supplements. As a result of these provisions, dietary ingredients used in
dietary supplements are no longer subject to the premarket safety evaluations
required of other new food ingredients or for new uses of old food ingredients.
They must, however, meet the requirements of other safety provisions.

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The provisions of DSHEA define dietary supplements and
dietary ingredients; establish a new framework for assuring safety; outline
guidelines for literature displayed where supplements are sold; provide for use
of claims and nutritional support statements; require ingredient and nutrition
labeling; and grant FDA the authority to establish good manufacturing practice (GMP)
regulations. The law also requires formation of an executive level Commission on
Dietary Supplement Labels and an Office of Dietary Supplements within the
National Institutes of Health.

In such case, the packaging on the product must denote the
product as a "Dietary Supplement," and the ingredient and nutritional
information must be disclosed in a portion of the packaging known as a
"Supplement Facts" box. In the event there are no structure or function claims,
the product can then be sold as a beverage, with all appropriate information
detailed on the label in a "Nutrition Facts" box. Other details, such as whether
a product is an enhanced water is a true "water" or a "water drink" are vague,
but generally modified as a "water drink" as an attempt to clarify to the
consumer the blurred lines of product differentiation. Enhanced waters are also
subject to certain bottled water classifications, depending upon the claims and
disclosures of the types of water used in the product (i.e. spring water,
purified water, etc.).

A California law requires that a specific warning appear on
any product that contains a component listed by the State as having been found
to cause cancer or birth defects. The law exposes all food and beverage
producers to the possibility of having to provide warnings on their products.
This is because the law recognizes no generally applicable quantitative
thresholds below which a warning is not required. Consequently, even trace
amounts of listed components can expose affected products to the prospect of
warning labels. Products containing listed substances that occur naturally in
the product or that are contributed to the product solely by a municipal water
supply are generally exempt from the warning requirement. No American Water Star
beverage products are currently required to display warnings under this law.
However, we are unable to predict whether an important component of our products
might be added to the California list in the future. We are also unable to
predict whether or to what extent a warning under this law would have an impact
on costs or sales of our products.

Investment in Technology

American Water Star is committed to using technology to meet
business objectives and to keep operating costs as low as possible. An example
is American Water Star's newly developed Dual Processor which dramatically
increases production capability for flavored beverage products.

American Water Star has installed EDI, a state-of-the-art
software inventory management and tracking system, which is mandatory when
dealing with the type of large accounts we intend to supply with our products.
This will enable us to significantly speed up the processing of orders from raw
materials purchasing to plant operations. This becomes especially critical as we
move to national production capability with plant capacity nationwide.

10

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American Water Star has two websites with a feature
reflecting where products are being sold, corporate information, a shopping
cart, and brand descriptions all of which can be accessed at
www.americanwaterstar.com, or www.allstarbeverages.com. Information contained on
the websites is notincorporate herein.

Compliance with Governmental Laws

Other than normal cleaning and sanitation supplies, our
business does not involve the use, handling, storage and disposal of potentially
toxic substances or wastes. Accordingly, we are not subject to regulation by
federal, state, and local authorities establishing requirements for the use,
management, handling, and disposal of these materials and health and
environmental quality standards, liability related to those standards, and
penalties for violations of those standards.

All of American Water Star's facilities in the United States
are subject to federal, state, and local environmental laws and regulations.
Compliance with these provisions has not had, and we do not expect such
compliance to have, any material adverse effect upon our or American Water
Star's capital expenditures, net income, or competitive position.

Personnel

As of December 31, 2004 we had 35 full-time employees. In
addition, we have contractual arrangements with 4 independent contractors to
provide administrative services to us. We use the service of independent
consultants and contractors to perform various professional services. We believe
the use of third-party service providers may enhance our ability to contain
general and administrative expenses. Management believes our future success will
depend in large part upon our ability to attract and retain qualified employees.
We have no collective bargaining agreements with our employees and believe our
relations with our employees are good.

Distributors

As of December 31, 2004, we had approximately 45 distributors
for our various product lines. The following is a list of some of our newer
distributors, who we began doing business with in 2004 and the general area in
which they service.

|Name of Distributor       | Service Areas               
|------------------------- | ----------------------------
|Johnson Brothers          | Hawaii                      
|McLane Company            | Throughout the United States
|H&M Distributing          | Idaho                       
|Capital Wine Distributing | South Carolina              
|Davis Distributing        | Eastern Seaboard            

11

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ITEM 2. DESCRIPTION OF PROPERTY

American Water Star maintains its corporate headquarters at
4560 South Decatur Blvd., Suite 301, Las Vegas, Nevada 89103. We lease
approximately 4,000 square feet of office space under a lease, expiring in April
2008. The minimum monthly rental for the premises is approximately $8,700, plus
standard, ancillary charges, such as property taxes, insurance, and certain
operating expenses applicable to the leased premises. The lease is subject to
annual rent increases at a rate of four percent per annum.

In addition, we have a lease for property at 4545 Cameron
Street, Suites A and B, Las Vegas, NV 89103. We lease approximately 11,000
square feet of warehouse and 4,000 square feet of office space under a lease,
expiring in October 2006. We initially used this property as our warehouse space
and our accounting department before relocating the accounting office to our
Arizona facility. Subsequently, we are utilizing this space for the operations
of our new subsidiary, C.R.D. of Nevada. The minimum monthly rental for the
premises is approximately $8,900, plus standard, ancillary charges, such as
property taxes, insurance, and certain operating expenses applicable to the
leased premises. The lease is subject to an annual rent increase of
approximately $300.

Mississippi Facility:

As of April 2004, American Water Star began leasing 56,000
square feet of an industrial building located at the Southwest corner of the
intersection of Jesse Hall Memorial Parkway and U.S. Highway 51 North, Magnolia,
Mississippi for use as a water bottling facility. The term of the lease is five
years at a monthly rental of approximately $14,000, plus standard, ancillary
charges, such as property taxes, insurance and certain operating expenses
applicable to the lease premises. American Water Star has one five-year option
to renew the lease with a rental increase in accordance with the CPI Index.
American Water Star believes the property is in good condition and suitable for
its needs as a bottling plant.

Arizona Facility:

As of May 28, 2004, American Water Star purchased a 72,000
square foot, multi-tenant, industrial warehouse located at 3910 East Wier
Avenue, Phoenix, Arizona 85040 for a purchase price of $2.4 million. We believe
this property is in good condition and suitable for our needs to be utilized as
a bottling plant.

12

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Florida Facility:

As of January 2004, American Water Star began leasing
warehouse facilities at 6301 Powers Avenue, Suites A, B1 and B2, Jacksonville,
Florida 32217, under two separate leases. All leases are for a term of three
years, with an option to renew by American Water Star for an additional three
years. Under the lease for Suite A, which is approximately 6,000 square feet,
base rent is $1,575 per month during 2004, $1,650 per month during 2005, and
$1,765 during 2006. Under the lease for Suites B1 and B2, which are together
approximately 13,563 square feet, base rent is $3,560 per month during 2004,
$3,730 per month during 2005 and $3,990 per month during 2006. In addition, we
pay a 7% sales tax to the landlord on such base rents plus certain common area
maintenance charges. Lastly, we pay an additional $5,500 per month in rental
charges for amortization of approximately $180,000 in Tenant Improvements. We
believe this property is in good condition and suitable for our needs to be
utilized as a bottling plant. In addition to these three suites, we have a month
to month lease for an additional two units in close proximity to these suites.
Under the month-to-month arrangement the rent is $10,500.

ITEM 3. LEGAL PROCEEDINGS

On February 17, 2004, a complaint was filed in Superior Court
in the County of Los Angeles, State of California, Case No. BC310716 styled American Water Star, Inc., etc. v. Kevin O'Keefe, an individual, CIBC
Oppenheimer, a division of CIBC World Markets Corp, a Delaware corporation;
Oppenheimer & Co., Inc., a New York corporation, Brighton Opportunity Fund, etc.
et al.  In this case, the Company asserted various contract and tort
claims, including fraud, against each of the defendants.  The case has been
remanded to state court after it was first removed to federal court on April 1,
2004. No cross-claims have been asserted against the Company.  The case was
ordered to arbitration. The arbitration process has begun. It is not possible at
this time to predict the outcome of this litigation.

On April 2, 2004, the Company was served with a complaint,
styled South Beach Beverage Company, Inc., a Delaware Corporation, vs.
American Water Star, Inc., a Nevada Corporation, and Roger Mohlman, Defendants,
United States District Court, District of Nevada, Case No. CV-S-04-0387-KJD-LRL.
Plaintiff alleged trademark infringement and was seeking a permanent injunction
against the Company's use of certain trademarks. The case was settled on
September 10, 2004 for an undisclosed amount, and upon American Water Star's
express abandonment of the trademark objects of this litigation and with the
stipulation that American Water Star cancel its pending proceeding in the U.S.
Patent and Trademark Office.

On April 14, 2004, a complaint was filed in the Lake
Superior/Circuit Court in the County of Lake, State of Indiana, Case No.
45C010404PL00085, styled Michiana Dairy Products LLC, Plaintiff vs. All-Star
Beverages, Inc., and Roger Mohlman, Defendants.  The complaint alleged
breach of contract and fraudulent inducement.  Plaintiff seeks damages of
$13,000,000 for ten years of lost profits and pre-judgment interest thereon. 
All-Star has denied the material allegations of the complaint and has filed a
counter-claim against Michiana Dairy Products, LLC and a third-party complaint
against Enhance Packaging Technologies, Inc. n/k/a Liqui-Box Canada, Inc. 
In the counter-claim and third party complaint, All-Star alleged breaches of
contract, good faith, and fair dealing, negligence, indemnification, breach of
express warranty, breach of implied warranty, fraud, constructive fraud, and
promissory estoppel, and damages.  All-Star believes Plaintiff's
allegations are without merit and that Plaintiff has damaged All-Star. 
All-Star intends to pursue this matter vigorously.  A Case Management
Conference was held on October 13, 2004 where the court set dates for discovery
and motions. The case is in discovery. It is not possible at this time to
predict the outcome of this litigation.

13

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On May 14, 2004, the Company was served with a complaint
styled First Advisory, LLC, Plaintiff vs. American Water Star, Inc., and
Thomas Krucker, Defendants, Circuit Court for Baltimore County, Maryland,
Case No. C-04-4853.  On May 28, 2004 the Company filed a Notice of Removal. 
Plaintiff has alleged causes of action for breach of contract, specific
performance, and a declaratory judgment regarding the earning of certain shares
of the Company's common stock.  Plaintiff seeks the delivery of 400,000
restricted shares of the Company's common stock, the delivery of an additional
700,000 shares of the Company's common stock without restrictions, and
registration of 150,000 previously issued and delivered shares of the Company's
common stock.  The Company brought a Motion to Dismiss for Lack of Personal
Jurisdiction or in the alternative a Transfer for Convenience to Nevada. 
The motion to transfer venue to Las Vegas was successful.  The Company
believes that the allegations are without merit and intends to defend this
matter vigorously.  The case is now in discovery. It is not possible at
this time to predict the outcome of this litigation.

On June 28, 2004, the Company joined by other creditors,
filed involuntary bankruptcy petitions against Geyser Products, LLC and Water
Star Bottling, Inc., in United States Bankruptcy Court, District of Nevada, Case
No. 04-14573 and Case No. 04-14578. The Company believes it is owed
substantial sums of money from the latter, debtor entities. The Company believes
that neither of the debtor entities have any hard or substantial assets from
which to make recovery, but the Company also believes that the debtor entities
may be pursuing litigation on their own behalf and that the principals of the
debtor entities may intend to keep any settlement proceeds for themselves,
rather than distribute proceeds to creditors. The Company did in fact discover
that certain claims were transferred from the debtor entities to related
entities. However, subsequent review of the underlying claims and an underlying
lawsuit filed in Wyoming disclosed that the claims did not have merit or
settlement value of any substance. There are also allegations of possible
litigation being pursued by the debtor entities against American Water Star
alleging trademark infringement, validity of an assignment of trademark rights
from Geyser to American Water Star, and unpaid compensation for the use of
Geyser trademarks. American Water Star disputes these claims.

A court ordered settlement conference was held in December
2004 in which debtor entities, American Water Star, and creditors agreed to
broad mutual releases between one another, including the release of any
potential litigation involving the trademark infringement allegations. The
conference resulted in a settlement agreement, wherein American Water Star would
issue 400,000 shares of unrestricted, registered common stock designated to
Water Star Bottling, Inc., in exchange for consulting services and 100,000
shares of restricted common stock. In addition, Mr. Mohlman would release a lien
he had on property located in Wyoming to the representative parties of Geyser
Products. However, subsequent to the settlement conference, one of the parties
that negotiated on behalf of Geyser Products has since denied his ability to act
on behalf of Geyser and has refused to sign the settlement agreement. In
response to his denial, American Water Star filed a motion for sanctions to
compel the carrying out of the settlement in bankruptcy court and a continued
hearing was held on April 27, 2005. At the hearing an order enforcing the
settlement agreement reached on December 14, 2004 was granted and the motion and
counter-motion for sanctions was withdrawn. Additionally, the involuntary
bankruptcy petition against Water Star Bottling, Inc. was dismissed and the
involuntary bankruptcy petition against Geyser Products, LLC will no longer be
contested. The execution of the order by all parties has not been completed as
of the date of this report.

14

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

We did not submit any matters to a vote of our security
holders during the fourth quarter of the fiscal year 2004.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

(a) Market Information

In June of 2004,our common stock was approved for
listing and trading on the American Stock Exchange under the symbol "AMW." Prior
to being listed on the American Stock Exchange, our common stock was quoted on
the OTC Bulletin Board under the symbol "AMWS." Our common stock began being
quoted on the OTC Bulletin Board in December 2000.

For the fiscal year 2003 and the first full quarter in 2004,
we were quoted on the OTC Bulletin Board and the following table lists the
quotations for the high and low bid prices as reported by a Quarterly Trade and
Quote Summary Report of the OTC Bulletin Board. The quotations from the OTC
Bulletin Board reflect inter-dealer prices without retail mark-up, mark-down, or
commissions and may not represent actual transactions.

On June 18, 2004 we were listed on the American Stock
Exchange and therefore the second quarter includes OTC Bulletin Board high and
low bid prices from April 1, 2004 to June 17, 2004 and American Stock Exchange
sales prices from June 18, 2004 to June 30, 2004. The third quarter of 2004
lists only the high and low sales prices as reported by the American Stock
Exchange.

|PERIOD            | HIGH | LOW  
|----------------- | ---- | -----
|2004              |      |      
|First Quarter     | OTC  | $2.03
|Second Quarter(1) | OTC  | $1.72
|                  | AMEX | $1.35
|Third Quarter     | AMEX | $1.02
|Fourth Quarter    | AMEX | $0.85

15

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2003 (OTC)First Quarter
			$0.45
			$0.16Second Quarter
			$0.32
			$0.115Third Quarter
			$0.85
			$0.12Fourth Quarter
			$1.38
			$0.73


(1) We were quoted on the OTC Bulletin Board
until June 17, 2004; therefore the second quarter of 2004 will be spilt between
the OTC high and low bids and the American Stock Exchange high and low sales
prices. The OTC quotes for the second quarter of 2004 are from April 1, 2004
through June 17, 2004. Subsequently we were listed on the American Stock
Exchange on June 18, 2004 and therefore the high and low sales prices for the
second quarter of 2004 are for the dates from June 18, 2004 through June 30,
2004.

On April 18, 2005, the American Stock Exchange (AMEX)
halted trading of our common stock due to our inability to timely file this
report. On April 20, 2005, we received a letter from the AMEX notifying us we
were no longer in compliance with their continued listing standards set forth in
Sections 134 and 1101 of the AMEX Company Guide. AMEX further advised us that we
must submit a plan by May 4, 2005, advising AMEX of action we had taken to bring
AMW into compliance. If we are not in compliance with the continued listing
standards by June 15, 2005 or do not make progress consistent with our plan,
then AMEX staff will initiate delisting proceedings. In addition, we may be
subject to delisting proceedings if our submitted plan is not accepted by AMEX.
On May 4, 2005, we submitted a plan to AMEX and on May 26, 2005 we were notified
that our plan had been accepted.

(b) Holders of Common Stock

As of December 31, 2004, we had approximately 693
stockholders of record of the 80,227,858 shares of common stock outstanding.

(c) Dividends

We have never declared or paid dividends on our Common Stock.
We intend to follow a policy of retaining earnings, if any, to finance the
growth of the business and do not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment of future dividends on the
Common Stock will be at the sole discretion of the Board of Directors and will
depend on our profitability and financial condition, capital requirements,
statutory and contractual restrictions, future prospects and other factors
deemed relevant.

New Age Spin-Off

In December of 2003, our Board of Directors declared a
dividend to stockholders of record on March 15, 2004, in the form of all of the
common stock of New Age, one of our wholly owned subsidiaries. As of the date of
this report, the dividend has not been paid.

16

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(d) Securities Authorized for Issuance under Equity
Compensation Plans



|Plan Category                                            |  | Number
		of shares to
		be issued upon exercise of outstanding options, warrants and rights
		(a) |  | Weighted-average exercise price of outstanding options, warrants and
		rights
		(b) |  | Number of
		shares remaining available for future issuance under equity compensation
		plans (excluding shares reflected in column (a))
		(c)
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|                                                         |  |                                                                                                   |  |                                                                                     |  |                                                                                                                                              
|Equity compensation plans
		approved by stockholders     |  | 0                                                                                                 |  | $0.00                                                                               |  | 0                                                                                                                                            
|                                                         |  |                                                                                                   |  |                                                                                     |  |                                                                                                                                              
|Equity compensation plans not
		approved by stockholders |  | 600,000 (1)                                                                                       |  | $0.77                                                                               |  | 12,111,140                                                                                                                                   
|                                                         |  |                                                                                                   |  |                                                                                     |  |                                                                                                                                              
|Total                                                    |  | 600,000                                                                                           |  | $0.77                                                                               |  | 12,111,140                                                                                                                                   

(1) The directors as of August 17, 2004 all received options
of 120,000 shares at an exercise price of $0.77.

Recent Sales of Unregistered Securities

On January 31, 2004, we closed a private placement conducted
by Westcap Securities, Inc. On November 14, 2003, the Company had commenced this
private placement of its common stock priced at a 30% discount to the closing
bid price of the Company's common stock on the day of the investment by the
purchaser. The Company sold 940,573 shares totaling $810,610 to 65 accredited
investors. The Company received a total of $692,390 after paying commissions,
fees and costs of the offering. Under the terms of the Sales Agreement, in
addition to its cash compensation, Westcap was issued 75,246 shares of
restricted common stock. Westcap's issuances of the shares described above were
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On February 3, 2004, the Company executed a Consulting
Agreement with Alpine Capital Partners, Inc. ("Alpine") pursuant to which Alpine
assisted the Company by conducting public relations work throughout the
financial community commencing February 1, 2004 and running through February 1,
2007, and in partial consideration therefore, the Company issued Alpine 800,000
shares of its restricted common stock, a valued at $1,760,000, and agreed to
include those shares in the Company's next registration statement. We believe
that the issuance of the shares was exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).
The shares were issued directly by the Company and did not involve a public
offering or general solicitation. The recipient of the shares was afforded an
opportunity for effective access to files and records of the Company that
contained the relevant information needed to make its investment decision,
including the Company's financial statements and 34 Act reports. The Company
reasonably believed that the recipient, immediately prior to issuing the shares,
had such knowledge and experience in its financial and business matters that it
was capable of evaluating the merits and risks of its investment. The recipient
had the opportunity to speak with the Company's president and directors on
several occasions prior to its investment decision.

17

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On March 3, 2004, the Company issued 220,350 shares totaling
$300,000 to 13 accredited investors pursuant to the discount offering conducted
in January 2004. The offering was conducted by the Company and no commissions
were paid. We believe the issuance was exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Regulation D Rule 506. The shares were issued directly by the Company and did
not involve a public offering or general solicitation. The recipients of the
shares were afforded an opportunity for effective access to files and records of
the Company that contained the relevant information needed to make the
investment decision, including the financial statements and Exchange Act
reports. The Company reasonably believed that the recipients, immediately prior
to issuing the shares, had such knowledge and experience in financial and
business matters that they were capable of evaluating the merits and risks of
their investment. The recipients had the opportunity to speak with the Company's
management on several occasions prior to their investment decision.

On May 7, 2004, the Company issued 350,000 shares of
restricted common stock, valued at $612,500, to MarketByte LLC, in consideration
of consulting services to be provided pursuant to a Consulting Agreement. The
value of the agreement was determined based on the market value of our stock on
the date the stock was earned. We believe that the issuance of the shares was
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation.

On May 7, 2004, the Company issued 280,000 shares of
restricted common stock, value at $425,600, to Don Hejmanowski in full
consideration for investor relation services to be provided pursuant to an
Independent Contractor Agreement commencing May 1, 2004 and ending on April 30,
2005. The value of the agreement was determined based on the market value of our
stock on the date the stock was earned. We believe that the issuance of the
shares was exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The recipient of the shares was afforded an opportunity for
effective access to files and records of the Company that contained the relevant
information, including the Company's financial statements and 34 Act reports,
and his prior involvement with the Company as a previous consultant.

On July 12, 2004, we issued 20,000 shares of restricted
common stock to Steve Simon and 5,000 shares of our restricted common stock to
James W. Dupree who each provided financial marketing consultant services. The
total value of these shares was $26,750. We believe that the issuance of the
shares was exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation.

18

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On July 23, 2004, we issued 200,000 shares of restricted
common stock to Marvin Lee Schwab pursuant to an agreement under which he
assisted in developing our operations as a bottle manufacturer for a period of
one year commencing June 28, 2004. On July 30, 2004, 180,000 shares of common
stock to Mr. Schwab were rescinded to properly reflect the amount of shares he
was to receive pursuant to the agreement. The value of shares after the error
was corrected was $20,200. We believe that the issuance of the shares was exempt
from the registration and prospectus delivery requirements of the Securities Act
of 1933 by virtue of Section 4(2). The shares were issued directly by the
Company and did not involve a public offering or general solicitation.

On October 28, 2004, the Company awarded 500,000 shares,
valued at $277,528, to Alpine Capital Partners as finder's fee for the Laurus
transaction. The shares were not issued as of December 31, 2004. We believe the
issuance was exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The recipient of the shares was afforded an opportunity for
effective access to files and records of the Company that contained the relevant
information needed to make their investment decision, including the Company's
financial statements and 34 Act reports. The Company reasonably believed that
the recipient, immediately prior to issuing the shares, had such knowledge and
experience in its financial and business matters that they were capable of
evaluating the merits and risks of its investment. The recipient had the
opportunity to speak with the Company's president and directors on several
occasions prior to its investment decision. The shares are restricted against
resale and may only be sold pursuant to Rule 144 or an effective registration
statement.

