Avani International Group Inc

10KSB/A 1 f10ksba1final.htm Avani International Group Inc

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Amendment No. 1

FORM 10-KSB/A

(Mark One)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the period ended December 31, 2005

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 for the transition period from ___ to ____.

Commission file number: 000-23319

AVANI INTERNATIONAL GROUP INC.

(Name of Small Business Issuer in its charter)

Nevada 88-0367866

(State of (I.R.S. Employer

Incorporation) I.D. Number)

#328-17 Fawcett Road, Coquitlam, B.C. (Canada) V3K 6V2

(Address of principal executive offices) (Zip Code)

Issuer's telephone number: 604-525-2386

Securities registered under Section 12 (b) of the Act:

Title of each class Name of exchange on which

to be registered each class is to be registered

None None

Securities registered under Section 12(g) of the Act:

Common Stock

(Title of Class)

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

Yes: X No:

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation SB 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 II of this Form 10-KSB or any amendment to this Form 10-KSB. [x]

State issuer's revenues for the most recent fiscal year. $307,194.

As of April 1, 2006, the aggregate market value of the voting and non-voting common equity held by non-affiliates is approximately $385,140. This calculation is based upon the average of the bid price of $0.04 and asked price of $0.07 of the common stock on April 1, 2006.

The number of shares issued and outstanding of issuer's common stock, $.001 par value, as of April 1, 2006 was 14,582,571.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Explanatory Note

The Company filed its Form 10-KSB for the period ended December 31, 2005 (“Form 10-KSB”) with the Securities and Exchange Commission on April 12, 2006. However, the Form 10-KSB omitted the Company’s audited report for the annual period ended December 31, 2004, as well as the audit report of Avani O2 Oxygen Water Sdn. Bhd (“Avani O2”), a Malaysian company and formerly a variable interest entity (“VIE”) of the Company (see discussions below regarding Avani O2 as the Company’s VIE) for the same period. This Amendment No. 1 to Form 10-KSB contains the Company’s audit report and Avani O2’s audited report, both for the annual periods ended December 31, 2004. No changes were made to the financial statements.

Except to the extent expressly set forth herein, this amended Form 10-KSB speaks as of the filing date of the original Form 10-KSB and has not been updated to reflect events occurring subsequent to the original filing date other than those required to reflect the effects of the comments received by the Staff. Accordingly, this amended Form 10-KSB should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-KSB, including any amendments to those filings.

PART I

Item 1. Description of Business.

Introduction.

Avani International Group Inc. ("Avani" or "Company") was organized under the laws of the State of Nevada on November 29, 1995.

Since its inception, Avani has constructed a bottling facility and has been engaged in the business of bottling and distributing bottled water product under the trade name "Avani Water.” The product is an oxygen enriched, purified bottled water produced from proprietary technology developed by Avani.

Avani’s executive offices and bottling facility are located at #328-17 Fawcett Road, Coquitlam, British Columbia (Canada) V3K 6V2, and its telephone number is (604) 525-2386.

General.

Avani was incorporated in the State of Nevada on November 29, 1995 under the name Rainfresh Technologies, Inc. and changed its name to Avani International Group, Inc. on January 14, 1997. As of December 31, 2005, it has two wholly owned subsidiaries; Avani Oxygen Water Corporation (formerly Avani Water Corporation), and Avani International Marketing Corporation.

Avani Oxygen Water Corporation was organized under the laws of the Province of British Columbia (Canada) on December 8, 1995. Avani International Marketing Corp. was incorporated under the laws of the Province of British Columbia on September 22, 1999.

The consolidated audited financial statements for the fiscal year period ended December 31, 2004 includes the results of Avani O2 Water Sdn. Bhd. (“Avani O2”), a Malaysian company. During the 2004 period, Avani O2 was variable interest entity (“VIE”) as defined in Financial Accounting Standards Board Interpretation No. 46R with the Company being its primary beneficiary. Accordingly, the Company consolidated Avani O2 in the audited results for the 2004 period. All material inter-company balances and inter-company transactions between the two companies were eliminated for the 2004 period. Avani O2 ceased being a VIE of the Company during the 2005 period, and the consolidated audited financial statements for the fiscal year period ended December 31, 2005 includes the results of the Company and its wholly owned subsidiaries and excludes the results of Avani O2.

Unless the context indicates otherwise, (i) all references to Avani or the Company herein include Avani International Group Inc. and its wholly-owned subsidiaries to the exclusion of Avani O2 and (ii) all dollar amounts are expressed in US dollars. Any reference to Canadian dollars shall be indicated as "CDN.”

Following its incorporation, Avani commenced construction of its bottling facility in May 1996 which was completed in August 1996. In September 1996, Avani initiated the production, marketing and sale of its purified, oxygen enriched water under the brand name “Avani Water”. It utilizes a unique technology which injects oxygen into purified water producing an oxygen enriched, purified bottled water.