On October 28, 2004, we issued warrants to purchase 1,000,000
million shares of our common stock, valued at $135,500, to Gryphon Master Fund,
L.P. in consideration for the receipt of a required waiver allowing the Laurus
financing. The exercise price of these warrants is $0.58 per share and may be
exercised at any time prior to October 28, 2009. Further, the warrant provides
Gryphon with the right to exercise the warrants on a cashless basis and has
registration rights, which must be filed no later than 150 days following the
issue date. We believe that the issuance of these warrants was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2). The warrants were issued directly by the Company and
did not involve a public offering or general solicitation. The recipient of the
warrants was afforded an opportunity for effective access to files and records
of the Company that contained the relevant information needed to make its
investment decision, including the Company's financial statements and 34 Act
reports. The Company reasonably believed that the recipient, immediately prior
to issuing the warrants, had such knowledge and experience in its financial and
business matters that it was capable of evaluating the merits and risks of its
investment. The recipient had the opportunity to speak with the Company's
president and directors on several occasions prior to its investment decision.

19

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On November 17, 2004, the Company issued 150,000 shares of
restricted stock, valued at $88,500, in connection with legal fees paid to
Stoecklein Law Group for corporate matters pursuant to our retainer agreement
and legal fees associated with the Laurus financing unrelated to the
registration statement filed on December 15, 2004. The value of the agreement
was determined based on the market value of our stock on the date the stock was
earned. We believe that the issuances of the shares described above were exempt
from the registration and prospectus delivery requirements of the Securities Act
of 1933 by virtue of Section 4(2). The shares were issued directly by the
Company and did not involve a public offering or general solicitation.

On November 17, 2004, the Company issued 50,000 shares of
restricted common stock, valued at $27,500, to Jerry Ludeman as compensation for
prior services as a director to the Company. The value of the agreement was
determined based on the market value of our stock on the date the stock was
earned. We believe that the issuance of the shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2). The shares were issued directly by the Company and
did not involve a public offering or general solicitation.

Issuance of Securities for Warrant Exercise

On February 2, 2004 two accredited investors were issued
shares upon exercise of warrants they issued in the 30% discount private
placement conducted by Camden Securities from August 2003 to September 2003. One
accredited investor exercised his warrant for 36,163 shares on January 23, 2004
at $0.50 per share for a total of $18,150.21. The other accredited investor
exercised his warrant for 15,377 shares on January 26, 2004 at a rate of $0.60
per share for a total of $9,300. The warrants described were exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2). The shares were issued directly by the Company and
did not involve a public offering or general solicitation. The private placement
was in reliance on Sections 4(2), Regulation D Rule 506 and/or 3(b) of the
Securities Act, based upon each investor's relationship to the Company, their
accredited investor status, the amount of securities offered, and the size and
manner of the offering.

On February 6, 2004, the Company issued 15,000 shares to
Irving Berke who exercised his warrants from the $0.35 private placement
conducted by the Company in October 2003. He exercised his warrants on February
2, 2004 at $0.525 per share for a total of $7,875. The warrants described were
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

20

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On February 18, 2004, the Company issued 30,000 shares of
common stock to Michael and Lori Weisser, who exercised their warrants from the
$0.35 private placement conducted by the Company in October 2003. They exercised
their warrants on February 8, 2004 at $0.525 per share for a total of $15,750.
The warrants described were exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by the Company and did not involve a public offering or
general solicitation. The private placement was in reliance on Sections 4(2),
Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

On February 18, 2004, the Company issued 32,541 shares of
common stock to Daniel and Janice Rey, who exercised their warrants from the 30%
discount private placement conducted by Camden Securities in September 2003.
They exercised their warrants on February 11, 2004 at $0.525 per share for a
total of $17,084. The warrants described were exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Section 4(2). The shares were issued directly by the Company and did not involve
a public offering or general solicitation. The private placement was in reliance
on Sections 4(2), Regulation D Rule 506 and/or 3(b) of the Securities Act, based
upon each investor's relationship to the Company, their accredited investor
status, the amount of securities offered, and the size and manner of the
offering.

On February 24, 2004, the Company issued 100,000 shares of
common stock to Richard Stevens. On February 17, 2004 he exercised his warrants
from the $0.35 private placement conducted by the Company in October 2003 at a
rate of $0.525 per share for a total of $52,500. The warrants described were
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On February 26, 2004, the Company issued 36,568 shares of
common stock to Forrest Williams, who exercised his warrants from the 30%
discount private placement conducted by Camden Securities in 2003. He exercised
his warrants on February 18, 2004 at $0.41 per share for a total of $15,000.19.
The warrants described were exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by the Company and did not involve a public offering or
general solicitation. The private placement was in reliance on Sections 4(2),
Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

On February 27, 2004, the Company issued 186,140 shares of
common stock to Camden Securities, Inc. for the exercise of 227,000 warrants
pursuant to the Sales Agency Agreement between the Company and Camden acting as
the placement agent for various private placements. The warrant agreement
provided for a "cashless exercise" and the shares were issued according to this
feature. The warrants described were exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).
The shares were issued directly by the Company and did not involve a public
offering or general solicitation. The shares were issued in reliance on Sections
4(2), Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

21

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On March 3, 2004, the Company issued 86,000 shares of common
stock to 3 accredited investors in connection with the $0.35 private placement
conducted by the Company in October 2003. The shares were exercised at $0.525
per share for a total of $45,150. The warrants described were exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2). The shares were issued directly by the Company and
did not involve a public offering or general solicitation. The private placement
was in reliance on Sections 4(2), Regulation D Rule 506 and/or 3(b) of the
Securities Act, based upon each investor's relationship to the Company, their
accredited investor status, the amount of securities offered, and the size and
manner of the offering.

On March 3, 2004, the Company issued 49,205 shares of common
stock to William Perry, who exercised his warrants from the 30% discount private
placement that was conducted by Camden Securities. Mr. Perry exercised his
warrant on February 26, 2004 at $0.61 per share for a total of $30,000.39. The
warrants described were exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by the Company and did not involve a public offering or
general solicitation. The private placement was in reliance on Sections 4(2),
Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

On March 8, 2004, the Company issued 104,000 shares of common
stock to 3 accredited investors who exercised their warrants from the $0.35
private placement conducted by the Company in October 2003. The shares were
exercised at $0.525 per share for a total of $54,600. The warrants described
were exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On March 8, 2004, the Company issued 30,352 shares of common
stock to Michael Harris, who exercised his warrants from the 30% discount
private placement conducted by Camden Securities. Mr. Harris exercised his
warrant on March 2, 2004 at $0.62 per share for a total of $18, 749.95. The
warrants described were exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by the Company and did not involve a public offering or
general solicitation. The private placement was in reliance on Sections 4(2),
Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

22

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On March 9, 2004, the Company issued 75,000 shares of common
stock to Laura Halper, who exercised her warrants from the $0.35 private
placement conducted by the Company in October 2003. She exercised her warrants
on March 3, 2004 at $0.525 per share for a total of $39,375. The warrants
described were exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On March 9, 2004, the Company issued 30,560 shares of common
stock to Bernard Saul, who exercised his warrants from the 30% discount private
placement conducted by Camden Securities. He exercised his warrants on March 3,
2004 at $0.61 per share for a total of $18,750.09. The warrants described were
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On March 12, 2004, the Company issued 439,071 shares of
common stock to 11 accredited investors, who exercised their warrants from the
$0.35 private placement conducted by the Company in October 2003. They exercised
their warrants at $0.525 per share for a total of $230,512.28. The warrants
described were exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On March 12, 2004, the Company issued 196,228 shares of
common stock to 8 accredited investors, who exercised their warrants from the
30% discount private placement conducted by Camden Securities. The amount
exercised at ranged from $0.43 per share to $0.61 per share for a total amount
of $100,501.05. The warrants described were exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Section 4(2). The shares were issued directly by the Company and did not involve
a public offering or general solicitation. The private placement was in reliance
on Sections 4(2), Regulation D Rule 506 and/or 3(b) of the Securities Act, based
upon each investor's relationship to the Company, their accredited investor
status, the amount of securities offered, and the size and manner of the
offering.

On March 15, 2004, the Company issued 45,000 shares of common
stock to Mary Miller, who exercised her warrants from the $0.35 private
placement conducted by the Company in October 2003. On March 15, 2004 the
Company received from Ms. Miller two promissory notes in the amounts of $7,875
and $15,750 as payment for the 15,000 warrants and the 30,000 warrants exercised
which are payable on or before March 15, 2005 and bear interest at a rate of
0.06% per annum. The warrants were exercised at a rate of $0.525 per share. The
notes are collateralized by the shares issued upon exercise.

23

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On March 15, 2004, the Company issued 86,428 shares of common
stock to 3 accredited investors, who exercised their warrants from the $0.35
private placement conducted by the Company in October 2003. They exercised their
warrants at $0.525 per share for a total amount of $45,374.93. The warrants
described were exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On March 15, 2004, the Company issued 47,994 shares of common
stock to 2 accredited investors, who exercised their warrants from the 30%
discount private placement conducted by the Camden Securities. The warrants were
exercised at $0.525 per share for a total of $25,197. The warrants described
were exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On June 4, 2004, the Company issued 15,000 shares of common
stock to Kate McKnight, who exercised her 15,000 warrants from the $0.35 private
placement conducted by the Company in October 2003. She exercised her warrants
at a price of $0.525 per share for a total of $7,875. The warrants described
were exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On June 4, 2004, the Company issued 24,802 shares of common
stock to Adela Pena, who exercised his 24,802 warrants from the 30% discount
private placement conducted by Camden Securities. He exercised his warrants at a
price of $0.60 per share for a total of $15,000.25. The warrants described were
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

24

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On June 14, 2004, the Company issued 300,000 shares of common
stock to Redwood Consultants, LLC pursuant to the exercise of warrants granted
to them in their consulting agreement with the Company. Of the total, 100,000
warrants were redeemable if the Company's common stock traded above $0.50 and
the shares had been registered. Another 100,000 warrants were redeemable if the
Company's common stock traded about $1.00 and the shares had been registered.
Finally, the remaining 100,000 warrants were redeemable if the Company's common
stock traded above $1.50 and the shares were registered. The shares were
registered in our registration statement on Form SB-2 dated May 7, 2004. We
believe the issuance was exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Regulation D Rule 506.
The shares were issued directly by the Company and did not involve a public
offering or general solicitation. The recipients of the shares were afforded an
opportunity for effective access to files and records of the Company that
contained the relevant information needed to make their investment decision,
including the financial statements and Exchange Act reports. The Company
reasonably believed that the recipients, immediately prior to issuing the
shares, had such knowledge and experience in financial and business matters that
they were capable of evaluating the merits and risks of their investment. The
recipients had the opportunity to speak with the Company's management on several
occasions prior to their investment decision.

On June 21, 2004, the Company issued 85,715 shares of common
stock to Karen Miller, who exercised her 85,715 warrants from the $0.35 private
placement conducted by the Company in October 2003. She exercised on June 14,
2004 at a price of $0.525 per share for a total of $45,000. The warrants
described were exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by the Company and did not involve a public offering or general
solicitation. The private placement was in reliance on Sections 4(2), Regulation
D Rule 506 and/or 3(b) of the Securities Act, based upon each investor's
relationship to the Company, their accredited investor status, the amount of
securities offered, and the size and manner of the offering.

On July 23, 2004, the Company issued 71,429 shares of common
stock to Rheal Cote, who exercised his 71,429 warrants from the $0.35 private
placement conducted by the Company in October 2003. He exercised his warrants on
July 7, 2004 at a price of $0.525 per share for a total of $37,500.23. The
warrants described were exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by the Company and did not involve a public offering or
general solicitation. The private placement was in reliance on Sections 4(2),
Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

On July 30, 2004, the Company issued 99,999 shares of common
stock to Gerald Bolduc, who exercised his warrants from the $0.35 private
placement conducted by the Company in October 2003. The warrants were exercised
on March 5, 2004 at a rate of $0.525 for a total of $52,500. The shares were not
issued until July 30, 2004 due to the subscription agreements being lost. The
warrants described were exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by the Company and did not involve a public offering or
general solicitation. The private placement was in reliance on Sections 4(2),
Regulation D Rule 506 and/or 3(b) of the Securities Act, based upon each
investor's relationship to the Company, their accredited investor status, the
amount of securities offered, and the size and manner of the offering.

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On August 8, 2004, VistaQuest exercised 500,000 warrants at a
price of $0.35 per share for a total compensation of $175,000. The 500,000
shares were issued on August 22, 2003 and could only be exercised in whole.
These shares were registered in our registration statement on Form SB-2 dated
May 7, 2004. We believe that the issuance of the shares described was from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2). The shares were issued directly by the Company and
did not involve a public offering or general solicitation.

Securities authorized for issuance under equity compensation
plans

On February 6, 2004, the Company issued 100,000 shares of
common stock, valued at $191,000, to Sean Flanagan for consideration of his
previous legal services. The shares were registered in a Registration Statement
on Form S-8 filed with the SEC on May 8, 2002.

On May 13, 2004, the Company issued 200,000 shares of common
stock, valued at $340,000, to Sean Flanagan for previous legal services. The
shares were registered in a registration statement on Form S-8 filed with the
SEC on May 13, 2004.

On July 23, 2004, we issued 1,600 shares of common stock,
valued at $1,616, for consulting services to Sharon Shepard pursuant to a
Consultant Agreement for a term of six months beginning April 1, 2004. The
shares were registered in a Registration statement on Form S-8 filed with the
SEC on April 1, 2004 and were earned in the second quarter of 2004.

On November 17, 2004, we issued 10,000 shares of common
stock, valued at $5,500, to Adriana Lucas pursuant to a consulting agreement.
The shares were registered in a Registration statement on Form S-8 filed with
the SEC on April 5, 2002.

In addition, the Stock Plan provides for the issuance of the
Company's equity securities as compensation for consulting and/or legal services
provided to the Company from time to time. The Company limits the recipients of
stock issued pursuant to the Stock Plan to natural persons who performed
bona-fide services to the Company which were not in connection with the offer or
sale of securities in a capital-raising transaction, and which do not directly
or indirectly promote or maintain a market for the Company's securities. All
shares issued pursuant to the Stock Plan were registered with the Commission on
Form S-8.

Subsequent Events

On February 28, 2005, we issued Laurus a warrant to purchase
1,500,000 shares of common stock with a purchase price of $0.50 pursuant to an
Amendment and Waiver Agreement for the purpose of amending the terms of the
previous Secured Convertible Term Note, the Securities Purchase Agreement, and
the Registration Rights Agreement, all dated October 26, 2004. The warrant has a
five year term. We believe the warrant was exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Regulation D Rule 506. The warrant was issued directly by the Company and did
not involve a public offering or general solicitation. Laurus was afforded an
opportunity for effective access to files and records of the Company that
contained the relevant information needed to make its investment decision,
including the financial statements and Exchange Act reports. The Company
reasonably believed that Laurus, immediately prior to its investment, had such
knowledge and experience in financial and business matters that they were
capable of evaluating the merits and risks of their investment. Laurus had the
opportunity to speak with the Company's management on several occasions prior to
its investment decision.

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

With the exception of historical matters, the matters
discussed herein are forward-looking statements that involve risks and
uncertainties. Forward-looking statements include, but are not limited to,
statements concerning anticipated trends in revenues and net income, the date of
introduction or completion of our products, projections concerning operations
and available cash flow. Actual results and events could differ materially from
those projected, anticipated, or implicit, in the forward-looking statements as
a result of the risk factors set forth below and elsewhere in this report. The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes
thereto appearing elsewhere herein.

OVERVIEW AND OUTLOOK

We develop, market, sell, and distribute bottled water along
with four branded beverages: Hawaiian Tropic, Geyser Fruit, Geyser Sport, and
Geyser Fruta. Our products are orientated to the health conscious consumer
looking for an alternative to products containing high sugar and caffeine
levels. Our customers include single and multi-store retail operations,
governmental agencies, and distributors who in turn sell to retail stores,
convenience stores, schools and other outlets. In addition, we moved into the
private label and co-packing industries in the fourth quarter and will continue
development of this market through fiscal year 2005.

We initially sold our products exclusively through
distributors who then supplied our products to retailers. Although we still use
distributors, we have expanded our sales effort through sales directly to
retailers. At December 31, 2003 we sold through distributors and directly to
customers of approximately 3,000 to 4,000 retail locations. At December 31,
2004, we sold through distributors and directly to customers with approximately
20,000 to 25,000 retail locations.

We expect to increase sales to our existing customers and
continue to increase the number of our customers through the fiscal year 2005.
Further, as a result of our diversification into the private label and
co-packing businesses, we anticipate a significant increase in our operating
revenues. The private label and co-packaging of beverages for other corporations
allows us to avoid costly marketing expenses that would otherwise be associated
with brand development, launch, and continuing promotions. We anticipate the
distribution of our sales over the next couple of years to have the following
breakdown:

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- 50%-60% private labeling,
- 30% co-packing,
- 10%-20% branded products.

American Water Star's focus on flavored water, tropical
beverages, teas, and mixers differentiates itself from traditional bottled water
because the perception is of an increased value with the many different flavors
we are able to offer. This perception also allows us to accommodate any
difference in price from standard bottled water. We also intend to capitalize on
this difference in the expansion of new product lines and flavors.

Beverage Industry Overview

According to the 2002/2003 Beverage World Beverage DataBank,
the Multiple Beverage Market, which consists of soft drinks, fruit beverages,
bottled teas, sports drinks and bottled water, beer, wine, and spirits (the
"Multiple Beverage Market"), accounted for retail revenue of $205.10 billion in
2001, an increase from 199.67 from 2000, an increase of 3.2%. Soft drinks are
the largest and most dominant segment of the non-alcoholic Multiple Beverage
Market, with retail sales of $55.94 billion and 15.41 billion gallons in 2001.
Although Soft Drinks account for nearly 50% of annual beverage gallonage, there
has been a series of new challengers in the Alternative Beverage Market, led in
particular by bottled water, that have cannibalized Soft Drinks' sales and
supremacy in the World Beverage Market Index. Sales of bottled water in the
United States doubled from 1.56 billion gallons in 1987 to 3.12 billion gallons
in 1996 ($4.3 billion in sales), and has continued to increase even further to
5.6 billion gallons in 2001 (an increase of 80% since 1996), which accounted for
$7.78 billion dollars in sales (an increase of 32% since 1996).

The United States Multiple Beverage Market's greatest growth
is principally in the newest segment of beverages, known as New Age Beverages.
The introduction of Alternative Beverages into the marketplace began in the late
1980's as a result of widespread consumer demand for alternatives to traditional
carbonated soft drinks. The category of Alternative/New Age Beverages now
consists of 9 different growing segments including: (1) single serve bottled
water, (2) natural/premium sodas, (3) sparkling waters, (4) sports drinks, (5)
ready-to-drink iced teas and ready-to-drink coffees, (6) single serve fruit
juices, and fruit Juice/Vegetable blends, (7) energy beverages, (8) nutrient
enhanced beverages, which are healthy beverages that have ingredients added to
satisfy a physical or functional need (i.e. added herbs for health, performance,
or nutrition, oxygen for performance recovery and enhancement, etc.), and (9)
New Age Dairy.

New Age Beverage sales have continued to experience
tremendous growth over past years (1997-$7 billion, 1998-$8 billion, 1999-$9.3
billion, 2000-$10.2 billion, 2001-$11.6 billion, and 2002-$13.2 billion), with
significant continued growth to come as existing brands gain greater acceptance
in the marketplace, and new brands and categories enter and evolve.

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Initially seen as a fad, beverage market analysts foresee a
long, healthy life for variable functional beverages (energy beverages enhanced
r-t-d teas and waters). According to Frost & Sullivan, a San Jose, Calif.-based
international strategic market consultant, the U.S. functional beverage market
generated revenues of $4.7 billion in 2000, and is projected to top $12 billion
by 2007.

Functional as well as, all alternative beverages have gone
from availability in small, niche health food stores to mainstream convenience
store and grocery/supermarket availability. As the Alternative Beverage Market
continues to grow in product lines and sales, as well as more consistent
mainstream visibility, many beverages have begun to straddle and crossover into
various categories of this market segment (i.e. herbal enhanced iced tea's and
waters). As this market continues to grow, and more and more new beverages are
formulated and crossover into various categories, additional market segments
will form, as in the case of flavored water. In fact, in March of 2005, the top
two bottled water marketers in the United States introduced new extensions of
zero-calorie flavored water products. The Beverage Marketing Corporation report
analyzing the flavored water market reported annual flavored water sales could
exceed $600 million within the next few years, which is considered to be the
medium-growth figure but a high-end projection is in the neighborhood of $800
million.

Bottled water, as the primary segment of the New Age
category, has continued to gain strong acceptance as an alternative beverage of
choice for the consumer. In its early development, bottled water was perceived
to be a luxury or elitist beverage as the general consumer felt it was
unnecessary to pay for a product that was otherwise available for "free" from
the tap. Since that time, as a result of various issues, including increased
availability, dietary and health concerns, and consumer fears of
public/municipal water supply safety, bottled water has gained acceptance
throughout all age, gender, economic, and social demographic segments throughout
the United States. Health and safety issues know no demographic boundaries, and
virtually all Americans are concerned about their diet and weight. As a
non-caloric, healthful beverage with no health concerns due to chemical
additives, bottled water is the beverage of choice for a long time to come.

An inherent limiting factor of a beverage and water company's
growth and income capabilities is that the majority of beverages and bottled
water companies are regional in nature and are restricted to their water source
volume and the distance in which their products can be most cost effectively
transported. Due to the nature of being a very dense and heavy element, water
and other beverages are very costly to ship. Shipment of water and beverages
beyond a 500 mile radius of a plant becomes costly, inefficient, and erodes
profitability. Furthermore, the water and beverage industry is extremely
competitive with a number of companies in each region vying for the same
clientele. These limitations impact short-term as well as long-term growth.
American Water Star plans to look for possible acquisition or plant purchases in
various strategic geographic locations that will afford the company to better
serve its clientele on a national basis.

Priorities of American Water Star

Key Priorities for the Company in 2004 and over the next
several years include the following:

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Product innovation

Innovation of our four established brands has been and will
continue to be critical to overall volume growth. We are currently developing
the Fling's Miami Beach line, which will include sugar-free, calorie-free teas,
energy drinks, mixers and flavored waters. In addition, we plan on expanding our
water products with several lines including the Vegas Ice and Desert Ice lines.
We are also entertaining the possibility of an energy drink line.

Distribution Cost Management

The cost of transporting finished goods from our various
plants to locations of customer outlets accounted for 9% of our net sales in
2004. The expense of shipping cases of beverages is approximately $0.60 per case
for every 500 miles. Due to the expense of fuel prices, the costs associated
with transporting finished goods are anticipated to either remain the same or to
increase. To combat these rising transportation costs, we are actively pursuing
several options, including purchasing our own fleeted trucks, distributing in a
500 mile radius of our plants, and other creative options with our distributors
and retailers. We anticipate that through these and other options that we will
be able to reduce our freight costs by up to 50%. In conjunction with our
distributing within a 500 mile radius of our plants, we plan to research the
possibility of expanding our operations with other plants in strategic
locations.

Productivity

To achieve operating performance in the company over the
long-term there must be ongoing improvements in labor productivity and asset
productivity. We are continuing to focus on our supply chain and distribution
functions for opportunities to improve productivity. Once all the three plants
are fully operational, we expect this to increase our ability to produce in a
more efficient manner. We also have intentions of establishing or locating
operations of bottle manufacturers in close proximity of our plants. This should
help reduce costs in the hauling of bottles and make it more efficient in being
able to fill orders in a more timely fashion.

Year Ended December 31, 2004 Compared to Year Ended December
31, 2003

Results of Operations

During the fourth quarter we began the initial test
production runs in our new facilities. These facilities are located in
Jacksonville, Florida; Magnolia, Mississippi; and Phoenix, Arizona. These three
facilities had in total six bottling lines in place at the end of the fourth
quarter of 2004. Currently the Mississippi and Arizona facilities are producing
product and the Florida facility is targeted to be in production by the 2nd
quarter of 2005. Due to Splenda® no longer being available to us, our products
and lines had to be reformulated, relabeled and retrofitted to run a sugar blend
and aspartame. This caused our bottling lines to not be completely operational
as early as anticipated. We also currently have plans to open a bottling
facility in Honolulu, Hawaii sometime in 2005.

30

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The initial three facilities are expected to commence
production with the ability to produce in total between 3,000 and 4,000
truckloads of beverage monthly. We believe that our cost to produce our products
will be less in our new production facilities than what we experienced in using
third parties; however, we plan to continue to use the co-packing arrangements
currently in place to supplement our production needs. We believe this new
production capacity will be sufficient to meet the demands for our products.
Most of the set up costs for these facilities have been paid for and the
remaining balance is expected not to exceed $250,000.

In February 2004, we acquired the assets of Sunset Bottling
Company ("Sunset"), the site of our Jacksonville, Florida production facility.
The cost of these assets totaled $362,980, consisting of $135,000 cash paid to
Sunset and 200,000 shares of our common stock valued at $227,980. In July 2004,
we sold the private label water business acquired in the Sunset transaction for
$250,000. This sale provides for the buyer to pay us $1.00 for each case of
water sold to private label customers until the purchase price has been paid or
until July 2009, whichever occurs first. We will record payments received as a
reduction of the intangible asset recorded as a result of the Sunset asset
acquisition. No payments were received on this agreement through December 31,
2004, and we have accounted for this receivable as being unlikely collectible.
As a result, this receivable amount was written off. Should any payments be
received pursuant to this agreement, they will be recorded as revenue if and
when received.

During 2004, we had negative cash flow from operations of
$7,068,783, and for the 2003 fiscal year we had negative cash flow from
operations of $1,697,198. During 2004, we raised $9,620,603 from the sale of
common stock and the exercise of warrants. An additional $1,700,000 was raised
through the conversion of debt to equity. These two amounts exceeded cash used
in operations. In October 2004, we raised $5 million through the issuance of a
convertible note with detachable warrants.

For the year 2004, we had gross profit of $547,651, or 17% of
net sales, respectively compared to gross profit of $1,012,242, or 38% of net
sales, in the comparable period of 2003. Gross profit amounts in 2004 were
reduced by inventory that was disposed of in connection with the opening of our
production facility in Mississippi. This inventory had a carrying value of
$268,164, or 8% of net sales for the year. In 2003, we incurred expenses associated
with slotting fees and promotional goods totaling $1,120,660.  This amount
represented 30% of gross sales and 68% of the cost of sales.  In
comparison, gross profit for 2004 was reduced
by slotting fees and the cost of promotional goods totaling $361,509, or 11% of
gross sales in 2004. These amounts were
paid directly or indirectly to customers (such as Safeway and Vons) for shelf
space in their stores for our products. We expect these costs to continue and
most likely will increase as we continue to increase the number of retail
locations in which our products are offered for sale to the public. In addition,
our sales in 2004 were primarily to Wal-Mart and other retail customers whereas
sales in 2003 were primarily to distributors. Sales prices to distributors are
about 20% higher than sales prices to Wal-Mart and other retailers.

Operating expenses for 2004 exceeded the gross profit
generated on our sales due to costs associated with developing the
infrastructure necessary to support our expected sales growth and legal,
accounting and consulting costs. Management plans to use aggressive sales
promotions, including offering free samples at retail locations, to increase
sales of our products. The initial success of this strategy is evidenced by the
large increase in the number of retail locations in which our products are
carried and the initial order for our products from Wal-Mart, to which $600,000
of products were delivered in April 2004. Total sales to Wal-Mart were
approximately 39% of our gross sales for the 2004 year end. We expect to
continue to obtain new customers for our products in 2005 that would provide for
continued significant increase in sales.

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During the third quarter of 2004, we were put on notice by
the licensor of Splenda® to remove their trademark from the labels of our
products. We have agreed to stop any future production of labels with their
trademark. We have been in communication with the licensor and have come to the
conclusion that we can no longer buy directly from them. In response to this we
have had to reformulate our blends with a sugar blend and aspartame
non-nutritive sweetener and relabel our products. We additionally had to
retrofit our bottling operations for these new formulations.

We had anticipated to launch a new product line of mixers and
commence sales during the fourth quarter of 2004. Since we were unable to obtain
Splenda® for this new product, we were unable to follow through with the actual
sales of the products. We have already implemented an alternative substitute in
the first quarter of 2005 and anticipate no further slowdown in this area.

Revenues

|        | 2004        | 2003        | Increase/(decrease)
|------- | ----------- | ----------- | -------------------
|$       | %          
|Revenue | $ 3,180,033 | $ 2,664,088 | $ 515,945          

During the year ended 2004, we recorded net sales of
$3,180,033 compared to net sales of $2,664,088 in the comparable period of 2003.
The increase of $515,945, or 19%, in sales for the year ended 2004 compared to
the same period in 2003 resulted from new customers obtained in 2004. This
increase was achieved in spite of the loss of two distributors and the decrease
in sales prices. Sales to Wal-Mart in 2004 were $1,237,825 and the remaining
$1,942,208 of net sales were primarily to other retail customers.

We have two major products: the Hawaiian Tropic brand, with
gross sales during 2004 of approximately $2,403,000, and our lines of Geyser
beverages, which include Geyser Sport, Geyser Fruta, and Geyser Fruit. Gross
sales of Geyser beverages during 2004 were approximately $1,125,000. During the
fourth quarter of 2003, we implemented our marketing program, which placed a
high priority on market penetration and establishing distribution channels. This
program involves aggressive use of promotional products and activities. We
believe that the levels of promotional costs are higher than industry averages,
but are necessary to be able to achieve our distribution and market penetration
goals. The success of this strategy is evidenced by our increase in gross sales
and the increase in the number of retail locations in which our products are
available. We sold through distributors and directly to customers approximately
3,000 to 4,000 retail locations as of December 31, 2003, which increased to
approximately 20,000 to 25,0000 retail locations as of December 31, 2004 We do
not as yet have sufficient operating history to determine if we will experience
seasonal fluctuations in the sales of our products.

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Cost of Sales



|                          | 2004        | 2003        | Increase/(decrease)
|------------------------- | ----------- | ----------- | -------------------
|$                         | %          
|                          |             |             |                    
|Cost of goods sold        | $ 2,632,382 | $ 1,651,846 | $ 980,536          
|Gross profit              | $ 547,651   | $ 1,012,242 | (464,591)          
|                          |             |             |                    
|Gross profit % of revenue | 17%         | 38%         | --                 

Gross Profit

In 2004, we realized a gross profit of $547,651, or 17% of
net sales. In comparison to 2003, we had a gross profit of $1,012,242, or 38% of
net sales. This decrease of profit was a result of the cost of discarded
inventory, higher costs with freight, additional shelving and introductory
costs.

Gross profit, excluding the cost of discarded inventory of
$268,164 from the third quarter of 2004, slotting fees and the cost of
promotional goods, totaled $1,277,324, or 40% of gross sales. The gross profits
for 2004, excluding the discarded inventory, slotting fees, and costs of
promotional goods, resulted in a greater overall amount than the $1,012,242
realized in 2003 and was slightly higher as a percentage of gross sales, 40%
versus 38%. We were able to maintain profit margins despite increased minimum
royalty on our Hawaiian Tropic products of $30,000 in each quarter of 2004 and
higher freight costs of $301,380 or 9% of net sales in 2004. These two items
totaled 13% of net sales for 2004 and 4% of net sales in 2003.

Freight costs represented 9% of net sales in 2004 in
comparison with 4% of net sales in the same periods of 2003. This increase in
freight cost resulted from an increase in freight rates due to increased fuel
costs and a broader distribution of our product in 2004 in comparison to 2003,
as our current co-packers were located in upstate New York and Southern
California while our customers are now national. Most of our sales in 2003 were
picked up by our customers. Our own production facilities in the southeast, the
south, and the southwest should mitigate some of the costs of freight to many of
our geographically dispersed customers along with our plans to expand our sales
efforts to areas that are within a 500 mile radius of any of our plants. At the
time of this report, the Mississippi and Phoenix production facilities are
producing products, and the Florida plant is targeted to be in production by the
second quarter of 2005.

Operating Expenses

|                                                           | 2004         | 2003        | Increase/(decrease)
|---------------------------------------------------------- | ------------ | ----------- | -------------------
|$                                                          | %           
|Administrative expense
		Third Parties                     | $ 8,635,015  | $ 1,584,801 | $ 7,050,214        
|Administrative expense
		Related Parties                   | $ 1,161,535  | $ 1,415,964 | $ (254,429)        
|Administrative Expense
		(Paid in Stock)
		Third Parties   | $ 5,228,797  | $ 2,098,525 | $ 3,130,272        
|Administrative Expense
		(Paid in Stock)
		Related Parties | $ 1,205,150  | $ 0         | $ 1,205,150        
|Total Operating Expenses                                   | $ 16,806,298 | $ 7,087,295 | $ 9,719,003        

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Total general and administrative expenses excluding
depreciation, amortization and the 2003 impairment of equipment, in 2004 was
$16,230,497 as compared to $5,099,290 for 2003. This resulted in an increase of
$11,131,207 or a 218% increase from 2003 to 2004.

The increase in general and administrative expenses can be
analyzed by two major categories: expenses related to payments by cash, and
expenses related to payments by stock and warrants. Total general and
administrative expenses related to payments by cash for 2004 were $9,796,550,
while general and administrative expenses related to payments by cash in 2003
were $3,000,765. The difference from 2004 to 2003 is $6,795,785 or a 226%
increase. The primary reasons for the variance were a $2,793,000 increase in
professional fees (from $466,000 to $3,259,000), a $1,409,000 increase in
payroll and contract labor expense (from $829,000 to $2,238,000), and a $527,000
increase in advertising costs (from $22,000 to $549,000). The increase in
professional fees in 2004 relates primarily to legal and consulting fees
associated with trademark applications, and litigation related to trademarks,
prior securities transactions, and product disputes. The increase in payroll and
contract labor expenses were primarily associated with the three new production
facilities. The remaining difference between the 2003 and 2004 general and
administrative expenses related to cash payments were also primarily related to
the three new production facilities, and included increases in expenses such as
rent, insurance, and repairs and maintenance.

General and administrative expenses related to payments by
stock and warrants were $6,433,947 in 2004 as compared to $2,098,525 in 2003.
The increase was $4,335,422, or 207%. These expenses were for consulting and
legal services in both 2003 and 2004. We used stock as compensation for services
as a means of preserving cash. When and if positive cash flows from operations
is generated, we anticipate that the use of this strategy will lessen.

General and Administrative - Related Parties

American Water Star has entered into contracts with Camelot,
Ltd., and D.A.M.E. Inc., entities which are controlled by, Donna Mohlman, the
former wife of our Chairman, Chief Executive Officer and largest stockholder.
American Water Star had contracts with Darwin Software, which at the time was
also controlled by Donna Mohlman. However, Ms. Mohlman no longer has any
ownership in Darwin Software but American Water Star continues to use the
services of Darwin. The agreements with Camelot include rental services of
equipment and leased employee costs for the beginning quarters of 2004. Camelot
has also provided bottling and office equipment for American Water Star.
Agreements with Darwin have been for product development. Additionally, the
agreements with D.A.M.E. have provided rental equipment, advertising consulting
and marketing services for American Water Star.

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Entities that have a relationship with the Company's
Chairman/ CEO were paid the following by the Company:





|                                                             | For the Years
		Ended
		December 31,
|------------------------------------------------------------ | ------------------------------------
|                                                             | 2004                                
|                                                             |                                     
|Software and
		website                                       | $                                   
|Computer
		hardware                                          |                                     
|Operating &
		capital lease payments                         |                                     
|Leased
		employees                                           |                                     
|Deposits on
		facilities                                     |                                     
|Leasehold
		improvements                                     |                                     
|Bottling and
		office equip.                                 |                                     
|Cash advances
		/ Repayment                                  |                                     
|Factoring
		agreements                                       |                                     
|Raw material
		purchases                                     |                                     
|Product
		development                                        |                                     
|Equipment
		rentals and repair                               |                                     
|Consulting
		Services (paid by issuance of stock- see below) |                                     
|                                                             |                                     
|Total                                                        | $                                   

Net Loss

|         | 2004         | 2003        | Increase/(decrease)
|-------- | ------------ | ----------- | -------------------
|$        | %           
|Net loss | $ 16,440,735 | $ 6,326,270 | $ 10,114,465       

Net loss was $16,440,735 for 2004 compared to net loss of
$6,326,270 in 2003. The increase in net loss reflects the impact of discarded
inventory, higher slotting fees and promotional goods and the high levels of
general and administrative expenses, including professional fees, consulting,
and legal fees.

Since inception we have recorded losses that would provide a
future tax benefit of approximately $6,734,000 as of December 31, 2004. A
valuation allowance for the full amount of the tax benefit was established based
on the lack of a history of earning pretax income.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of a company's ability to meet
potential cash requirements. The Company has historically met its capital
requirements through cash flows from operations, borrowings from our CEO and
majority stockholder, and borrowings from third parties and the issuance of
equity securities.

As of December 31, 2004, we had working capital of $1,357,269
compared to working capital of $2,525,162 as of December 31, 2003. The decrease
in working capital was primarily attributed to an increase in notes payable and
the current portion of long term debt. These items increased $2,800,000 from
2003 to 2004 and were partially offset by an increase in cash and accounts
receivables from 2003 to 2004 of $1,200,000.

Net cash used in operating activities in 2004 was $7,068,783,
compared to $1,697,198 in prior year 2003, an increase of $5,371,585. The
increase in cash used in operating activities is primarily due to an overall
increase in operational expenses during 2004 as discussed further in our results
of operations.

Net cash used in investing activities for 2004 was
$8,408,533, compared to $229,747, an increase of $8,178,786. The overall
increase in cash used in investing activities result from the purchase of
bottling and other equipment used in the production facilities approximating
$6,674,000. We do not anticipate having the same level of capital expenditures
in the next twelve months.

Net cash provided by financing activities for 2004 was
$16,042,545, compared to $2,562,351 in prior year 2003, an increase of
$13,480,194. Our financing has come primarily through three different sources:
private placements, capital lease obligations, and a loans from an unrelated and
related parties. During 2004, we realized proceeds from issuance of common stock
of $9,620,603, capital lease obligations of $1,082,000, an advance from a
related party of $1,600,000, and a loan from an unrelated party of $5,000,000.
In 2003, we received cash from private placements of $1,952,623, short-term
borrowings of $146,475, and loans from related parties of $463,253. We intend to
continue to pursue external financing sources to fund our business until cash
flow from operations is sufficient.

Effective October 26, 2004, we concluded a $5 million debt
financing with Laurus Master Fund, Ltd. and issued a three-year term note, with
monthly payments of interest commencing on December 1, 2004, and monthly
principal payments commencing on February 1, 2005. The term note bears interest
at an initial rate equal to prime rate plus three percent (3%), and is subject
to reduction on a month-by-month basis if specified conditions are met. For any
cash payments we make on the note, we are required to pay an amount equal to
102% of the principal amount due. Based on current interest rates, our monthly
cash payments of principal and interest beginning on February 1, 2005 would be
approximately $151,515.15. Our actual required cash payments on the note could
be less if amounts under the note are converted into our common stock. We can
prepay the note at any time upon payment of an amount equal to 125% of the
outstanding principal balance plus any accrued and unpaid interest.

36

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As a condition to the Laurus Transaction, we were required to
obtain certain waivers from investors who acquired stock in our company in a
prior financing. Although we obtained waivers from the investors, in
consideration of the waiver from Gryphon Master Fund, L.P. we issued warrants to
purchase 1,000,000 shares of our common stock. The exercise price of these
warrants is $0.58 per share and may be exercised at any time prior to October
28, 2009. Further, the warrants provide Gryphon with the right to exercise the
warrants on a cashless basis. None of the other investors were, nor will the be,
compensated for their waivers.

On February 28, 2005 Laurus agreed to waive each Event of
Default which may have arisen under Section 4.1 of the Term Note signed in
October 2004. In consideration of the waivers we agreed to (i) pay Laurus the
unpaid interest accrued under the Term Note and (ii) issue a new five year
warrant to Laurus to purchase an additional 1,500,000 shares of the common stock
with an exercise price of $0.50 per share. We further agreed to register the
additional warrant in the next Registration Statement, filed by the us but no
later than six (6) months from the execution of this additional warrant. As part
of this agreement the liquidated damages of our previous Registration Agreement
from October 2004, resumed on April 15, 2005 with respect to the filing of the
registration statement, and resumed on May 1, 2005 with respect to the
effectiveness of such registration statement. Pursuant to the Registration
Agreement, if the registration statement is not timely filed, or declared
effective within the timeframe described, or if the registration is suspended
other than as permitted, in the Registration Rights Agreement, we will be
obligated to pay Laurus a fee equal to 2.0% of the original principal amount of
the Note for each 30 day period (pro rated for partial periods) that such
registration conditions are not satisfied. At the time of this report we have
not complied with these timeframes and may be subject to such penalties.

During much of 2004, we also had an agreement to factor a
majority of our receivables although, such arrangements ceased as of December
31, 2004. We anticipate pursuing another factoring agreement in 2005 assuming we
can obtain favorable terms. We believe we will need approximately $6,000,000 in
the next twelve months for operational cash flow requirements, $250,000 for
equipment capital expenditures and $3,500,000 for implementing our plans to open
a facility in Hawaii. The Company will continue to rely on its capital
requirements through cash flows from operations, borrowings from our CEO and
majority stockholder, and borrowings from third parties and issuance of equity
for the next twelve months. During 2004, the Company's CEO and majority
stockholder advanced the Company approximately $1,700,000 which was converted
into common stock in 2004. However, there is no assurance that the CEO and
majority stockholder will be able continue to provide borrowings to the Company
or will we be successful in raising needed capital through borrowings from third
parties and/or issuance of equity.

Going Concern

The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements during the years ended December 31, 2004, and 2003, the
Company incurred losses from operations of $16,440,735 and $6,326,270
respectively. The financial statements do not include any adjustments relating
to the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. It is management's
plan to finance its operations for the foreseeable future primarily through
capital raised through financing options in the investment community and by
increasing its revenues through its current and new customers. However, there
can be no assurance that these sources will provide sufficient cash inflows to
enable the Company to achieve its operational objectives.

37

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OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results or
operations, liquidity, capital expenditures or capital resources that is
material to investors.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND PRONOUNCEMENTS.

Our consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). GAAP requires us to make estimates and assumptions that affect
the reported amounts in our consolidated financial statements including various
allowances and reserves for accounts receivable and inventories, the estimated
lives of long-lived assets and trademarks and trademark licenses as well as
claims and contingencies arising out of litigation or other transactions that
occur in the normal course of business. The following summarize our most
significant accounting and reporting policies and practices:

Trade Accounts Receivable

We record trade accounts receivable at net realizable value.
This value includes an appropriate allowance for estimated uncollectible
accounts to reflect any loss anticipated on the trade accounts receivable
balances and charged to the provision for doubtful accounts. We calculate this
allowance based on our history of write-offs, level of past due accounts based
on the contractual terms of the receivables and our relationships with and
economic status of our customers.

Inventories

Inventories consist primarily of raw materials, supplies,
concentrates, and syrups and are valued at the lower of cost or market. We
determine cost on the basis of the average cost or first-in, first-out methods.

Stock-Based Compensation

Common stock, warrants, options issued for services by
non-employees is accounted for based on the fair market value at the date the
services are performed. If the services are to be performed over a period of
time the value is amortized over the life of the period that services are
performed.

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Property, Plant, Equipment

We state property, plant and equipment at cost and depreciate
such assets principally by the straight-line method over the estimated useful
lives of the assets. Management assesses the recoverability of the carrying
amount of property, plant and equipment if certain events or changes occur, such
as a significant decrease in market value of the assets or a significant change
in the business conditions in a particular market. The estimated useful lives of
the assets or the lease term based on the following life expectancy:

|Computer equipment            | 5 years      
|----------------------------- | -------------
|Software                      | 3 years      
|Office furniture and fixtures | 7 years      
|Bottling equipment            | 7-10 years   
|Leasehold improvements        | Life of lease

Depreciation commences upon implementation of the asset.
Repairs and maintenance expenditures are charged to operations as incurred.
Major improvements and replacements, which extend the useful life of an asset,
are capitalized and depreciated over the remaining estimated useful life of the
asset. When assets are retired or sold, the costs and related accumulated
depreciation and amortization are eliminated and any resulting gain or loss is
reflected in operations.

Long-Lived Assets

We review the carrying value of long-lived assets at each
balance sheet date if indication of impairment exists. Recoverability is
assessed using undiscounted cash flows based upon historical results and current
projections of earnings before interest and taxes. Impairment is measured using
discounted cash flows of future operating results based upon a rate that
corresponds to the cost of capital. Impairments are recognized in operating
results to the extent that carrying value exceeds discounted cash flows of
future operations. As of December 31, 2004 and 2003 we recognized an expense in
the amount of $0 and $1,745,669, respectively

Income Taxes

Income taxes are accounted for under the asset and liability
method of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

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Revenue Recognition

Revenue from the sale of our products is recorded when title
and risk of loss have passed to the customer. Revenue is recorded at the time of
shipment. Sales are recorded net of discounts, rebates, and promotional costs.

FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS

RISKS RELATING TO OUR BUSINESS AND OUR MARKETPLACE

We are a relatively young company with a minimal operating
history

Since we are a young company, it is difficult to evaluate our
business and prospects. At this stage of our business operations, even with our
good faith efforts, potential investors have a high probability of losing their
investment. Since our reorganization in 2002 and our change of business
direction, we have brought a number of recognized brands to market and generated
revenue from operations. However, our future operating results will depend on
many factors, including the ability to generate sustained and increased demand
and acceptance of our products, the level of our competition, and our ability to
attract and maintain key management and employees. While management believes its
estimates of projected occurrences and events are within the timetable of its
business plan, there can be no guarantees or assurances that the results
anticipated will occur.

We have not achieved profitability on an annual basis and
expect to continue to incur net losses in future quarters.

If we do not achieve profitability, our business may not grow
or continue to operate. In order to become profitable, we must increase our
revenues and/or decrease expenses. We may not be able to increase or even
maintain our revenues, and we may not achieve sufficient revenues or
profitability in any future period. We recorded a net loss of $16,440,735 for
the year ended December 31, 2004, and at December 31, 2004 we had an accumulated
deficit of $23,344,304. We could incur net losses for the foreseeable future. We
will need to generate additional revenues from the sales of our products or take
steps to reduce operating costs to achieve and maintain profitability. Even if
we are able to increase revenues, we may experience price competition that will
lower our gross margins and our profitability. If we do achieve profitability,
we cannot be certain that we can sustain or increase profitability on a
quarterly or annual basis.

We received an opinion from our accountants which raises
doubt about our ability to continue as a Going Concern.

Our audited financial statements for the year ended December
31, 2004, which are included in this filing, indicate that there was substantial
doubt about our ability to continue as a going concern due to our need to
generate cash from operations and obtain additional financing.

40

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We may require additional funds to operate in accordance with
our business plan.

We may not be able to obtain additional funds that we may
require. We do not presently have adequate cash from operations or financing
activities to meet our long-term needs. Our operations have been financed to
date through debt and sales of our equity. If unanticipated expenses, problems,
and unforeseen business difficulties occur, which result in material delays, we
will not be able to operate within our budget. If we do not achieve our
internally projected sales revenues and earnings, we will not be able to operate
within our budget. If we do not operate within our budget, we will require
additional funds to continue our business. If we are unsuccessful in obtaining
those funds, we cannot assure you of our ability to generate positive returns to
the Company. Further, we may not be able to obtain the additional funds that we
require on terms acceptable to us, if at all. We do not currently have any
established third-party bank credit arrangements. If the additional funds that
we may require are not available to us, we may be required to curtail
significantly or to eliminate some or all of our development, manufacturing, or
sales and marketing programs.

If we need additional funds, we may seek to obtain them
primarily through equity or debt financings. Such additional financing, if
available on terms and schedules acceptable to us, if available at all, could
result in dilution to our current stockholders and to you. We may also attempt
to obtain funds through arrangement with corporate partners or others. Those
types of arrangements may require us to relinquish certain rights to our
intellectual property or resulting products.

If we acquire additional companies or products in the future,
they could prove difficult to integrate, disrupt our business, dilute
stockholder value or adversely affect our operating results.

We anticipate that we will make other investments in
complementary companies or products. We may not realize the anticipated benefits
of any such acquisition or investment. The success of our acquisition program
will depend on our ability to overcome substantial obstacles, such as the
availability of acquisition candidates, our ability to compete successfully with
other acquirers seeking similar acquisition candidates, the availability of
funds to finance acquisitions and the availability of management resources to
oversee the operation of acquired businesses. Furthermore, we may have to incur
debt or issue equity securities to pay for future acquisitions or investments,
the issuance of which could be dilutive to us or our existing stockholders. In
addition, our profitability may suffer because of acquisition-related costs or
future impairment costs for acquired goodwill and other intangible assets.

We have limited resources and we can offer no assurance that
we will be able to integrate and manage any acquisitions successfully. We have
no present commitments, understandings, or plans to acquire other complementary
companies or products.

We are highly dependent on Roger Mohlman, our President and
CEO. The loss of Mr. Mohlman, whose knowledge, leadership, and technical
expertise upon which we rely, would harm our ability to execute our business
plan.

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We are largely dependent on Roger Mohlman, our President and
CEO, for specific proprietary technical knowledge and specialized market
knowledge. Our ability to successfully market and distribute our products may be
at risk from an unanticipated accident, injury, illness, incapacitation, or
death of Mr. Mohlman. Upon such occurrence, unforeseen expenses, delays, losses
and/or difficulties may be encountered. American Water Star has identified top
quality key management and is in the process of adding these people for the
expected development of the company.

Our success may also depend on our ability to attract and
retain other qualified management and sales and marketing personnel. We compete
for such persons with other companies and other organizations, some of which
have substantially greater capital resources than we do. We cannot give you any
assurance that we will be successful in recruiting or retaining personnel of the
requisite caliber or in adequate numbers to enable us to conduct our business.

Increases in prices of raw materials used in our operations
could adversely effect our financial position.

We are dependent upon a ready supply of raw materials. The
prices for these materials are determined by the market, and may change at any
time. Furthermore, we are not engaged in any purchase agreements with our
suppliers which provide for mechanisms alleviating price fluctuations of raw
materials. Therefore, increases in prices for any of these raw materials could
have a material adverse impact on our financial position. The loss of a supplier
could disrupt our operations and the time to effect a change to a new supplier
could adversely impact our business in the short term should a change become
necessary.

We have entered into bottling and distributorship
arrangements in various key markets and the termination of our relationship with
any of these parties for any reason may adversely affect our results of
operations in those markets and our results of operations and business prospects
as a whole.

We have agreements with third parties to bottle and
distribute our products in various markets. Notwithstanding our expectations
that our three new bottling facilities, which commenced production of our
products in 2005, a change in these relationships could seriously interrupt our
business in those areas in both the long and short term.

We may encounter production and cost problems as we begin
production of our own beverages, nor can we provide assurances that we can have
sufficient production capacity.

In the event that sales of our products increase
dramatically, we cannot provide any assurances that we would have sufficient
production capacity or that we would be able to fully use our production
capacity as a matter of economics. Therefore, despite the commencement of our
bottling program, the loss of our third-party suppliers or service providers
could have a material adverse effect on our operations and financial results.
If, for any reason, we are unable to obtain suppliers at commercially reasonable
costs within the requisite time frame, we could experience significant delays
and cost increases. In addition, we may lose customers as a result of our
failure to meet their demand.

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We rely on the performance of wholesale distributors for the
success of our business.

We sell our products directly to large retailers or
distributors for resale to retail outlets. The replacement or poor performance
of our major distributors or our inability to collect accounts receivable from
our major retailers and/or distributors could materially and adversely affect
our results of operations and financial condition. In addition, distributors and
retailers of our products offer products which compete directly with our
products for retail shelf space and consumer purchases. Accordingly, there is a
risk that these distributors or retailers may give higher priority to products
of our competitors. In the future, our distributors and retailers may not
continue to purchase our products or provide our products with adequate levels
of promotional support.

If we cannot effectively manage our growth, we may incur
substantial losses.

Any dramatic growth in our business could place a substantial
burden on our production capacity and administrative resources. Businesses,
which grow rapidly, often have difficulty managing their growth. We have limited
management depth, and we will have to employ experienced executives and key
employees capable of providing the necessary support. We may be unable to do so
and our management may not be able to manage our growth effectively or
successfully. Rapid growth can often put a strain on management, financial, and
operational resources of a company. In addition, we would likely need to enhance
our operational systems and personnel procedures. Our failure to meet these
challenges could cause our efforts to expand operations to prove unsuccessful
and cause us to incur substantial operating losses.

The bottled water industry is regulated at both the state and
federal level.

If we are unable to comply with applicable regulations and
standards in any jurisdiction, we might not be able to sell our products in that
jurisdiction, and our business could be seriously harmed.

The United States Food and Drug Administration ("FDA")
regulates bottled water as a food. Our bottled water must meet FDA requirements
of safety for human consumption, labeling, processing and distribution under
sanitary conditions and production in accordance with the FDA "good
manufacturing practices." In addition, all drinking water must meet
Environmental Protection Agency standards established under the Safe Drinking
Water Act for mineral and chemical concentration and drinking water quality and
treatment which are enforced by the FDA. We also must meet state regulations in
a variety of areas. These regulations set standards for approved water sources
and the information that must be provided and the basis on which any therapeutic
claims for water may be made. Failure to comply with such laws and regulations
could result in fines against us, a temporary shutdown of production, recalls of
the product, loss of certification to market the product or, even in the absence
of governmental action, loss of revenue as a result of adverse market reaction
to negative publicity. Any such event could have a material adverse effect on
our business. We cannot assure you that we have been or will at all times be in
compliance with all regulatory requirements or that we will not incur material
costs or liabilities in connection with regulatory requirements.

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Our products may also be subject to Federal Food, Drug and
Cosmetic Act, various environmental statutes, and various other federal, state
and local statutes and regulations applicable to the production, transportation,
sale, safety, advertising, labeling, and ingredients of such products.

We may incur material losses as a result of product recall
and product liability.

We may be liable if the consumption of any of our products
causes injury, illness or death. We also may be required to recall some of our
products if they become contaminated or are damaged or mislabeled. A significant
product liability judgment against us, or a widespread product recall, could
have a material adverse effect on our business, financial condition and results
of operations. The government may adopt regulations that could increase our
costs or our liabilities.

Litigation and publicity concerning product quality, health
and other issues may cause consumers to avoid our products and may result in
liabilities.

Litigation and complaints from consumers or government
authorities resulting from beverage and food quality, illness, injury and other
health concerns or other issues may affect our industry. More specifically, we
may be the subject of class action or other litigation relating to these
allegations. Any litigation or adverse publicity surrounding any of these
allegations may negatively affect us, regardless of whether the allegations are
true, by discouraging consumers from buying our products. In addition,
litigation could result in a judgment for significant damages against us. We
could also incur significant litigation costs and the diversion of management
time as a result of a lawsuit or claim regardless of the result.

We carry limited product liability insurance.

The packaging and distribution of beverages can lead to
product liability claims, including liability due to the presence of
contaminants in products. We maintain insurance coverage against the risk of
product liability and product recall. However, the amount of the insurance we
carry is limited, the insurance is subject to certain exclusions and may or may
not be adequate. In addition to direct losses resulting from product liability
and product recall, we may suffer adverse publicity and damage to our reputation
in the event of contamination which could have a material adverse effect on
sales and profitability.

We may be unable to compete successfully in the highly
competitive beverage industry.

The beverage industry is highly competitive. Our products are
sold in competition with all liquid refreshments. There can be no assurance that
we will be able to compete successfully. Many of our competitors have far
greater financial, operational and marketing resources and more established
proprietary trademarks and distribution networks than we do. Furthermore, the
beverage industry is characterized by rapid changes, including changes in
consumer tastes and preferences, which may result in product obsolescence or
short product life cycles. As a result, competitors may be developing products
of which we are unaware which may be similar or superior to our products.
Accordingly, there is no assurance that we will be able to compete successfully
or that our competitors or future competitors will not develop products that
render our products less marketable.

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Our reliance on Wal-Mart as our largest retail customer could
have an adverse effect on our business.

Wal-Mart Stores, Inc., our largest customer, accounted for
approximately 39% or $1,237,000 of our gross sales for the year ended December
31, 2004. The loss or significant decrease in sales to Wal-Mart would have an
adverse effect on our business. Accordingly, we are dependent upon the continued
support of Wal-Mart unless we expand our customer base to reduce our reliance on
them. There can be no assurance that we will expand our customer base or that we
will supply Wal-Mart with any of our products in the future. However, based on
the first quarter sales, American Water Star has made significant strides in
broadening its base so that no one single account will cripple the company sales
wise.

If we do not successfully anticipate changes in consumer
preferences and tastes, sales of our products could be adversely affected.

Our portfolio currently consists of beverages in a variety of
flavors. Establishing our competitive position depends on our ability to license
products that have a strong appeal to consumers. Consumer preferences may shift
due to a variety of factors, including changes in demographic and social trends,
the availability and appeal of alternative beverages or packaging as well as
general economic conditions. Any significant shift in consumer preferences
coupled with our failure to anticipate and react to such changes could reduce
the demand for certain products in our portfolio resulting in reduced sales or
harm to the image of our brands. No assurance can be given that consumer demand
for fruit flavored waters will exist, grow or will not diminish in the future.

Our sales are seasonal.

The beverage industry generally experiences its highest sales
by volume during the spring and summer months and its lowest sales by volume
during the winter months. As a result, our working capital requirements and cash
flow will vary substantially throughout the year. Consumer demand for our
products will be affected by weather conditions. Cool, wet spring or summer
weather could result in decreased sales of our products and could have an
adverse effect on our financial position. Additionally, due to the seasonality
of the industry, results from any one or more quarters are not necessarily
indicative of annual results or continuing trends. Increasing our beverage line
to include more choices such as mixers is an ongoing development of the company
and seasonality will be less and less a factor.

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We may not be able to develop successful new beverage
products which are important to our growth.

Part of our strategy is to increase our sales through the
development of new beverage products. We cannot assure you that we will be able
to develop, market, and distribute future beverage products that will enjoy
market acceptance. The failure to develop new beverage products that gain market
acceptance could have an adverse impact on our growth and materially adversely
affect our financial condition.

We depend upon our trademarks and proprietary rights, and any
failure to protect our intellectual property rights or any claims that we are
infringing upon the rights of others may adversely affect our competitive
position.

Our success depends, in large part, on our ability to protect
our current and future brands and products and to defend our intellectual
property rights. We cannot be sure that trademarks will be issued with respect
to any future trademark applications or that our competitors will not challenge,
invalidate or circumvent any existing or future trademarks issued to, or
licensed by, us.

Our trade secret protection may be insufficient to protect
our intellectual property.

We have attempted to protect our intellectual property. We
have been, and will continue to be required to disclose our trade secrets and
proprietary intellectual property not only to our employees and consultants, but
also to potential corporate partners, collaborators, and contract manufacturers.
In those circumstances, we use our best efforts to obtain adequate assurance of
the confidential treatment of the disclosed information. However, we cannot give
you any assurance that any confidentiality agreements that we may enter into
with such persons will not be breached, that we would have adequate remedies for
any breach, or that our trade secrets and proprietary intellectual property will
not otherwise become known or be independently discovered by competitors. We
believe that our competitors, many of whom are more established, and have
greater financial and personnel resources than we do, may be able to replicate
our processes, brands, flavors, or unique market segment products in a manner
that could circumvent our protective safeguards. Therefore, we cannot give you
any assurance that our confidential business information will remain
proprietary.

RISK FACTORS RELATING TO OUR COMMON STOCK

A significant number of shares of our common stock may be
sold in to the market.

Sales of substantial number of shares of our common stock
within any narrow period of time, or the potential for those sales even if they
do not actually occur, could reduce the market price of our common stock unless
and until we achieve revenue growth or cost savings and other business economies
sufficient to offset the effect of significant sales of our common stock. We
cannot assure you that we will achieve revenue growth, cost savings or other
business economies.

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In addition, your percentage of ownership and voting power,
and the price of our common stock may decrease because we may issue a
substantial number of shares of common stock, or securities convertible, or
exercisable into our common stock. We may also issue additional warrants and
options to purchase shares of our common stock. These future issuances could be
at values substantially below the price paid for our common stock by current
stockholders. We may conduct additional future offerings of our common stock,
preferred stock, or other securities with rights to convert the securities into
shares of our common stock, which may result in a decrease in the value or
market price of our common stock.

Because our common stock is deemed a low-priced "Penny"
stock, an investment in our common stock should be considered high risk and
subject to marketability restrictions.

Since our common stock is a penny stock, as defined in Rule
3a51-1 under the Securities Exchange Act, it will be more difficult for
investors to liquidate their investment. Until the trading price of the common
stock rises above $5.00 per share, if ever, trading in our common stock is
subject to the penny stock rules of the Securities Exchange Act specified in
rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting
transactions in any penny stock, to:

- Deliver to the customer, and obtain a written receipt
	for, a disclosure document;
- Disclose certain price information about the stock;
- Disclose the amount of compensation received by the
	broker-dealer or any associated person of the broker-dealer;
- Send monthly statements to customers with market and
	price information about the penny stock; and
- In some circumstances, approve the purchaser's account
	under certain standards and deliver written statements to the customer with
	information specified in the rules.

Consequently, the penny stock rules may restrict the ability
or willingness of broker-dealers to sell the common stock and may affect the
ability of holders to sell their common stock in the secondary market and the
price at which such holders can sell any such securities. These additional
procedures could also limit our ability to raise additional capital in the
future.

We may not meet the continued listing requirements of AMEX's
company guide, which could result in the delisting of our common stock.

Under the rules for continued listing on AMEX, a company is
required to maintain certain minimum requirements; otherwise AMEX will consider
suspending dealings or delisting of the common stock. Generally, AMEX will
consider delisting or suspending a company based on, among other things, the
following criteria: stockholder's equity, operating losses, reduced market value
of publicly held shares, substantial disposition of assets, total number of
stockholders, and whether the company has been timely in its filings with the
SEC and AMEX. Our failure to meet these continued listing requirements could
result in delisting of our common stock from AMEX.

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As a result of our inability to timely file this report, AMEX
notified us of noncompliance with AMEX's Company Guide. We have met AMEX's
deadline for submitting a proposed plan of compliance, but if our plan is not
accepted our stock could be delisted from AMEX. If our stock is delisted from
AMEX, it would most likely result in trading of our stock on the OTC Bulletin
Board maintained by the National Association of Securities Dealers, Inc or an
other quotation system.

Our directors and executive officers beneficially own a
substantial amount of our common stock.

Accordingly, these persons, as a group, will be able to exert
significant influence over the direction of our affairs and business, including
any determination with respect to our acquisition or disposition of assets,
future issuances of common stock or other securities, and the election or
removal of directors. Such a concentration of ownership may also have the effect
of delaying, deferring, or preventing a change in control of the Company or
cause the market price of our stock to decline. Notwithstanding the exercise of
their fiduciary duties by the directors and executive officers and any duties
that such other stockholder may have to us or our other stockholders in general,
these persons may have interests different than yours.

We do not expect to pay dividends for the foreseeable future.

For the foreseeable future, it is anticipated that earnings,
if any, that may be generated from our operations will be used to finance our
operations and that cash dividends will not be paid to holders of our common
stock.

We are subject to SEC regulations and changing laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and
other trading market rules, are creating uncertainty for public companies.

We are committed to maintaining high standards of corporate
governance and public disclosure. As a result, we intend to invest appropriate
resources to comply with evolving standards, and this investment may result in
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance activities.

RISKS ASSOCIATED WITH LAURUS FINANCING

We have substantial indebtedness to Laurus Master Fund, Ltd.
which is secured by all of our assets and a stock pledge of our subsidiary,
All-Star Beverages, Inc. If an event of default occurs under the secured note
issued to Laurus, Laurus may foreclose on our assets and we may be forced to
curtail our operations or sell some of our assets to repay the note.

On October 26, 2004, we entered into a $5 million credit
facility with Laurus Master Fund, Ltd. pursuant to a secured convertible term
note and related agreements. Subject to certain grace periods, the notes and
agreements provide for the following events of default (among others):

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- Failure to pay interest and principal when due;
- An uncured breach by us of any material covenant, term or
	condition in any of the notes or related agreements;
- A breach by us of any material representation or warranty
	made in any of the notes or in any related agreement;
- Any money judgment or similar final process filed against
	us for more than $50,000;
- Any form of bankruptcy or insolvency proceeding
	instituted by or against us;
- Suspension of our common stock from our principal trading
	market for five consecutive days or five days during any ten consecutive
	days;
- Failure to timely deliver our shares of common stock upon
	conversion; and
- Change in the controlling ownership.

In the event of a future default under our agreements with
Laurus, Laurus may enforce its rights as a secured party and we may lose all or
a portion of our assets or be forced to materially reduce our business
activities.

As a result of the Laurus Transaction, we were required to
obtain certain waivers from investors who acquired stock in our company in a
prior financing. Although we obtained waivers from the investors, in
consideration of the waiver from Gryphon Master Fund, L.P. we issued warrants to
purchase 1,000,000 shares of our common stock. The exercise price of these
warrants is $0.58 per share and may be exercised at any time prior to October
28, 2009. Further, the warrants provide Gryphon with the right to exercise the
warrants on a cashless basis. We did not have to, nor do we anticipate having
to, compensate any of the other investors to obtain the waivers.

There can be no assurance that we will satisfy all of the
conditions of the agreements executed in the private placement with Laurus.

Pursuant to the terms of certain agreements, we are subject
to a condition subsequent to obtain an effective registration statement
permitting the resale of common stock issued upon the exercise of the conversion
rights of the purchaser and the exercise of the warrants. The initial
requirement of requiring the registration statement to be effective on or before
100 days was amended on February 28, 2005, to allow the effectiveness date
pushed back to on or before April 30, 2005. At the time of this report being
filed, we have not complied with this requirement. Failure to satisfy this
condition subsequent could constitute a default. In connection with the
transaction, we have granted to the purchaser a security interest in all of our
assets.

The issuance of shares to Laurus upon conversion of the
convertible term note and exercise of its warrants may cause immediate and
substantial dilution to our existing stockholders. Future sales of common stock
by Laurus and our existing stockholders could result in a decline in the market
price of our common stock.

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The issuance of shares upon conversion of the convertible
term note and exercise of warrants may result in substantial dilution to the
interests of other stockholders. Laurus may ultimately convert and sell the full
amount of 10,877,192 shares issuable on conversion of the Note, assuming all
conversion criteria are satisfied. Although Laurus in some cases may not,
subject to certain exceptions, convert their term note and/or exercise their
warrants if such conversion or exercise would cause them to own more than 4.99%
of our outstanding common stock, this restriction does not prevent Laurus from
converting and/or exercising some of their holdings and then converting the rest
of their holdings. In this way, Laurus could sell more than this limit while
never holding more than this limit, which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock, including other selling security holders in this offering.

It is likely at the time when shares of common stock are
issued to Laurus, the conversion price of such securities will be less than the
market price of the securities. The issuance of common stock under the terms of
our agreements with Laurus will result in dilution of the interests of the
existing holders of common stock at the time of the conversion. Furthermore, the
sale of common stock owned by Laurus as a result of the conversion of the
convertible term note may result in lower prices for the common stock if there
is insufficient buying interest in the markets at the time of conversion.

Future sales of our common stock by Laurus and our other
stockholders could result in a decline in the market price of our common stock.

We have filed a registration statement for the resale of
14,071,052 shares, or 17.54% of our outstanding common stock (this amount
includes 10,877,192 shares of common stock which may be issued upon conversion
of a convertible note held by Laurus and 2,543,860 shares of common stock which
may be issued upon exercise of a warrant held by Laurus). It is likely that
market sales of the 14,071,052 shares offered for resale pursuant to this
prospectus (or the potential for those sales even if they do not actually occur)
may have the effect of depressing the market price of our common stock. This
might also make it more difficult for us to raise funds through the issuance of
debt or the sale of equity securities.

As of December 31, 2004, 80,227,858 shares of our common
stock were issued and outstanding of which 40,580,829 shares of our Common Stock
were eligible for sale in the public market. This represents approximately 51%
percent of our outstanding shares of Common Stock. The remaining 39,647,029
shares of common stock outstanding are "restricted securities" as defined in
Rule 144. These shares include a total of 36,214,986 shares held by our
"affiliates" (as that term is defined in Rule 144). These restricted securities
may be sold in the future pursuant to registration statements filed with the SEC
or without registration under the Securities Act to the extent permitted by Rule
144 or other exemptions under the Securities Act.

We are unable to predict the potential effect that sales into
the market of substantial shares of our common stock may have on the then
prevailing market price of our common stock. On March 31, 2005, the last
reported sale price of our common stock on the American Stock Exchange was
$0.44. During the three months prior to March 2005, the average daily trading
volume of our common stock was approximately 189,228 shares. As a result, the
potential resale and possible fluctuations in trading volume of such a
substantial amount of our stock may affect the share price negatively beyond our
control.

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In addition to filing a registration statement covering the
14,071,052 shares of common stock, we have agreed to file a registration
statement, within 150 days of the October 28, 2004 or immediately upon this
registration statement being declared effective, covering 1,000,000 shares of
common stock underlying warrants issued to Gryphon Master Fund. Furthermore, we
have granted a new warrant to Laurus for 1,500,000 shares of our common stock at
an exercise price of $0.50 which will also require a registration statement to
be filed by September 2005.

Laurus has no obligation to convert shares if the market
price is less than the conversion price.

Laurus has no obligation to cause us to issue common stock if
the market price is less than the applicable conversion price. On March 31, 2005
the closing price of our stock was $0.44 The convertible note has a conversion
price of $0.57. Laurus has no obligation to convert the securities or to accept
common stock as payment for interest if the market price of the securities for
five trading days prior to a conversion date is less than 110% of the conversion
price. The amount of common stock that may be issued to Laurus is subject to
certain limitations based on price, volume and/or the inventory of our common
stock held by Laurus.

ITEM 7. FINANCIAL STATEMENTS

See Index to Financial Statements and Financial Statement
Schedules appearing on page F-1 through F-22 of this Form 10-KSB.

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

On September 30, 2003, we engaged Kelly & Company as our
principal independent accountant after the resignation of Weinberg & Company as
our principal independent accountant on August 18, 2003. (See our Current Report
on Form 8-K, as filed with the Commission on August 25, 2003 and October 6,
2003.)

On February 24, 2005, we dismissed Kelly & Company as our
principal independent accountant and appointed Weaver and Martin LLC as our
principal independent accountant. (See our Current Report on Form 8-K, as filed
with the Commission on February 28, 2005 and March 8, 2005).

We have had no disagreements on accounting and financial
disclosure with our former principal independent accountants, Weinberg & Company
or Kelly & Company, during our last two most recent fiscal years. However, Kelly
& Company, in a letter addressed to the Commission dated March 4, 2005, which
was filed as an Exhibit to the 8-K/A filed on March 8, 2005, raised concerns
over American Water Star's failure to complete responses and provide
documentation to Kelly & Company in regards to certain matters, which caused
Kelly & Company to question their reliance on management's representations as to
these matters. Subsequent to the letter and Kelly's dismissal, American Water
Star's Audit Committee completed an internal investigation involving these
concerns and deemed it resolved to their full satisfaction.

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ITEM 8A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. As of the end of the period
covered by this Annual Report, Roger Mohlman, our President and Chief Executive
Officer, and Dale Barnhart, our then Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures. Based on the
evaluation, which disclosed no significant deficiencies or material weaknesses,
Mr. Mohlman and Mr. Barnhart concluded that our disclosure controls and
procedures are effective. There were no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

Subsequent Evaluation

On April 25, 2005, our management concluded, following
consultation with our Audit Committee and our independent registered public
accounting firm, Weaver & Martin LLC, that our financial statements for the
unaudited quarterly periods ended March 31, 2004, June 30, 2004, and September
30, 2004 filed on Forms 10-QSB should no longer be relied upon due to certain
incorrect calculations relating to the valuation of equity transactions issued
for services. Our management is doing everything in their power to prepare and
correct the errors in our financial statements and will reflect these changes in
amended Form 10-QSBs. Correction of this error will result in a change of value
of the stock issuances for services in the financial statements. The Audit
Committee has discussed with the independent auditors the matters surrounding
the need to restate the prior quarter financial statements.

Management has determined the internal control deficiency
that resulted in the need for the restatements were due to incorrect
calculations performed by previous accounting personnel, which related to the
valuation of equity transactions issued for services. Our certifying officers
have reevaluated the adequacy of our disclosure and procedures at the end of the
quarterly periods and believe that the controls currently in place will prevent
similar errors from occurring in the future. Management believes it has
alleviated the deficiency with the addition of new accounting personnel, Chief
Financial Officer, and auditors.

As a result of having to amend the Form 10-QSBs for the first
three quarters of 2004, an increase of consulting expenses, a change in the net
loss, and a change in loss per share will all be affected.

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PART III

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

The members of our board of directors serve for one year
terms and are elected at the next annual meeting of stockholders, or until their
successors have been elected. The officers serve at the pleasure of the board of
directors. Information as to our current directors and executive officers

is as follows:

|Name                   | Age | Title                                             
|---------------------- | --- | --------------------------------------------------
|Roger Mohlman          | 57  | President, CEO, Treasurer,
		Chairman of the Board
|Daniel Beckett (1)     | 46  | CFO, Secretary, Director                          
|Leonard Kowalewski (2) | 61  | Director of Operations                            
|Richard Mesnick (3)    | 60  | Executive Vice President of Sales                 
|Dr. Mark DeBruin       | 44  | Independent Director                              
|Arthur de Joya (4) (5) | 39  | Independent Director                              

1. Effective as of March 9, 2005, Dale Barnhart resigned from his position
	of Chief Financial Officer, Secretary and a director of American Water Star.
	Upon the resignation of Mr. Barnhart, Mr. Daniel Beckett was appointed the
	position of Chief Financial Officer, Secretary, and director of American
	Water Star.
2. Effective as of December 27, 2004, Mr. Kowalewski joined management of
	American Water Star as the Director of Operations.
3. Effective as of March 29, 2005, Mr. Mesnick joined management of
	American Water Star as the Executive Vice President of Sales.
4. Effective as of February 1, 2005, Mr. Arthur de Joya filled a director
	vacancy left by David Lieberman's resignation of the Board of Directors.
5. Effective as of March 8, 2005, Dale Paisley resigned as a director and
	the Chairman of the Audit Committee of American Water Star. Upon his
	resignation, Mr. de Joya was appointed as the Chairman of the Audit
	Committee.

Duties, Responsibilities, and Experience

Roger Mohlman has been the President,
Treasurer, CEO and a Director of the Board of American Water Star since August
of 2002. From 1986 to July 2002, Mr. Mohlman was the President of Camelot Ltd.,
LLC, a holding company for various businesses, including Rumours, Delizia, and
Excalibur Awards. From January 1998 until June 2001, he was the CEO and
President of Venda Tel, Inc. and Merlin Computers, manufacturers of slot
machines and telco equipment and software. From 1981 to 1997, Mr. Mohlman was
the owner of Pobeda Manufacturing, Inc. in Mexico, a licensee for manufacturing
name-brand clothing for U.S. companies. Mr. Mohlman has over 30 years of
experience in product licensing and business development. Prior to joining
American Water Star, Mr. Mohlman in 2001 was found guilty of a misdemeanor for
unlicensed practice of contracting in California. Mr. Mohlman currently devotes
substantially all of his time to American Water Star and its subsidiaries.

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On June 28, 2004, American Water Star joined with other
creditors and filed involuntary bankruptcy petitions against Geyser Products,
LLC and Water Star Bottling, Inc., in United States Bankruptcy Court, District
of Nevada.

Daniel Beckett was appointed to American
Water Star's management team as the Chief Financial Officer and Secretary on
March 9, 2005. From September 2004 to March 9, 2005, Mr. Beckett was the
Controller for American Water Star and was appointed to the position of Chief
Financial Officer and Secretary upon the resignation of Mr. Barnhart. Mr.
Beckett has held various financial positions with private and public companies
prior to his employment with American Water Star. From February 2002 to August
2004, Mr. Beckett served as Vice President of Finance for Universal Teleservices
Arizona LLC and was responsible for the day-to-day financial management of the
multi-million dollar telemarketing company. From September 2000 to February
2002, Mr. Beckett served as Controller for Sugar Supply Company, a petroleum and
oil wholesaler. From November 1999 to September 2000, Mr. Beckett served as
Controller for Laird Plastics Inc., a plastic wholesaler. Mr. Beckett received
his Bachelor of Science degree from Grace College in Indiana.

Leonard Kowalewski, prior to coming to
American Water Star, worked as the General Manager at Southeast Canners. At
Southeast Canners he was responsible for the entire operations of the co-op and
reorganized the production equipment to utilize the two bottle fillers at the
same time increasing the plant capacity by 3 million cases. Prior to starting at
Southeast Canners in 2003, Mr. Kowalewski worked for the Coca-Cola Export
Corporation, Coca-Cola Company and Minute Maid Company from 1994 to 2003. While
at Minute Maid Company, Mr. Kowalewski worked as the Manager of Capital Projects
and Operations Development. At Coca-Cola Company, he served as a Manager of
Production Impact Teams. While at Coca-Cola Export Corporation he worked as a
Technical Service Director and Field Operation Manager where he was responsible
for the introduction of seven new bottle shapes and nine new products over a
period of five months. Mr. Kowalewski began working in the beverage industry in
1969 at Anheuser-Busch and has since then worked for Fleischman Distilling,
General Cinema Beverages, Coca-Cola Enterprises and the Minute Maid Company
thereby giving him a strong background in operations and manufacturing of soft
drinks, distilled spirits and beer.

Richard Mesnick, prior to joining
American Water Star, he spent over thirty years at E&J Gallo Winery as the
Director of Field Sales Training. During his time at Gallo he trained regional
sales and marketing managers, assisted in the development of training manuals,
co-authored video scripts for numerous marketing programs, coordinated and
developed national college recruiting programs, and conducted bilingual
marketing seminars in Latin America. Prior to his employment at Gallo, Mr.
Mesnik worked for Mattel Toys in Los Angeles for two years. Mr. Mesnik received
his Bachelor Degree in Political Science and has a Gradutate Degree in
Psychology from the University of California, Los Angeles.

Dr. Mark DeBruin has been a member of the board
of American Water Star since August 2004 and was serves on all three committees
of American Water Star. Dr. DeBruin is a Medical Doctor and licensed in both
medicine and surgery. Dr. DeBruin was Board certified in Family Practice in 1990
and recertified in 1996. Since 1990 until present, Dr. DeBruin has maintained a
private medical practice in Orangevale, CA. Dr. DeBruin also serves as a
consultant to Mercy Hospital of Folsom, active staff, and at Sutter Roseville
Medical Center, courtesy. In addition to his private practice, Dr. DeBruin holds
administrative positions as a Proctor at the California Osteopathic State
Boards, Family Practice Chief at Mercy Hospital of Folsom, Primary Care
Physician Chief at Hill Physicians network and as a Medical Doctor at Ultracare
Home Health. Dr. DeBruin is a member of the American Medical Association,
Sacramento Osteopathic Medical Association, California Medical Association,
American Osteopathic Association and American Academy of Family Practice.

54

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Arthur de Joya was appointed to the Board
on February 1, 2005 to fill the vacancy left by Mr. Lieberman's resignation and
serves on the all three committees of American Water Star. Upon Mr. Paisley's
resignation, Mr. de Joya was appointed as the Chairman of the Audit Committee.
He has over 13 years of experience in both public and private accounting, mainly
working with publicly traded companies. Mr. de Joya is a Certified Public
Accountant licensed in Nevada and since April 2003 he has worked as an
independent accountant in Las Vegas at De Joya & Company, a certified public
accounting and consulting firm. Prior to being an independent accountant, Mr. de
Joya worked at L.L. Bradford & Company, LCC as a partner-in-charge of the audit
practice for approximately five years. Mr. de Joya was employed for KMPG LLP
working with many large publicly traded companies before he began work at L.L.
Bradford & Company. Currently, Mr. de Joya serves as the Chief Financial Officer
for GamezNFlix, Inc, a publicly traded company on the OTC Bulletin Board. Mr. de
Joya has also served as a chief financial officer for a publicly traded mining
company, Vista Continental Corporation. Mr. de Joya received his B.S. in
Business Administration from the University of Nevada, Las Vegas and is a member
of the American Institute of Certified Public Accountants and Nevada Society of
Certified Public Accountants.

Limitation of Liability of Directors

Pursuant to the Nevada General Corporation Law, our Articles
of Incorporation exclude personal liability for our Directors for monetary
damages based upon any violation of their fiduciary duties as Directors, except
as to liability for any breach of the duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or any transaction from which a Director receives an improper personal
benefit. This exclusion of liability does not limit any right which a Director
may have to be indemnified and does not affect any Director's liability under
federal or applicable state securities laws. We have agreed to indemnify our
directors against expenses, judgments, and amounts paid in settlement in
connection with any claim against a Director if he acted in good faith and in a
manner he believed to be in our best interests.

Election of Directors and Officers.

No Executive Officer or Director of American Water Star has
been the subject of any Order, Judgment, or Decree of any Court of competent
jurisdiction, or any regulatory agency permanently or temporarily enjoining,
barring suspending or otherwise limiting him from acting as an investment
advisor, underwriter, broker or dealer in the securities industry, or as an
affiliated person, director or employee of an investment company, bank, savings
and loan association, or insurance company or from engaging in or continuing any
conduct or practice in connection with any such activity or in connection with
the purchase or sale of any securities.

55

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No Executive Officer or Director of American Water Star,
except for Mr. Mohlman's conviction of unlicensed practice of contracting, has
been convicted in any criminal proceeding (excluding traffic violations) or is
the subject of a criminal proceeding which is currently pending.

No Executive Officer or Director of American Water Star is
the subject of any pending legal proceedings.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires our executive officers and directors, and
persons who beneficially own more than ten percent of our common stock, to file
initial reports of ownership and reports of changes in ownership with the SEC.
Executive officers, directors and greater than ten percent beneficial owners are
required by the SEC regulations to furnish us with copies of all Section 16(a)
forms they file. Based upon a review of the copies of such forms furnished to us
and written representations from our executive officers and directors, we
believe that as of the date of this filing, our CEO and President, Roger Mohlman,
was not current in his reports under this section.

Audit Committee

Prior to June 17, 2004, we did not have an Audit Committee
and our board of directors performed the necessary functions of an Audit
Committee, such as: recommending a firm of independent certified public
accountants to audit the annual financial statements; reviewing the independent
auditors independence, the financial statements, and their audit report; and
reviewing management's administration of the system of internal accounting
controls.

Since June 17, 2004, we have established and appointed
members of the Board to the Audit Committee in accordance with section
3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee
initially was comprised of two directors; Messrs. Paisley (Chairman) and
Lieberman. On January 31, 2005, Mr. Lieberman resigned as a director and a
member of the Audit Committee. The board of directors for American Water Star
appointed Mr. Arthur de Joya to fill the vacancies left by Mr. Lieberman's
resignation. On March 8, 2005, Mr. Paisley resigned as the Chairman of the Audit
Committee and the Board appointed Mr. de Joya to serve as the new Chairman and
appointed Dr. DeBruin to serve as a member of the Audit Committee. Currently,
none of the members of the Audit Committee are or have been our officers or
employees, and each member qualifies as an independent director as defined by
Section 121B(2)(c) of the American Stock Exchange Company and Section 10A(m) of
the Securities Exchange Act of 1934, and Rule 10A-3 thereunder. The Audit
Committee held 3 meetings (including telephonic meetings) since being
established.

56

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The Audit Committee has the sole authority to appoint
(subject to ratification by our stockholders) and, when deemed appropriate'
replace our independent auditors, and has established a policy of pre-approving
all audit and permissible non-audit services provided by our independent
auditors. The Audit Committee has, among other things, the responsibility to
evaluate the qualifications and independence of our independent auditors; to
review and approve the scope and results of the annual audit; to evaluate with
the independent auditors our financial staff and the adequacy and effectiveness
of our systems and internal financial controls; to review and discuss with
management and the independent auditors the content of our financial statements
prior to the filing of our quarterly reports on Form 10-QSB and annual reports
on Form 10-KSB; to review the content and clarity of our proposed communications
with investors regarding our operating results and other financial matters; to
review significant changes in our accounting polices; to establish procedures
for receiving, retaining, and investigating reports of illegal acts involving us
or complaints or concerns regarding questionable accounting or auditing matters,
and supervise the investigation of any such reports, complaints or concerns; to
establish procedures for the confidential, anonymous submission by our employees
of concerns or complaints regarding questionable accounting or auditing matters;
and to provide sufficient opportunity for the independent auditors to meet with
the committee without management present.

Audit Committee Report

Prior to the adoption of the Audit Committee, the Board of
Directors fulfilled the duties of reviewing and discussing with management the
audited financial statements included in the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2003. This review included a discussion of
the quality and the acceptability of the Company's financial reporting and
controls.

During the past fiscal year, the Board of Directors discussed
with the independent auditors the matters required to be discussed by Statement
of Auditing Standards No. 61. The Board of Directors also received during the
past fiscal year the written disclosures and the letter from the auditors
required by Independence Standards Board Standard No. 1 and has discussed with
the independent auditors their independence.

Based on the reviews, discussions, and disclosures referred
above, the Company's audited financial statements for the fiscal year ended
December 31, 2004 was recommended to be included in American Water Star's Annual
Report filed on Form 10-KSB for such fiscal year.

Since the adoption of an Audit Committee on June 17, 2004,
the Committee held 3 meetings during this year, including telephonic meetings.
The meetings were designed to facilitate and encourage communication among the
Committee, management, and American Water Star's independent auditors.

The material in this report is not "soliciting material" and
is not deemed filed with the SEC and is not to be incorporated by reference in
any filing of American Water Star's under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether made before
or after the date hereof and irrespective of any general incorporation language
in any such filing.

57

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Submitted by the
Audit Committee of the Board of Directors,

Arthur de Joya

Dr. Mark DeBruin

Code of Ethics

A code of ethics relates to written standards that are
reasonably designed to deter wrongdoing and to promote:

1. Honest and ethical conduct, including the ethical
	handling of actual or apparent conflicts of interest between personal and
	professional relationships;
2. Full, fair, accurate, timely and understandable
	disclosure in reports and documents that are filed with, or submitted to the
	Commission and in other public communications made by an issuer;
3. Compliance with applicable governmental laws, rules and
	regulations;
4. The prompt internal reporting of violations of the code
	to the Audit Committee; and
5. Accountability for adherence to the code.

We adopted a corporate code of ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions in that our
officers and directors serve in all the above capacities. We will provide an
electronic or paper copy of the code of ethics free of charge, upon request made
to our Company Secretary. If any substantive amendments are made to the written
code of ethics, or if any waiver (including any implicit waiver) is granted from
any provision of the code to our Chief Executive Officer, Chief Financial
Officer or Corporate Controller, we will disclose the nature of such amendment
or waiver in a report on Form 8-K.

Nominating Committee

Prior to June 17, 2004, we did not have a Nominating and
Corporate Governance Committee Charter. Our board of directors performed the
necessary functions associated with a Nominating and Corporate Governance
Committee.

Since June 17, 2004, we have drafted a Nominating and
Corporate Governance Committee Charter and have appointed members of the Board
to the Committee. The Nominating and Corporate Governance Committee is currently
comprised of two directors. The initial members were Messrs. Paisley, Lieberman,
and Dr. DeBruin, however since the resignation of Mr. Lieberman and Mr. Paisley,
Mr. de Joya has joined Dr. DeBruin as a member of the committee. Each member of
the Nominating and Corporate Governance Committee currently qualifies as an
independent director as defined by Section 121 of the American Stock Exchange
Company Guide. The Nominating and Corporate Governance Committee held one
meetingsince its inception on June 17, 2004.

The Nominating and Corporate Governance Committee has the
responsibility to ensure that the Board is properly constituted to meet its
fiduciary obligations to American Water Star and our stockholders and that we
have and follow appropriate governance standards. To carry out this purpose, the
Nominating and Corporate Governance Committee has the responsibility to annually
review the Code of Ethics; develop and continually assess and monitor compliance
with appropriate corporate governance guidelines; to evaluate the criteria for
Board membership and the independence of Board members; and to oversee the
evaluation of the performance of our Board and its committees and our
management. In addition, the Nominating and Corporate Governance Committee also
has the responsibility to identify, evaluate and recommend candidates to our
Board and their election as members of our Board.

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ITEM 10. EXECUTIVE COMPENSATION

(a) General

The following table sets forth information concerning the
total compensation that we have paid or that has accrued on behalf of our chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the most recent fiscal year ending December 31, 2004
and for the fiscal years ending December 31, 2003 and 2002. The remuneration
described in the table does not include the cost of American Water Star's
benefits furnished to the named executive officers, including premiums for
health insurance and other benefits provided to such individuals that are
extended in connection with the conduct of American Water Star's business.

(b) Summary Compensation Table

|Name and
		Principal Position                                 | Year               | Annual
		Compensation     | Long Term Compensation
|------------------------------------------------------------- | ------------------ | ------------------------- | ----------------------
|Salary                                                        | Bonus              | Other Annual Compensation | Awards                
|Restricted Stock                                              | Options            | LTIP payouts             
|Roger Mohlman
		(1)
		Chief Executive
		Officer and President | 2004
		2003
		2002 | $399,600
		$162,500
		-0- | -0-
		-0-
		-0-       

(1) Mr. Mohlman has served as Chief Executive Officer,
President, and director of American Water Star since June 2002. In July 2003, he
was also named Chairman of the Board and Chief Financial Officer of American
Water Star. Mr. Mohlman's salary was accrued for American Water Star's 2003 and
2004 fiscal years. The 2003 amount was paid in April and $298,600 of the 2004
amount was paid. In February 2004, Mr. Mohlman received 200,000 shares of
American Water Star's common stock pursuant to our stock plan in consideration
of his services to American Water Star in 2002 and 2003.

(c) Option Grant Table

Stock Option Grants During Fiscal Year 2004

We currently maintain a consultant and employee stock
compensation plan at American Water Star to compensate officers, directors,
employees, consultants, and certain other persons providing bona fide services
to American Water Star or to compensate officers, directors, employees for
accrual of salary, through the award of our common stock. The effective date of
the stock plan is December 27, 2002 and was later amended in March of 2004. The
following table includes the current options granted as of December 31, 2004.

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On August 17, 2004, in accordance with Section 5 of American
Water Star's Stock Plan, the Board of Directors granted to each of its directors
options, pursuant to a Grants of Options Agreement, to purchase up to 120,000
shares of its common stock at the exercise price of $0.77 per share.

EXECUTIVE OFFICER/DIRECTOR OPTION GRANTS

|Name          | Year | Number of securities
		underlying options granted |  | Percent of total options
		granted to employees in fiscal year |  | Exercise or base price
		($/Share) |  | Expiration Date
|------------- | ---- | ------------------------------------------------- |  | -------------------------------------------------------------- |  | ---------------------------------- |  | ---------------
|              |      |                                                   |  |                                                                |  |                                    |  |                
|Roger Mohlman | 2004 | 120,000                                           |  | 20%                                                            |  | $0.77                              |  | 08/17/2009     

(d) Aggregated Option Exercises and Fiscal Year-End 2003 and
Fiscal Year-End 2004

AGGREGATED OPTION EXERCISES 
IN FISCAL YEAR 2004 OPTION VALUES

|Name          | Year | Shares acquired on exercise
		(#) |  | Value
		Realized ($) |  | Number of Securities
		underlying unexercised options at December 31, 2004 |  | Value of unexercised options
		at December 31, 2004
|------------- | ---- | --------------------------------- |  | -------------------- |  | -------------------------------------------------------------------------- |  | ---------------------------------------------------
|              |      |                                   |  |                      |  |                                                                            |  |                                                    
|Roger Mohlman | 2004 | 0                                 |  | 0                    |  | 120,000                                                                    |  | 0                                                  

(f) Compensation of Directors

All directors will be paid $2,000 for attending board or
committee meetings. Directors have also been given 120,000 options in 2004
pursuant to our stock plan for compensation of their services as a director.

(g) Employment contracts and termination of employment and
change-in-control arrangements.

Roger Mohlman: Effective January 1, 2003, we
entered into an employment agreement with Roger Mohlman to serve as our
President and CEO. Prior to that date, Mr. Mohlman did not have any employment
agreement. The term of the employment contract is one year from the effective
date. Both parties, upon mutual written agreement, may extend the contract for
an additional two years. After a two-year extension, both parties may make
additional extensions in one year increments. The initial annual base
compensation for 2003 was set at $120,000 (subject to increase by the Board of
Directors), stock options, annual bonus in accordance with American Water Star's
performance, and various benefits. In February 2004, pursuant to a resolution of
the Board, the employment agreement was extended for two years and Mr. Mohlman's
base salary was set at $240,000. In 2003, we accrued the $120,000 base salary
and awarded Mr. Mohlman compensation of approximately $42,500 for his services
to us commencing in August 2002, all of which compensation was paid in April
2004.

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Daniel Beckett: Effective March 9, 2005, we
entered into an employment agreement with Daniel Beckett to serve as our Chief
Financial Officer and Secretary of American Water Star. Prior to that date, Mr.
Beckett was the Controller for the Company. Under his previous consulting
agreement, Mr. Beckett was granted 50,000 shares of common stock with a market
value of $37,000. These shares were earned but have not been issued as of the
date of this report. Pursuant to the terms of the employment contract, Mr.
Beckett shall be employed for a ninety-day probationary term allowing for a
review of the terms and compensation of the contract. If the review is
satisfactory to both parties, the employment of Mr. Beckett will continue for
the remainder of a one-year term set to expire on March 31, 2006. Mr. Beckett
shall receive annual compensation of $150,000 for his services as the Chief
Financial Officer.

Termination of Employment

There are no compensatory plans or arrangements, including
payments to be received from American Water Star, with respect to any of our
executives officers, set out above which would in any way result in payments to
any such person because of his resignation, retirement, or other termination of
such person's employment with American Water Star, or any change in control of
American Water Star, or a change in the person's responsibilities following a
change in control of American Water Star.

Compensation Committee

Prior to June 17, 2004, we did not have a Compensation
Committee Charter and the Board performed the necessary functions related to
compensation. Since June 17, 2004, a Compensation Committee Charter has been
approved and members of the Board have been appointed to the Committee. The
Compensation Committee is currently comprised of two directors. The current
members are Messrs. De Joya and Dr. DeBruin. Each member of the Compensation
Committee qualifies as an independent director as defined by Section 121 of the
American Stock Exchange Company Guide. The Compensation Committee did not hold
any meetings during 2004. The Compensation Committee will have the
responsibility to develop guidelines for, evaluate and approve cash and equity
compensation and benefit plans, programs, and agreements for our Chief Executive
Officer and other executive officers; to administer our stock incentive plans;
and to develop and review the Company's compensation philosophy.

Stock Compensation Plan

We currently maintain a consultant and employee stock
compensation plan for American Water Star to compensate officers, directors,
employees, consultants, and certain other persons providing bona fide services
to American Water Star or to compensate officers, directors, employees for
accrual of salary, through the award of our common stock. The effective date of
the stock plan is December 27, 2002 and was later amended in March of 2004.

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

The following table presents information, to the best of our
knowledge, about the beneficial ownership of our common stock on April 15, 2005,
held by those persons known to beneficially own more than 5% of our capital
stock and by our directors and executive officers.

The percentage of beneficial ownership for the following
table is based on 80,227,858 shares of common stock outstanding as of April 15,
2005. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and does not necessarily indicate beneficial
ownership for any other purpose. Under these rules, beneficial ownership
includes those shares of common stock over which the stockholder has sole or
shared voting or investment power. It also includes (unless footnoted) shares of
common stock that the stockholder has a right to acquire within 60 days after
April 15, 2005 through the exercise of any option, warrant or other right. The
percentage ownership of the outstanding common stock, however, is based on the
assumption, expressly required by the rules of the Securities and Exchange
Commission, that only the person or entity whose ownership is being reported has
converted options or warrants into shares of our common stock.

Security Ownership of Management and Certain Beneficial
Owners

|Name and
		Address of Beneficial Owner(1),Officer, or
		Director |  | Number
		of Shares(2) |  | Percent of
		Ownership
		(3)
|---------------------------------------------------------------- |  | --------------------- |  | ----------------------------
|Roger Mohlman, President,
		CEO, and Chairman                    |  | 35,582,916            |  | 44.4%                       
|Daniel Beckett (4),CFO,
		Secretary, and Director                |  | 50,000                |  | 0.0%                        
|Leonard Kowalewski (5),
		Director of Operations                 |  | 50,000                |  | 0.0%                        
|Richard Mesnik (6), Executive
		Vice President of Sales          |  | 0                     |  | 0.0%                        
|Mark DeBruin (7)(9), Director                                    |  | 1,256,595             |  | 1.6%                        
|Arthur de Joya (7)(8),
		Director                                |  | 68,500                |  | 0.0%                        
|                                                                 |  |                       |  |                             
|Total of all Officers,
		Directors, and Beneficial Owners        |  | 36,908,011            |  | 46.0%                       

1. As used in this table, "beneficial ownership" means the
	sole or shared power to vote, or to direct the voting of, a security, or the
	sole or shared investment power with respect to a security (i.e., the
	power to dispose of, or to direct the disposition of, a security). All
	addresses are care of the Company, 4560 South Decatur Boulevard, Las Vegas,
	NV 89103.
2. The amount listed does not include 120,000 options
	granted to the directors as of August 17, 2004, which were Roger Mohlman,
	Dale Barnhart, Dale Paisley, David Lieberman, and Dr. Mark DeBruin.
3. Figures are rounded to the nearest tenth of a percent.
4. On March 9, 2005, Mr. Barnhart resigned as the Chief
	Financial Officer, Secretary, and as a director of American Water Star. Mr.
	Daniel Beckett was appointed to serve as the new Chief Financial Officer,
	Secretary and director due to the vacancy created by Mr. Barnhart's
	resignation. Mr. Beckett pursuant to his previous agreement was granted
	50,000 shares of common stock, which have been earned but not yet issued.

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1. On December 27, 2004, Mr. Kowalewski joined the
	management of American Water Star as the Director of Operations. Prior to
	joining management, Mr. Kowalewski was granted 50,000 shares of common
	stock, which have been earned but not yet issued.
2. Mr. Mesnick was appointed as the Executive Vice President
	of Sales on March 29, 2005.
3. Mr. Paisley resigned as a director and as a member of all
	the committees he served on American Water Star on March 8, 2005. Mr. de
	Joya was appointed by the Board to serve as the Chairman of the Audit
	Committee upon Mr. Paisley's resignation. Dr. DeBruin was also appointed by
	the Board to serve on the Audit Committee upon the resignation of Mr.
	Paisley.
4. Mr. Lieberman resigned as a director of American Water
	Star on January 31, 2004. Mr. de Joya was appointed to the Board to serve in
	the vacancy created by Mr. Lieberman's resignation.
5. This amount reflects 10,000 shares held in custody for
	Daniel Steven DeBruin, 10,000 shares held in custody for Michelle Christine
	DeBruin, and 988,095 shares held in a revocable trust for Mark and Susan
	DeBruin.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ROGER MOHLMAN

American Water Star has entered into several transactions
with Roger Mohlman, our chairman, chief executive officer, and majority
stockholder, and with entities that were related to this individual at the time
the transactions or relationships commenced.

At December 31, 2003, American Water Star issued a note
payable to acquire inventory from Roger Mohlman, our CEO, President and
Chairman, for $375,960. During 2003, we issued 1,828,153 shares of common stock
to Mr. Mohlman as payment of liabilities of $254,457. The issuance of shares in
satisfaction of the obligation was based on the fair value of the stock at the
time of issuance, and no gain or loss was recorded on this transaction.

During 2003, American Water Star purchased inventory from Mr.
Mohlman for 15,666,934 shares of our common stock with fair value of $1,253,355,
which equaled the lower of predecessor cost or fair value of the inventory. Mr.
Mohlman assumed an obligation recorded by us in the amount of $106,169. This
assumption is included in advances from and accrued compensation to chairman,
chief executive officer, and majority stockholder.

During the first quarter of 2003, we exchanged $162,307 of
demand notes payable into 676,278 shares of common stock. The notes were held by
Mr. Mohlman and were converted at the fair market value of our common stock at
the time of conversion.

During the second quarter of 2003, we sold 1,151,875 shares
of our common stock to entities controlled by Mr. Mohlman for $92,150, the fair
value of the shares at the date of the sale.

In June 2004, IQ USA, Inc., a company which was to provide
services to New Age Packaging, was incorporated, which initially listed Mr.
Mohlman as an officer in error. Subsequently, Mr. Mohlman resigned and is no
longer affiliated with IQ USA. Mr. Mohlman does not currently nor has he in the
past had any ownership interest in IQ USA.

During the third quarter of 2004, we issued 1,888,889 shares
of our common stock to Mr. Mohlman in cancellation of $1.7 million in cash
advances made to us in the three-month period ended September 30, 2004. In
addition, Mr. Mohlman loaned New Age, our wholly-owned subsidiary, $1,150,000
without interest or collateral due July 2005.

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Subsequent to the year end, American Water Star issued three
note payable in March and April for a total of $400,000 to Mr. Mohlman. The
notes are due April 1, 2006 and will accrue interest at 10% per year.

DONNA MOHLMAN

Pursuant to a factoring agreement, American Water Star
factored certain of its accounts receivable with Camelot, Ltd, an entity
controlled by Donna Mohlman, the former wife of our chairman, chief executive
officer, and majority stockholder. The factoring agreement required a 5%
transaction fee and daily usage fee based on an annual percentage rate. The
maximum amount to be advanced under this agreement was $4,000,000. In October,
we cancelled this factoring agreement with Camelot. American Water Star's
obligations to Camelot are collateralized by all of our accounts receivable,
inventories, and equipment. The unpaid amounts due from Camelot have been offset
against advances from Camelot.

Camelot, Ltd. was established as a holding company that
provides financial assistance to various companies through different types of
financing transactions. Camelot has provided such services to American Water
Star and its related subsidiaries, as well as to companies not affiliated with
American Water Star. Camelot has provided American Water Star a financial
vehicle to conduct American Water Star's business pursuits. Donna Mohlman is an
officer of Camelot and has some control over J.T. Management Trust, the trust
funding Camelot's endeavors. The beneficiary of the trust is Mr. Mohlman's and
Donna Mohlman's son. Although these transactions are not negotiated at
"arms-length," our directors and executive officers deemed it reasonable based
on certain criteria of American Water Star not having established credit ratings
capable of conducting business and the terms being fair and reasonable.

IQ USA, Inc., a company providing equipment and services to
New Age Packaging, received funds from Camelot, Ltd., which were primarily used
to purchase the New Age Packaging equipment from a third party supplier. IQ USA
subsequently entered into a 60 month lease with New Age Packaging, which
commenced on October 15, 2004 and requires monthly payments of $21,888.63.

Ms. Mohlman is the sole officer of D.A.M.E., Inc.. American
Water Star has a consulting agreement with D.A.M.E. whereas D.A.M.E. is to
provide product advertisement campaigns, slogans, trademark design, and other
needed artwork. The term of this agreement was for 24 months beginning on
January 1, 2004. D.A.M.E. is to receive $10,000 a month for services and 100,000
shares of restricted common stock.

Ms. Mohlman was an authorized officer of Darwin Software,
which provided All-Star Beverages with services of design of product labels and
bottles, website development and maintenance services, and installation of
computer networking systems and telephone systems. These agreements were in
effect from November 2002 through November 2004. Subsequently, Ms. Mohlman has
sold her investment in the company and no longer has any affiliation with
Darwin. American Water Star, however continues to do business with Darwin
Software and its new management.

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The following is a summary of services all of the related
entities provided the company:

|                                                           | For the Years
		Ended
		December 31,
|---------------------------------------------------------- | ------------------------------------
|                                                           | 2004                                
|                                                           |                                     
|Software and
		website                                     | $                                   
|Computer
		hardware                                        |                                     
|Operating &
		capital lease payments                       |                                     
|Leased
		employees                                         |                                     
|Deposits on
		facilities                                   |                                     
|Leasehold
		improvements                                   |                                     
|Bottling and
		office equip.                               |                                     
|Cash advances
		/ Repayment                                |                                     
|Factoring
		agreements                                     |                                     
|Raw
		material purchases                                   |                                     
|Product development                                        |                                     
|Equipment rentals and repair                               |                                     
|Consulting Services (paid by issuance of stock- see below) |                                     
|                                                           |                                     
|Total                                                      | $                                   

ACQUISITION OF NEW AGE PACKAGING, INC.

On December 23, 2002, we completed the acquisition of New Age
Packaging, Inc. (then known as American Distribution & Packaging, Inc.), a
privately-held Nevada corporation ("New Age"), pursuant to an Acquisition
Agreement dated December 23, 2002. Pursuant to that Agreement, New Age exchanged
100% of its outstanding common stock for 5,200,000 newly issued shares of our
common stock. Upon completion of that acquisition, New Age became a wholly-owned
subsidiary of American Water Star.

Although the consideration exchanged in the New Age
acquisition was not negotiated at "arms-length," our directors and executive
officers deemed it reasonable based on certain criteria such as the valuation of
the assets of New Age; New Age's current and historical business operations; the
potential of New Age; and the potential benefit to our stockholders. Our
directors determined that the consideration for the exchange was reasonable
under these circumstances.

The Board of Directors of American Water Star, on December
31, 2003, resolved to spin-off New Age to our stockholders of record as of March
15, 2004 as a stock dividend. As of the date of this report the spin-off has not
occurred; although we still intend to complete the spin-off.

65

---

ACQUISITION OF ALL-STAR BEVERAGES, INC.

On December 24, 2002, we completed the acquisition of
All-Star Beverages, Inc., a privately-held Nevada corporation ("All-Star"),
pursuant to an Acquisition Agreement dated as of September 6, 2002. Pursuant to
that Agreement, All-Star exchanged 100% of its outstanding common stock for
12,645,824 newly issued shares of our common stock. Upon completion of that
acquisition, All-Star became a wholly-owned subsidiary of American Water Star.

Although the consideration exchanged in the All-Star
acquisition was not negotiated at "arms-length," our directors and executive
officers deemed it reasonable based on certain criteria such as the valuation of
the assets of All-Star; All-Star's current and historical business operations;
the potential of All-Star; and the potential benefit to our stockholders. Our
directors determined that the consideration for the exchange was reasonable
under these circumstances.

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K

(a) Exhibits

EXHIBIT INDEX

|Exhibit
		Number | Description                                                                                                                                                                                                                                                                       
|---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i)(a)          | Articles of Incorporation
		(Exhibit 3.1 to the Company's Annual Report on Form 10-KSB filed on
		April 13, 2000 and incorporated by reference herein).                                                                                                                           
|3(i)(b)          | Certificate of Amendment to
		the Company's Articles of Incorporation (Exhibit 3.2 to the Company's
		Annual Report on Form 10-KSB filed on April 13, 2000 and incorporated by
		reference herein).                                                                               
|3(i)(c)          | Certificate of Change in
		Number of Authorized Shares pursuant to NRS 78.209, which defines the
		rights of holders of equity securities being registered (Exhibit 4.3 of
		the Company's report on Form S-8 filed on April 5, 2002 and incorporated
		by reference herein).     
|3(i)(d)          | Certificate of Amendment to
		the Company's Articles of Incorporation changing the name of the Company
		and increasing its authorized common stock (Exhibit 3.4 of the Company's
		Quarterly Report on Form 10-QSB filed on May 20, 2002 and incorporated
		by reference herein).
|3(ii)(a)         | Bylaws of the Company
		(Exhibit 3.3 of the Company's Annual Report on Form 10-KSB filed on
		April 13, 2000 and incorporated by reference herein).                                                                                                                               
|4.1              | Certificate of Designation of
		Series A Convertible Preferred Stock (Exhibit 4.4 of the Company's
		Registration Statement on Form S-8 filed on April 5, 2002 and
		incorporated by reference herein).                                                                           
|4.2              | Amended Stock Plan (Exhibit
		4.1 filed on Company's Quarterly Form 10-QSB filed on November 19, 2004
		and incorporated by reference herein).                                                                                                                                    
|4.3              | Securities Purchase
		Agreement, dated October 26, 2004 between the Company and Laurus Master
		Fund, Ltd. (Exhibit 4.1 of the Company's Report on Form 8-K filed on
		November 4, 2004 and incorporated by reference herein).                                                    
|4.4              | Registration Rights
		Agreement, dated October 26, 2004 between the Company and Laurus Master
		Fund, Ltd. (Exhibit 4.2 of the Company's Report on Form 8-K filed on
		November 4, 2004 and incorporated by reference herein).                                                    
|4.5              | Master Security Agreement,
		dated October 26, 2004 in favor of Laurus Master Fund, Ltd (Exhibit 4.3
		of the Company's Report on Form 8-K filed on November 4, 2004 and
		incorporated by reference herein).                                                                     
|4.6              | Subsidiary Agreement, dated
		October 26, 2004 between All-Star Beverages, the Company's subsidiary,
		and Laurus Master Fund, Ltd. (Exhibit 4.4 of the Company's Report on
		Form 8-K filed on November 4, 2004 and incorporated by reference herein)                            
|10.1             | Employment Agreement with
		Roger Mohlman (Exhibit 10.4 of the Company's Annual Report on Form
		10-KSB filed on April 16, 2003 and incorporated by reference herein).                                                                                                            

66

---

|10.2  | Trademark and Design License
		Agreement dated January 1, 2003 for the use of the Hawaiian Tropic name
		(Exhibit 10.6 of the Company's Annual Report on Form 10-KSB filed on
		April 16, 2003 and incorporated by reference herein).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  | Employment Agreement, dated
		March 9, 2005 (Exhibit 10 of the Company's Report on Form 8-K filed on
		April 19, 2005 and incorporated by reference herein).                                                                         
|14.1  | Code of Ethics and Business
		Conduct (Exhibit 14.1 of the Company's Annual Report on Form 10-KSB
		filed on April 16, 2003 and incorporated by reference herein).                                                                   
|16.1  | Letter Submitted by former
		auditors Kelly & Company (Exhibit 16.2 of the Company's Report of Form
		8-K/A filed on March 8, 2005 and incorporated by reference herein).                                                            
|23.1  |                                                                                                                                                                                                                                      
|31.1* | Certification pursuant to
		Section 302 of the Sarbanes-Oxley Act for Roger Mohlman                                                                                                                                                  
|31.2* | Certification pursuant to
		Section 302 of the Sarbanes-Oxley Act for Daniel Beckett                                                                                                                                                 
|32.1* | Certification pursuant to
		Section 906 of the Sarbanes-Oxley Act for Roger Mohlman                                                                                                                                                  
|32.2* | Certification pursuant to
		Section 906 of the Sarbanes-Oxley Act for Daniel Beckett                                                                                                                                                 

________________________
* Filed herewith

(b) Reports on Form 8-K

67

---

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1) AUDIT FEES

The aggregate fees billed for the fiscal year ended December
31, 2003, for professional services rendered by Kelly & Company, for the
registrant's review of the financial statements included in the registrant's
Form 10-QSB or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for fiscal year
2004 and 2003 were $105,302 and $213,987, respectively. The aggregate fees
billed for the fiscal year ended December 31, 2004, for professional services
rendered by Weaver and Martin LLC, for the audit of the registrant's annual
financial statements was $150,000

(2) AUDIT-RELATED FEES

The aggregate fees billed for the fiscal year ended December
31, 2004, for assurance and related services by Kelly & Company that are
reasonably related to the performance of the review of the registrant's
financial statements for fiscal year 2004 were $-0-.

The aggregate fees billed for the fiscal year ended December
31, 2004, for assurance and related services by Weaver and Martin, LLC, that are
reasonably related to the performance of the audit of the registrant's financial
statements for fiscal year 2004 were $-0-.

(3) TAX FEES

The aggregate fees to be billed by Weaver & Martin, LLC and
Kelly & Company for professional services to be rendered for tax fees for fiscal
years 2004 and 2003 were $2,190 and $-0-, respectively.

(4) ALL OTHER FEES

Kelly & Company billed us $14,455 for audit related services
relating to our Registration Statement on Form S-8 and Form SB-2. There were no
other fees to be billed by Kelly & Company for the fiscal years 2004 and 2003
other than the fees described herein and above.

(5) AUDIT COMMITTEE POLICIES AND PROCEDURES

Since the audit committee's inception it has pre-approved all
audit and non-audit services.

(6) If greater than 50 percent, disclose the percentage of
hours expended on the principal accountant's engagement to audit the
registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal accountant's
full-time, permanent employees.

Not applicable.

68

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on our behalf by the undersigned, thereunto duly authorized.

|AMERICAN WATER STAR, INC. | DATED: June 3, 2005
|------------------------- | -------------------
|                         
|By:/s/ Roger Mohlman     
|Roger Mohlman, President 

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

|Signature          | Title           | Date        
|------------------ | --------------- | ------------
|                   |                 |             
|/s/ Roger Mohlman  | President,      | June 3, 2005
|Roger Mohlman      | CEO, Chairman  
|                   |                
|/s/ Dan Beckett    | CFO, Secretary,
|Dan Beckett        | Director        | June 3, 2005
|                   |                 |             
|/s/ Mark DeBruin   | Director        | June 3, 2005
|Mark DeBruin      
|                   |                 |             
|/s/ Arthur de Joya | Director        | June 3, 2005
|Arthur de Joya     |                 |             

69

---

American Water Star, Inc.
Index To Financial Statements

|Report of Independent Certified Public
		Accountants - Weaver and Martin | F-1       
|------------------------------------------------------------------------ | ----------
|                                                                         |           
|Report of Independent Certified Public
		Accountants - Kelly & Company   | F-2       
|                                                                         |           
|Balance Sheets, December 31, 2004 and 2003                               | F-3 - F-4 
|                                                                         |           
|Statement of Operations for the Years Ended
		December 31, 2004 and 2003 | F-5       
|                                                                         |           
|Statement of Stockholders' Equity from
		December 31, 2002 to            |           
|December 31, 2004                                                        | F-6       
|                                                                         |           
|Statement of Cash Flows for the Year Ended
		December 31, 2004 and 2003  | F-7       
|                                                                         |           
|Notes to Financial Statements                                            | F-8 - F-22

70

---

Report of Independent Registered Public Accounting Firm

Stockholders and Directors
American Water Star, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet
of American Water Star, Inc. and subsidiaries as of December 31, 2004 and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for the year ended December 31, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of American Water Star, Inc. as of December 31, 2004 and the results of
its operations and cash flows for the year ended December 31, 2004 in conformity
with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring losses and had
negative cash flows from operations that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in the Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.





/s/ Weaver & Martin, LLC

Weaver & Martin, LLCKansas City, Missouri,
June 2,2005

F-1

---

Report of Independent Registered Public Accounting Firm

To the Board of Directors
American Water Star, Inc. and subsidiaries

We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of American Water Star, Inc. and
subsidiaries for the year ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the result of operations and cash flows of American Water
Star, Inc. for the year ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.



/s/ Kelly & Company

Kelly & Company
Costa Mesa, California
April 4, 2004

F-2

---

American Water Star, Inc.
Consolidated Balance Sheets

|                                                                                                                | December 31,
|--------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                | 2004        
|Assets                                                                                                          |             
|                                                                                                                |             
|Current assets:                                                                                                 |             
|Cash                                                                                                            | $ 1,286,624 
|Accounts receivable, net of allowance for doubtful accounts of $100,000
		and $247,037 at 12/31/04 and 12/31/03 | 636,156     
|Inventories                                                                                                     | 3,156,323   
|Notes receivable                                                                                                | -           
|Prepaid expenses                                                                                                | 197,835     
|Deferred financing costs                                                                                        | -           
|Total current assets                                                                                            | 5,276,938   
|                                                                                                                |             
|Property,
		plant and equipment, net                                                                            | 4,277,971   
|                                                                                                                |             
|Equipment
		held for future use                                                                                 | 4,412,433   
|                                                                                                                |             
|Leased
		equipment from a related party held for future use                                                     | 1,082,000   
|                                                                                                                |             
|Other
		assets:                                                                                                 |             
|Debt
		issue costs, net                                                                                         | 960,500     
|Advances to related parties                                                                                     | 913,835     
|Deposits                                                                                                        | -           
|Deposits and prepaid expenses - related party                                                                   | 277,414     
|Total other assets                                                                                              | 2,151,749   
|                                                                                                                |             
|                                                                                                                | $ 17,201,091

See notes to consolidated financial statements

F-3

---

American Water Star, Inc.
Consolidated Balance Sheets

|                                                                                                                                                        | December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                                        | 2004        
|                                                                                                                                                        |             
|Liabilities and Stockholder's Equity                                                                                                                    |             
|                                                                                                                                                        |             
|Current
		liabilities:                                                                                                                                  |             
|Accounts payable                                                                                                                                        | $ 134,910   
|Accrued liabilities                                                                                                                                     | 525,437     
|Accrued compensation and notes payable - Chairman /CEO                                                                                                  | 1,736,015   
|Current maturity of long-term convertible debt                                                                                                          | 1,372,862   
|Current portion of capital lease obligation -related party                                                                                              | 150,445     
|Advances from related parties                                                                                                                           | -           
|Total current liabilities                                                                                                                               | 3,919,669   
|                                                                                                                                                        |             
|Long-term liabilities                                                                                                                                   |             
|Long-term capital lease obligation -related party                                                                                                       | 744,997     
|Long-term convertible debt                                                                                                                              | 3,127,673   
|Total long-term liabilities                                                                                                                             | 3,872,670   
|                                                                                                                                                        |             
|Stockholders' equity                                                                                                                                    |             
|                                                                                                                                                        |             
|Preferred stock, $0.0001 par value, 20,000,000 shares authorized, no
		shares issued.                                                                   | -           
|                                                                                                                                                        |             
|Series A preferred convertible, 4,100,0000 shares authorized, no shares
		issued                                                                        | -           
|                                                                                                                                                        |             
|Common stock, $0.0001 par value, 150,000,000 shares authorized,
		80,227,858 and 63,263,206 shares issued and outstanding as of 12/31/04
		and 12/31/03 | 8,023       
|                                                                                                                                                        |             
|Stock bought or for services not issued 720,000 shares at 12/31/04                                                                                      | 72          
|Unamortized cost of shares issued for services                                                                                                          | (119,879)   
|Additional paid-in capital                                                                                                                              | 32,864,840  
|Accumulated (deficit)                                                                                                                                   | (23,344,304)
|                                                                                                                                                        | 9,408,752   
|                                                                                                                                                        |             
|                                                                                                                                                        | $ 17,201,091

See notes to consolidated financial statements

F-4

---

American Water Star, Inc.
Consolidated Statements of Operations

|                                                                                 | For the Years
		Ended
		December 31,
|-------------------------------------------------------------------------------- | ------------------------------------
|                                                                                 | 2004                                
|                                                                                 |                                     
|Sales                                                                            | $ 3,180,033                         
|Cost of sales                                                                    | 2,632,382                           
|                                                                                 |                                     
|Gross profit                                                                     | 547,651                             
|                                                                                 |                                     
|Expenses:                                                                        |                                     
|Depreciation and amortization                                                    | 575,801                             
|General and administrative expenses                                              | 13,863,812                          
|General and administrative expenses - related party                              | 2,366,685                           
|Loss
		due to impairment of equipment                                            | -                                   
|                                                                                 |                                     
|Total cost and expenses                                                          | 16,806,298                          
|                                                                                 |                                     
|Net operating (loss)                                                             | (16,258,647)                        
|                                                                                 |                                     
|Other (expense):                                                                 |                                     
|Interest (expense)                                                               | (182,088)                           
|Interest (expense) related party                                                 | -                                   
|                                                                                 |                                     
|Total other income (expense)                                                     | (182,088)                           
|                                                                                 |                                     
|Net (loss)                                                                       | $ (16,440,735)                      
|                                                                                 |                                     
|Weighted average number of
		common shares outstanding - basic and fully diluted | 77,020,086                          
|                                                                                 |                                     
|Net (loss) per share - basic
		and fully diluted                                 | $ (0.21)                            

See notes to consolidated financial statements

F-5

---

American Water Star, Inc.
Statements of Changes in Stockholders' Equity

|                                                                 | Common Stock | Additional Paid-in Capital | Unamortized cost of Shares
		issued for Services | Stock Earned for Services Not
		Issued | Accumulated (Deficit) | Total Stockholders' Equity
|---------------------------------------------------------------- | ------------ | -------------------------- | ------------------------------------------------ | -------------------------------------- | --------------------- | --------------------------
|Shares                                                           | Amount      
|Balance, December 31, 2002                                       | 30,158,398   | $ 3,016                    | $ 7,455,424                                      | $ (636,400)                            | $ -                   | $ (577,299)               
|                                                                 |              |                            |                                                  |                                        |                       |                           
|Shares issued for cash                                           | 5,693,662    | 569                        | 1,952,054                                        | -                                      | -                     | -                         
|Shares issued for extension
		of notes payable                   | 39,000       | 4                          | 7,776                                            | -                                      | -                     | -                         
|Shares issued upon conversion
		of notes payable                 | 2,785,036    | 279                        | 731,406                                          | -                                      | -                     | -                         
|Shares issued upon conversion
		of notes payable - related party | 1,828,153    | 183                        | 254,274                                          | -                                      | -                     | -                         
|Shares issued for inventory
		purchase - related party           | 15,666,934   | 1,567                      | 1,251,788                                        | -                                      | -                     | -                         
|Shares issued for placement
		of factoring agreement             | 300,000      | 30                         | 59,970                                           | -                                      | -                     | -                         
|Shares issued for consulting                                     | 6,792,023    | 679                        | 2,735,729                                        | (2,736,408)                            | -                     | -                         
|Amortization of unearned
		services                              | -            | -                          | -                                                | 2,098,525                              | -                     | -                         
|Reversal of unearned
		consulting                                | -            | -                          | (636,400)                                        | 636,400                                | -                     | -                         
|Net (loss)                                                       |              |                            |                                                  |                                        |                       |                           
|For the year ended December
		31, 2003                           | -            | -                          | -                                                | -                                      | -                     | (6,326,270)               
|Balance, December 31, 2003                                       | 63,263,206   | 6,327                      | 13,812,021                                       | (637,883)                              | -                     | (6,903,569)               
|                                                                 |              |                            |                                                  |                                        |                       |                           
|Shares issued for cash                                           | 9,188,013    | 919                        | 8,357,929                                        | -                                      | -                     | -                         
|Warrants exercised for cash                                      | 2,738,572    | 274                        | 1,261,481                                        | -                                      | -                     | -                         
|Shares issued for asset
		acquisition                            | 200,000      | 20                         | 219,980                                          | -                                      | -                     | -                         
|Shares issued upon
		conversion of notes payable - related party | 1,888,889    | 189                        | 1,699,811                                        | -                                      | -                     | -                         
|Shares issued for consulting                                     | 2,549,178    | 254                        | 4,540,041                                        | -                                      | -                     | -                         
|Warrants issued for services                                     | -            | -                          | 933,700                                          | -                                      | -                     | -                         
|Shares and options issued
		for services - related party         | 400,000      | 40                         | 935,560                                          | -                                      | -                     | -                         
|Amortization                                                     | -            | -                          | -                                                | 518,004                                | -                     | -                         
|Beneficial conversion of
		convertible note                      | -            | -                          | 234,796                                          | -                                      | -                     | -                         
|Warrants issued for
		convertible loan                           | -            | -                          | 322,515                                          | -                                      | -                     | -                         
|Shares for services not yet
		issued - related party             | -            | -                          | 269,528                                          | -                                      | 22                    | -                         
|Shares for services not yet
		issued                             | -            | -                          | 277,478                                          | -                                      | 50                    | -                         
|Net (loss)                                                       |              |                            |                                                  |                                        |                       |                           
|For the year ended December
		31, 2004                           | -            | -                          | -                                                | -                                      | -                     | (16,440,735)              
|Balance, December 31, 2004                                       | 80,227,858   | $ 8,023                    | $ 32,864,840                                     | $ (119,879)                            | $ 72                  | $ (23,344,304)            

See notes to consolidated financial statements

F-6

---

American Water Star, Inc.|
Statements of Cash Flows

|                                                                                            | For the Years Ended
		December 31,
|------------------------------------------------------------------------------------------- | ----------------------------------
|                                                                                            | 2004                              
|Cash flows
		from operating activities                                                      |                                   
|Net (loss)                                                                                  | $ (16,440,735)                    
|Depreciation and
		amortization                                                             | 607,367                           
|Amortization of
		beneficial conversion and consulting services                             | 528,725                           
|Amortization of
		loan fees and deferred financing costs                                    | 193,404                           
|Shares and
		warrants issued for services and asset acquisition                             | 5,971,524                         
|Shares and
		options issued for services - related party                                    | 1,205,150                         
|Shares issued for
		advances from the Chairman/CEO                                          | 1,700,000                         
|Impairment
		charges on equipment                                                           | -                                 
|Provision for
		doubtful accounts                                                           | -                                 
|Accrued interest
		- related parties                                                        | -                                 
|Adjustments to
		reconcile net (loss) to cash used in operating activities:                 |                                   
|(Increase) in
		accounts receivable                                                         | (611,315)                         
|(Increase) in
		inventories                                                                 | (196,538)                         
|Decrease in other
		current assets                                                          | 81,500                            
|(Increase) in
		prepaid expenses                                                            | (197,835)                         
|Increase in
		accounts payable and accrued expenses                                         | 275,465                           
|Increase
		(decrease) in accrued compensation to Chairman/CEO                               | (185,495)                         
|Net cash (used)
		by operating activities                                                   | (7,068,783)                       
|                                                                                            |                                   
|Cash flows
		from investing activities                                                      |                                   
|Purchase of
		equipment                                                                     | (2,629,477)                       
|Purchase of
		equipment - related parties                                                   | (4,045,061)                       
|Advances,
		deposits and prepaid expense to related parties                                 | (1,733,996)                       
|Increase in notes
		receivable                                                              | -                                 
|Net cash (used)
		by investing activities                                                   | (8,408,534)                       
|                                                                                            |                                   
|Cash flows
		from financing activities                                                      |                                   
|Capital lease
		obligations                                                                 | 1,082,000                         
|Payments on
		capital lease obligations -related party                                      | (186,558)                         
|Proceeds from
		note payable                                                                | -                                 
|Advances from
		related parties                                                             | -                                 
|Advances from
		chairman/CEO stockholder                                                    | 1,600,000                         
|Proceeds from
		long-term debt                                                              | 5,000,000                         
|Debt issue costs
		and beneficial conversion feature on long-term convertible debt          | (1,073,500)                       
|Proceeds from
		sale of common stock                                                        | 9,620,603                         
|Net cash provided
		from financing activities                                               | 16,042,545                        
|                                                                                            |                                   
|Net increase in
		cash                                                                      | 565,228                           
|Cash - beginning                                                                            | 721,396                           
|Cash - ending                                                                               | $ 1,286,624                       
|                                                                                            |                                   
|Supplemental
		disclosures:                                                                 |                                   
|Interest paid                                                                               | $ 64,000                          
|Income taxes paid                                                                           | $ -                               
|                                                                                            |                                   
|Supplementary
		disclosure of Non-Cash Investing and Financing Activities                   |                                   
|                                                                                            |                                   
|Issuance of stock
		for services and an asset acquisition                                   | $ 4,760,296                       
|Issuance of stock
		for the conversion of a note payable to the Chairman/CEO                | 1,700,000                         
|Issuance of
		warrants for services                                                         | 933,700                           
|Issuance of stock
		and options for services - related party                                | 935,600                           
|Stock for
		services earned but not issued - related party                                  | 269,550                           
|Stock for
		services earned but not issued                                                  | 277,528                           
|Warrants issued
		for long-term debt                                                        | 322,515                           
|Issuance of stock
		for the purchase of inventory from the Chairman/CEO                     | -                                 
|Conversion of
		convertible notes payable into stock                                        | -                                 
|Issuance of note
		payable to acquire inventory from a related party                        | -                                 
|Issuance of stock
		to Chairman/CEO for a payment of a liability                            | -                                 
|Issuance of stock
		for a placement fee for a credit facility                               | -                                 
|Issuance of stock
		for an extension of a maturity date on certain of its convertible notes | -                                 

See notes to consolidated financial statements

F-7

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

Nature of Business

The Company was originally organized on June 1, 1999 as
American Career Centers, Inc. On April 2, 2002 we amended our Articles of
Incorporation to change our name to American Water Star, Inc. We are engaged in
the production and sale of multiple non-alcoholic, non-carbonated beverages.

Use of Estimates

The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities in our consolidated financial statements and accompanying
notes. Although these estimates are based on our knowledge of current events and
actions we may undertake in the future, actual results may ultimately differ
from estimates and assumptions.

Principles of Consolidation

The accompanying consolidated financial statements include
the accounts of American Water Star, Inc. a Nevada Corporation and its wholly
owned subsidiaries, All Star Beverage, Inc. and New Age Packaging and
Distribution, Inc. and are prepared in accordance with accounting principles
generally accepted in the United States. The accompanying financial statements
reflect the results of operations and financial condition of All Star Beverage,
Inc. and New Age Distribution.

Risks and Uncertainties

The Company's operations could be adversely affected by
restrictions on sources of supply; advertising effectiveness; changes in
labeling requirements; changes in governmental regulations; changes in the rate
or method of taxation; the expropriation of private enterprise; or product
issues such as a product recall. The foregoing list of risks and uncertainties
is not exclusive. We monitor our operations with a view to minimizing the impact
to our overall business that could arise as a result of the risks inherent in
our business.

Loss per share

Net loss per share is provided in accordance with Statement
of Financial Accounting Standards No. 128 (SFAS #128) "Earnings Per Share".
Basic loss per share is computed by dividing losses available to common
stockholders by the weighted average number of common shares outstanding during
the period. There were no securities considered to be dilutive in the
computation of earnings (loss) per share.

Trade Accounts Receivable

We record trade accounts receivable at net realizable value.
This value includes an appropriate allowance for estimated uncollectible
accounts to reflect any loss anticipated on the trade accounts receivable
balances and charged to the provision for doubtful accounts. We calculate this
allowance based on our history of write-offs, level of past due accounts based
on the

F-8

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contractual terms of the receivables and our relationships
with and economic status of our customers.

Inventories

Inventories consist primarily of raw materials, supplies,
concentrates and syrups and are valued at the lower of cost or market. We
determine cost on the basis of average cost or first-in, first-out methods.

Stock-Based Compensation

Common stock, warrants and options issued for services by
non-employees is accounted for based on the fair market value at the date the
services are performed. If the services are to be performed over a period of
time the value is amortized over the life of the period that services are
performed.

We account for our stock option plan in accordance with the
provisions of SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No.
123 permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of the grant.

Income Taxes

We account for income taxes under SFAS 109, Accounting for
Income Taxes. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities. The provision for income taxes differ from the amounts
currently payable because of temporary differences in the recognition of certain
income and expense items for financial reporting and tax reporting purposes.

Fair value of financial instruments

The carrying value of current assets and liabilities
reasonably approximates their fair value due to their short maturity periods.
The carrying value of our debt obligations reasonably approximates there fair
value at the stated interest rate approximates current market interest rates of
debt with similar terms that is available to us.

Earnings per common share

SFAS No. 128, Earnings Per Share requires presentation of
"basic" and "diluted" This standard requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the diluted loss per share computation.

Potentially issuable shares of common stock pursuant to
outstanding stock options and warrants are excluded from the diluted
computation, as their effect would be anti-dilutive.

Cash and cash equivalents

Cash and cash equivalents include cash in banks and
certificates of deposit that mature within three months of the date of purchase.

F-9

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property, Plant and Equipment

We state property, plant and equipment at cost and
depreciate such assets principally by the straight-line method over the
estimated useful lives of the assets. Management assesses the recoverability of
the carrying amount of property, plant and equipment if certain events or
changes occur, such as a significant decrease in market value of the assets or a
significant change in the business conditions in a particular market. The
estimated useful lives of the assets or the lease term based on the following
life expectancy:

|Computer equipment            | 5 years      
|----------------------------- | -------------
|Software                      | 3 years      
|Office furniture and fixtures | 7 years      
|Bottling equipment            | 7-10 years   
|Leasehold improvements        | Life of lease

Depreciation commences upon implementation of the asset.
Repairs and maintenance expenditures are charged to operations as incurred.
Major improvements and replacements, which extend the useful life of an asset,
are capitalized and depreciated over the remaining estimated useful life of the
asset. When assets are retired or sold, the costs and related accumulated
depreciation and amortization are eliminated and any resulting gain or loss is
reflected in operations.

Derivative Financial Instruments

We account for derivative financial instruments in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, SFAS No. 138, and SFAS No. 149. Our
Company recognizes all derivative instruments as either assets or liabilities at
fair value in our consolidated balance sheets.

Advertising costs

The Company expenses all costs of advertising as incurred.
There were $563,678 and $42,814 advertising costs included in general and
administrative expenses as of December 31, 2004 and 2003.

Revenue recognition

Revenue from the sale of our products is recorded when title
and risk of loss have passed to the customer. Revenue is recorded at the time of
shipment. Sales are recorded net of discounts, rebates and promotional costs.

Debt issue costs

Costs related to securing our long-term convertible debt are
recorded as an asset and are amortized over the life of the debt.

F-10

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-lived assets

We review the carrying value of long-lived assets at each
balance sheet date if indication of impairment exists. Recoverability is
assessed using undiscounted cash flows based upon historical results and current
projections of earnings before interest and taxes. Impairment is measured using
discounted cash flows of future operating results based upon a rate that
corresponds to the cost of capital. Impairments are recognized in operating
results to the extent that carrying value exceeds discounted cash flows of
future operations. At December 31, 2003 we recognized an impairment expense in
the amount of $1,745,669.

Recent issued accounting Standards

In January 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51" (the
Interpretation). The Interpretation requires the consolidation of variable
interest entities in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. Currently, entities are generally consolidated by an enterprise that
has a controlling financial interest through ownership of a majority voting
interest in the entity. The Interpretation was originally immediately effective
for variable interest entities created after January 31, 2003, and effective in
the fourth quarter of fiscal 2003 for those created prior to February 1, 2003.
However, in October 2003, the FASB deferred the effective date for those
variable interest entities created prior to February 1, 2003, until the first
quarter of fiscal 2004. This interpretation did not affect our financial
statements.

In November 2004, the FASB issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handing costs, and spoilage.
This statement requires that those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal" which was the
criterion specified in ARB No. 43. In addition, this Statement requires that
allocation of fixed production overheads to the cost of production be based on
normal capacity of the production facilities. This pronouncement is effective
for the Company beginning October 1, 2005. The Company does not believe adopting
this new standard will have a significant impact to its financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised
2004). Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The new standard will be effective for
the Company in the first interim or annual reporting period beginning after
December 15, 2005. In 2004, the Company granted its first stock options to the
Chairman/CEO and other directors. The Company expensed the fair value of those
options.

F-11

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications

Certain reclassifications have been made to prior periods to
conform to current presentation.

2. Going concern

The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements during the years ended December 31, 2004, and 2003, the
Company incurred losses from operations of $16,440,735 and $6,326,270
respectively. The financial statements do not include any adjustments relating
to the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. It is management's
plan to finance its operations for the foreseeable future primarily through
capital raised through financing options in the investment community and by
increasing its revenues through its current and new customers. However, there
can be no assurance that these sources will provide sufficient cash inflows to
enable the Company to achieve its operational objectives.

3. Accounts receivable

Trade accounts receivable are stated at the amount the
Company expects to collect. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. Management considers the following factors when
determining the collectibility of specific customer accounts: customer
credit-worthiness, past transaction history, current economic and industry
trends, and changes in customer payment terms. If the financial condition of the
Company's customers were to deteriorate, adversely affecting their ability to
make payments, additional allowances would be required.

Changes in the allowance for doubtful accounts is as follow:

|                     |   | For the Years Ended
		December 31,
|-------------------- | - | ----------------------------------
|                     |   | 2004                              
|Beginning balance:   | $ | 247,037                           
|Additional provision |   | 100,000                           
|Write - offs         |   | (247,037)                         
|                     |   |                                   
|Ending balance       | $ | 100,000                           

Third-Party Factor

Pursuant to a previous factor agreement, the majority of our
receivables were factored at a fee of 32.5% per annum. On October 28, 2004, we
cancelled our previous factor agreement pursuant to the terms of our financing
arrangement with Laurus Master Fund, Ltd. As of December 31, 2004, all factored
accounts receivable had been collected.

F-12

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Inventory

Inventories, consisting of raw materials and finished goods,
are stated at the lower of cost (first-in, first-out) or market and consist of
the following at December 31:

|                  | December 31,
|----------------- | ------------
|                  | 2004        
|Raw materials     | $           
|Finished goods    |             
|                  |             
|Total Inventories | $           

5. Property, plant and equipment

Plant, plant and equipment consisted of the following:

|                                  | December 31,
|--------------------------------- | ------------
|                                  | 2004        
|Bottling and other equipment      | $           
|Office equipment                  |             
|Furniture and fixtures            |             
|Website                           |             
|Vehicles                          |             
|Improvements                      |             
|Building                          |             
|Land                              |             
|                                  |             
|Subtotal                          |             
|                                  |             
|Less accumulated depreciation     |             
|                                  |             
|Total property, plant & equipment | $           

Depreciation and amortization totaled $607,367 in 2004 and
$232,507 in 2003. Depreciation of $48,194 and $134,091 was included in the cost
of sales in 2004 and 2003 respectively

6. Equipment held for future use

Bottling and other equipment with a cost of $4,412,433 and
$2,258,571 for the years ended December 31, 2004 and 2003 had not been put into
service at the respective year ends. No depreciation will be recorded until
these assets are placed into service.

F-13

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Accrued compensation and notes payable to the
	Chairman/CEO

Loans payable to the Chairman/CEO consist primarily of cash
advances and at December 31, 2004 the advances totaled $1,635,000. Each loan is
non-interest bearing and due on demand, however we recorded accrued interest of
$35,000 based on a 6% interest rate. Accrued compensation was $101,015 and
$321,510 for 2004 and 2003 respectively.

8. Long-term convertible debt

On October 28, 2004 we issued a $5,000,000 secured
convertible term note ("Note") to Laurus Master Fund, Ltd. ("Laurus"). The Note
is convertible into shares of our common stock at an initial conversion price of
$0.57 per share. Pursuant to this agreement, we also issued to Laurus a warrant
("Warrant") to purchase up to 2,543,860 shares of our common stock at an
exercise price of $0.66. The warrant expires on October 28, 2009. The
unamortized cost of the warrants issued to Laurus of $322,515 will accrete to
interest expense over the period of the loan based on the interest method. For
the period ended December 31, 2004 the accreted amount of the unamortized cost
of warrants was $32,399 and this was reported as interest expense. There was a
beneficial conversion feature to the convertible note. On the day the note was
issued the difference between the price the note could be converted to based on
the price our common stock was trading and the conversion price for Laurus
totaling $234,796. The beneficial conversion will be amortized based on the
interest method as interest expense over the life of the loan. For the year
ended December 31, 2004 the amount of accretion to interest expense resulting
from the beneficial conversion was $10,721.

The Note has a term of three years and accrues interest at
the prime rate plus 3% per year (8.0% as of December 31, 2004). All our assets
secure the Note. Interest on the principal amount is payable monthly, in
arrears, on the first business day of each calendar month commencing December 1,
2004. In addition, effective February 1, 2005, we are required to make monthly
principal payments in the amount of $151,515 per month and continuing until the
maturity date. Under the terms of the Note, the monthly interest payment and the
monthly principal payment are payable either in cash at 102% of the respective
monthly amortization amounts or, if certain criteria are met, in shares of our
common stock. The principal criteria for the monthly payments to be made in
shares of our common stock include:

- the effectiveness of a current registration statement
		covering the shares of our common stock into which the principal and
		interest under the Note are convertible;
- an average closing price of our common stock for the
		previous five trading days greater than or equal to 110% of the fixed
		conversion price; and
- the amount of such conversion not exceeding 25% of
		the aggregate dollar-trading volume of our common stock for the previous
		22 trading days.

We may prepay the non-restricted and the restricted facility
of the Note at any time by paying 125% of the amortizing principal amount then
outstanding, together with accrued but unpaid interest thereon. Upon an event of
default under the Note, Laurus may demand repayment of the outstanding principal
balance at a rate of 130% of the Note plus any accrued interest.

On a month-by-month basis, if we register the shares of
common stock issuable upon conversion of the Note and upon exercise of the
Warrant on a registration statement declared effective by the

F-14

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities and Exchange Commission, and the market price of
our common stock for five consecutive trading days exceeds the conversion price
by at least 25%, then the interest rate on the Note for the succeeding calendar
month shall be reduced by 1% for every 25% increase in the market price of our
common stock above the conversion price of the Note, but in no event shall the
interest rate be less than 6.0%.

Laurus also has the option to convert all or a portion of the
Note into shares of our common stock at any time, subject to limitations
described below, at a conversion price of $0.57 per share, subject to adjustment
as described below. At December 31, 2004 the maximum amount of conversion that
Laurus could convert was 3,898,136 shares of our common stock. Laurus is limited
on its ability to convert is the conversion of the Note or the exercise of the
Warrant would cause the shares then held by Laurus to exceed 4.99% of our
outstanding shares of common stock unless there has been an event of default or
Laurus provides us with 75 days prior notice.

We were obligated to file a registration statement with the
Securities and Exchange Commission ("SEC") registering the resale of shares of
our common stock issuable upon conversion of the Note and exercise of the
Warrant by December 12, 2004, and to have such Statement declared effective by
the SEC by no later than February 5, 2005. We timely filed the registration
statement, but it has not yet been declared effective. If the registration
statement is suspended other than as permitted in the Registration Rights
Agreement, or if our common stock is not listed for three consecutive trading
days, we are obligated to pay Laurus additional cash fees. The cash fees are
2.0% of the original principal amount of the Note for each 30-day period in
which we fail to correct these issues. On February 28, 2005, we agreed to amend
our original note with Laurus due to the registration not becoming effective as
required by the original note.

Long-term debt consists of the following:

|                                  |  | For the Years Ended
		December 31
|--------------------------------- |  | ---------------------------------
|                                  |  | 2004                             
|                                 
|Long-term convertible debt        |  | $   5,000,000                    
|Less Unamortized cost of warrants |  | (275,390)                        
|Less beneficial conversion        |  | (224,075)                        
|Subtotal                          |  | 4,500,535                        
|Current portion                   |  | 1,372,862                        
|                                 
|Total Long Term Convertible Debt  |  | $  3,127,673                     

Maturities of long-term convertible debt for the five years
succeeding December 31, 2004 are as follows:

|2005         |  | 2006         |  | 2007         |  | 2008  |  | 2009 
|------------ |  | ------------ |  | ------------ |  | ----- |  | -----
|            
|$  1,667,000 |  | $  1,818,000 |  | $  1,515,000 |  | $ -0- |  | $ -0-

F-15

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We incurred fees relating to the convertible debt totaling
$1,073,500. These fees will be amortized over the life of the debt. For the year
ending December 31, 2004, we amortized $113,000 of the loan fees. We also had
deferred finance costs in 2003 of which $33,279 was amortized in 2004.

9. Commitments and Contingencies

Legal proceedings

The Company is involved in various unresolved legal actions,
administrative proceedings and claims in the ordinary course of business.
Although it is not possible to predict with certainty the outcome of these
unresolved actions, the Company believes these unresolved legal actions will not
have a material effect on its financial position or results of operations.

Operating leases

We have lease agreements and arrangements, whereby we lease
warehouse and operating facilities from companies including Camelot, Ltd., a
related party. For the years ended December 31, 2004 and 2003 our rent expense
was approximately $722,000 and $501,000 respectively.

The following is a schedule by year of future minimum lease
payments under all the lease agreements:

|Year Ending  |  |   | Related Party | Non- Related Party
|------------ |  | - | ------------- | ------------------
|December 31, |  |   | Amount        | Amount            
|             |  |   |               |                   
|2005         |  | $ | 135,079       | 388,026           
|2006         |  |   | 139,894       | 376,669           
|2007         |  |   | -0-           | 286,186           
|2008         |  |   | -0-           | 209,454           
|2009         |  |   | -0-           | 56,250            
|             |  |   |               |                   
|             |  | $ | 274,973       | 1,316,585         

License agreements

In January 2003, the Company entered into an agreement with a
corporation that owns the licensing rights to a consumer product trademark. The
agreement provides the Company with a three-year exclusive license to produce,
market and sell flavored water bearing the trademark name in the United States
and Canada. In consideration, the Company agreed to pay a royalty of four
percent of invoice sales (net of shipping and sales taxes), payable each
quarter. The agreement calls for a guaranteed minimum annual royalty fee of
$40,000 in 2003, $120,000 in

F-16

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2004 and $200,000 in 2005. The agreement may be renewed at
the option of the Company provided certain minimum sales have occurred. Royalty
expense was $120,000 and $40,000 in the years ended December 31, 2004 and 2003
respectively.

Consulting agreement

The Company entered into a consulting agreement on March 4,
2004 with SLD Capital Corp. whereby the consultant would provide financial and
marketing assistance for a three year period and would be compensated $10,000
each month.

10. Impairment charges on equipment

As a result of the delay in implementation of the Company's
business plan in 2003, the Company recorded an impairment in the carrying value
of its bottling and other equipment of $1,754,669. Of the impairment charge,
$437,639 related to bottling and other equipment used in the Company's
operations with the remainder relating to equipment held for future use.

11. Capital lease obligations

The Company is leasing bottling equipment from a related
entity (IQ USA, Inc) that has been recorded as a capital leases. The equipment
was valued at an appraised amount of $1,082,000. At December 31, 2004 the
equipment has not been placed into service so no amortization has been recorded.
When this equipment is placed into service the cost will be amortized over the
remaining lease term.

The lease period is 5 years and the Company was required to
pay a deposit of $151,567, which represented the residual value of the lease.
The deposit was offset against the lease obligation. The effective weighted
interest rate of the leases was 14.5%. Monthly payments for the leases are
$21,889.

At December 31, 2004 the current portion of capital lease
obligations was $150,445 and the long-term portion of the capital lease
obligation was $744,997. Future minimum lease payments are as follows-
2005-$150445, 2006-$168,596 2007-$189,005 2008-$211,890 and 2009-$175,506.

12. Income Taxes

Deferred income taxes are determined based on the tax effect
of items subject to differences in book and taxable income. The Company had no
income tax provision for the years ended December 31, 2004 and 2003. There is
approximately $19,806,000 of net operating loss carry-forwards, which expires in
2022-2024. The net deferred tax is as follows:

|                                                                                   | For the Years Ended December 31,
|---------------------------------------------------------------------------------- | --------------------------------
|Non-current deferred tax asset
		(liabilities):                                    | 2004                            
|Net operating loss carry-forward                                                   | $ 6,734,000                     
|Allowances, reserves and depreciation
		Accrued compensation
		Valuation allowance | 435,000
		34,000
		(7,204,000)  
|Total deferred tax net                                                             | $ --                            

F-17

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the provision for income taxes to the statutory federal
rate (34%) for continuing operations is as follows:

|                                                                                      | For the Years Ended
		December 31,
|------------------------------------------------------------------------------------- | ----------------------------------
|                                                                                      | 2004                              
|Statutory tax benefit                                                                 | $(5,590,000)                      
|Non-deductible expense
		Deductible
		expenses for tax purposes
		Valuation allowance | 591,000
		(293,000)
		5,292,000   
|Income tax benefit                                                                    | $--                               

13. Related party transactions

During the year ended December 31, 2003, we purchased
inventory from our Chairman/CEO for 15,666,934 shares of the Company's common
stock with fair value of $1,253,355, which equaled the lower of predecessor cost
or fair value of the inventory.

In 2003, the Company's Chairman/CEO assumed an obligation
recorded by the Company in the amount of $106,169. This assumption is included
in accrued compensation and notes payable - Chairman/CEO.

On February 20, 2004, we issued 200,000 shares of our common
stock to the Company's Chairman/CEO pursuant to his employment valued at
$362,000, the fair market value of the underlying shares on the date of issue.

We issued 1,888,889 shares of common stock to our Chairman/
CEO in consideration for the cancellation of advances totaling $1,700,000 he
made to the Company.

Entities that have a relationship with the Company's
Chairman/ CEO were paid the following by the Company:

|                                   | For the Years Ended
		December 31,
|---------------------------------- | ----------------------------------
|                                   | 2004                              
|                                   |                                   
|Software and website               | $                                 
|Computer hardware                  |                                   
|Operating & capital lease payments |                                   
|Leased employees                   |                                   
|Deposits on facilities             |                                   
|Leasehold improvements             |                                   
|Bottling and office equip.         |                                   
|Cash advances / Repayment          |                                   
|Factoring agreements               |                                   

F-18

---

AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Raw material purchases                                       |   | 369,728   |  |   | -0-      
|------------------------------------------------------------ | - | --------- |  | - | ---------
|Product development                                          |   | 219,474   |  |   | -0-      
|Equipment rentals and repair                                 |   | 55,530    |  |   | -0-      
|Consulting Services (paid by issuance of stock- see
		below) |   | 179,000   |  |   | -0-      
|                                                             |   |           |  |   |          
|Total                                                        | $ | 7,017,076 |  | $ | 2,468,238

Included in the above schedule was the value of 100,000
shares of our common stock that was issued on February 26, 2004, to a related
party entity (D.A.M.E.), controlled by the former wife of our Chairman/CEO. The
stock was for consulting services and was valued at $179,000, the fair market
value of the underlying shares on the date of issue.

14. Stockholders' Equity

Common stock

As of December 31, 2004, there were an additional 720,000
shares of common stock we needed to issue for services or shares we sold.

Stock Transactions

During 2003, we sold, in several offerings, 5,693,662 shares
of our common stock and warrants to purchase 2,746,550 shares of our common
stock with exercise prices of $0.53 and $0.54 per share. The net proceeds of
these offerings totaled $1,952,623.

During 2003, the Company issued 39,000 shares of its common
stock with a fair value of $7,780 for a one-year extension of the due date of
the convertible notes payable.

During 2003, the holders of the Company's 10%, 15%, and 25%
convertible notes payable totaling $731,685 elected to convert the notes payable
into 2,785,036 shares of the Company's common stock.

During 2003, the Company issued 6,792,023 shares of its
common stock and warrants to purchase 1,700,000 common shares for consulting
services. The fair value of these shares and warrants totaled $2,736,408. Using
the Black-Scholes pricing model, the warrants were valued using the following
assumptions: no annual dividends, expected volatility of 95%, weighted average
risk free interest rate of 1.29%, and a weighted average term of 1.5 years.

During 2003, the Company purchased inventory from its
Chairman/CEO for 15,666,934 shares of the Company's common stock with fair value
of $1,253,355, which equaled the lower of predecessor cost or fair value of the
inventory.

During 2003, the Company issued 300,000 shares of common
stock as a fee in obtaining the third party accounts receivable factoring
agreement. These shares had a fair value of $60,000 at the time of issuance.

During 2003, the Company issued 1,828,153 shares of its
common stock to a related party in satisfaction of debt obligations totaling
$254,457. The issuance of shares in satisfaction of the obligation was based on
the fair value of the stock at the time of issuance.

F-19

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AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2004, we sold 9,188,013 shares of our common stock for
net proceeds of $8,358,848. In conjunction with the sale of common stock, we
issued 8,888,888 warrants pursuant to the February offering. Per the offering
document, 4,444,446 warrants were issued with the initial purchase of common
stock and expired on June 28, 2004 at which time, each of the initial warrants
were replaced with 4,444,442 and set to expire on February 18, 2009.

On May 25, 2004, we issued 200,000 shares of our common stock
as partial consideration for the acquisition of the assets of Sunset Bottling
Company valued at $220,000.

During the year ended December 31, 2004, we issued 2,738,572
shares of our common stock upon exercise of warrants for cash. The proceeds from
the warrants were $1,261,755 of which $23,625 had been expensed as consulting
fees as December 31, 2004.

During the year ended December 31, 2004, we issued 2,949,178
shares and had 720,000 shares that were earned but not issued of our common
stock for services. The fair value of these shares based on the price of our
common stock on the date of the shares were earned was $5,746,374. This included
620,000 shares issued to related parties that was valued at $928,550

We issued 1,888,889 shares of our common stock to our
Chairman/CEO in consideration for the cancellation of $1,700,000 in advances he
made to the Company.

Options and warrants

On May 4, 2004 we issued warrants to purchase 1,000,000
shares of our common stock at a strike price of $1.28 for a term of 1 year to
Merrick Okamoto, for services. The value of the warrants using the Black-Scholes
pricing model was $798,200 that was recorded as consulting expense.

On October 28, 2004, we issued 2,543,860 warrants to Laurus
Master Fund, Ltd., in connection with the convertible note agreement. The
warrants allowed Laurus Master Fund to purchase common stock at a price of $0.66
per share expiring on October 28, 2009. The value of the warrants using the
Black-Scholes pricing model was $322,515, which was recorded as additional paid
in capital.

On October 28, 2004, we issued warrants to purchase 1,000,000
shares of our common stock at a strike price of $0.58 for a term of 5 years to
Gryphon Master Fund, LP, for services. The value of the warrants using the
Black-Scholes pricing model was $135,500, which was recorded as a consulting
expense.

The weighted average of the assumptions used to value the
warrants in 2004 were: Interest rate-3.50%, Days to expiration-1491, Stock price
$0.81, Strike price-$0.77, Volatility-74%, Yield-0%.

During 2004, we sold 9,188,013 shares of our common stock,
which included warrants. 4,444,446 warrants were issued with the initial
purchase of common stock and expired on June 28, 2004 at which time, each of the
initial warrants were replaced with 4,444,442 and set to expire on February 18,
2009 and have a strike price of $1.65.

F-20

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AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 17, 2004 we granted 600,000 options to five
employees and directors that had a strike price of $.77 and expired in 5 years.
The value of the options using the Black-Scholes pricing model was $276,600. The
assumptions used to value the options were: Interest rate-3.5%, Days to
expiration-1825, Stock price- $.77, Strike price-$.77, Volatility-74% and
Yield-0%.

A summary of stock options and warrants is as follows:

|                                 |         |   |          |  |             | Weighted
|-------------------------------- | ------- | - | -------- |  | ----------- | --------
|                                 |         |   | Weighted |  |             | Average 
|                                 |         |   | Average  |  |             | Exercise
|                                 | Options |   | Price    |  | Warrants    | Price   
|                                 |         |   |          |  |             |         
|Outstanding at January 1, 2003   | --      | $ | --       |  | 227,000     | $       
|Granted                          | --      |   | --       |  | 4,446,550   |         
|Cancelled                        | --      |   | --       |  | --          |         
|Exercised                        | --      |   | --       |  | --          |         
|Outstanding at December 31, 2003 | --      | $ | --       |  | 4,673,550   | $       
|                                 |         |   |          |  |             |         
|Granted                          | 600,000 |   | .77      |  | 8,988,302   |         
|Cancelled                        | --      |   | --       |  | --          |         
|Exercised                        | --      |   | --       |  | (2,752,432) | $       
|Outstanding at December 31, 2004 | 600,000 | $ | .77      |  | 12,376,538  | $       

15. Concentrations

During 2004 the Company had one major customer that accounted
for 39% of gross sales. During 2003 the Company relied on three customers for
approximately 40% of gross sales. In 2004 there were no significant suppliers
that accounted for more than 10% of the costs of sales. In 2003 the Company
utilized certain suppliers that accounted for 95% of products purchased.

16. Spin Off

In December 2003, the Company's Board of Directors declared a
dividend in the form of all of the common stock of New Age Packaging &
Distribution, Inc., (NAPD) formerly American Distributing & Packaging, Inc. The
distribution of the shares has not occurred. At December 31, 2004 NAPD's
condensed balance sheet and statements of operations was as follows:

|Leased Equipment from related parties held for future
		use | $ | 1,082,000  
|----------------------------------------------------------- | - | -----------
|Total assets                                                |   | 1,196,249  
|                                                            |   |            
|Notes payable and accrued interest to the
		Chairman/CEO    |   | (1,600,000)
|Capital lease obligation- related party                     |   | (895,441)  
|Total Liabilities                                           | $ | (2,630,440)
|                                                            |   |            
|Stockholder's deficit                                       | $ | (1,434,914)
|                                                            |   |            
|Revenue                                                     |   | -0-        
|Net Loss                                                    | $ | (1,388,714)

F-21

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AMERICAN WATER STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. Subsequent Events

On February 28, 2005, the Company entered into an "Amendment
and Waiver Agreement" with Laurus Master Fund Ltd. in connection with the
financing agreement entered into on October 28, 2004. The amended Agreement
provides for payment of accrued interest, principal and fees, pursuant to the
original note in the form of a warrant to purchase 1,500,000 shares of the
Company's common stock with an exercise price of $0.50 per share.

We entered into an agreement to purchase from Colorado River
Distributors, LLC, the distribution rights of their Nevada Division for an
amount of $103,000. In addition to purchasing the distribution rights, we
purchased the existing inventory of their Nevada Division for $55,216.29.
Colorado River Distributors has distributing agreements for the paper products
of Arrowhead Water, Coca Cola, Gatorade, and Tropicana. Upon this acquisition,
we established a new subsidiary of C.R.D. Nevada, in which we incorporated the
operations of Colorado River Distributors' Nevada Division and consolidated the
business with our current operations in Las Vegas. This agreement allows us to
expand our operations to distributing and we will now supply beverage products
to over 450 new accounts including CVS Pharmacy, Walgreens, Savon Drugs, Vons
Food & Drug and a number of other major retailers in the Las Vegas, Nevada area.







F-22