Avani has sold its product in the greater Vancouver metropolitan area and internationally, from time to time, mainly to the United States, Malaysia and Japan. The Company has provided home and business delivery of 2.5 and 5 gallon bottles in the Vancouver metropolitan area and, to a limited extent, sells 500 ml and 1.5 liter PET bottles directly to retail outlets in the Vancouver area. The Company's sales nationally and internationally, except in Malaysia, have been limited. During 2004, substantially all of the Company’s distribution was made to Avani O2. As previously disclosed by the Company and as stated in greater detail below, during late 2004 and in 2005, the Company terminated its business relationships with Avani O2. On July 15, 2005, the Company sold to an unaffiliated third party, certain assets relating to its business of delivering 5 and 2.5 gallon bottles and renting water coolers in the Vancouver area. The assets included the Company’s active customer accounts, three vehicles, and related inventory and equipment. The purchaser paid the Company the sum of $40,000 CDN, and assumed the payment of $89,070 CDN in prepaid water cooler and bottle deposits. The Company also agreed not to compete in any business in British Columbia (Canada) involving the production and sale of 2.5 and 5 gallon water bottles.

Prior Agreements with Avani O2.

The Company previously had entered two significant agreements with Avani O2 which are described below.

Joint Venture Agreement. On February 18, 2000, Avani and Avani O2 entered into a

joint venture agreement, which was later amended on January 15, 2002, January 23, 2003, and April 19, 2004, respectively. The agreement, among other terms, granted Avani O2 licensing rights to establish a bottling facility in Malaysia. Under the agreement, Avani O2 has the right of first refusal to produce and sell the Company’s proprietary water product on a worldwide basis, except for Canada. Avani contributed bottling equipment relating to its proprietary technology to the Malaysian bottling facility. In exchange, the Company received a 2% royalty from all licensed products and initially a 30% before tax profits interest generated by the bottling equipment. Under the April 2004 amendment, the 30% pre tax net profits interest was replaced with a rental fee payable by Avani O2 to Avani equal to 20,000 Malaysian Ringitt (RM) per each bottling line per month plus 0.19RM per 355ml bottle produced (or 0.00054RM per ml) retroactive to January 1, 2003. Each 3.8 RM equals $1.00 USD. As of December 31, 2005, Avani O2 owes Avani $591,283 in respect of the royalty and net profits (now rental) payments due to Avani under the agreement. On July 1, 2005, the Company terminated the joint venture agreement with Avani O2, along with all licensing rights granted to Avani O2.

Asset Sale Agreement. On October 25, 2002, Avani, together with its wholly owned subsidiary, Avani Oxygen Water Corporation entered into a Sale and Purchase Agreement with Avani O2 (“Asset Sale Agreement”). Pursuant to the Asset Sale Agreement, Avani agreed to sell certain the assets of its subsidiary consisting of its real estate, located in Coquitlam, British Columbia, and plant and equipment to Avani O2 for a total consideration of $1,650,000 Canadian Dollars (CDN), subject to other terms and conditions. The total purchase price was payable in 24 monthly instalments of $70,620.00 CDN commencing October 1, 2002 to and continuing on the first date of each month ending September 1, 2004; with a final payment of $220,686.00 CDN due on October 1, 2004. Interest accrued on the unpaid balance at the rate of 8% per annum calculated annually. Accrued and unpaid interest also was due and payable on October 1, 2004. Avani O2 made 24 monthly installments totaling of $1,584,000 CDN (or approximately $1,317,804 USD). However, on October 1, 2004, it failed to make the final payment, with accrued interest, totaling $220,686 CDN (or approximately $183,599 USD) under the Asset Sale Agreement. On December 13, 2004, Avani notified Avani O2 that it has terminated the Asset Sale Agreement, and that all payments were non-refundable under the terms of the Asset Sale Agreement.

Mr. Chin Yen Ong, who is the nephew of the Company’s President, was the largest shareholder of Avani 02 prior to July 1, 2005 when he divested the entirety of his Avani O2 stock. He remains a controlling shareholder of the Company.

As of December 31, 2005, Avani O2 owes the Company $77,386 plus interest of $10,255, and $446,724 plus interest of $56,918 royalty and net profits (and rentals fees), respectively, under the February 18, 2000 joint venture agreement, and $412,338 plus interest of $112,626 in past due payments for products sold to Avani O2.

In connection with the trade payables due to the Company, the Company filed a Garnishing Order Before Judgment against Avani O2 in the Supreme Court of British Columbia (Canada) and garnished $227,356 CDN of funds held by Avani O2 in a Canadian bank. On September 21,

2005, the court granted a default judgment in favor of the Company against Avani O2 for the total sum of $1,108,596 CDN. The amount includes $800,581 ($981,031 CDN) in amounts past due plus $105,733 ($127,565 CND .On October 25, 2005, the Court transferred to the Company the amount of $227,356.73 CDN which was previously garnished by the Company.

The parties continue to discuss a settlement of the outstanding amounts due the Company. However, the outcome of these discussions can not be predicted.

During fiscal 2005, the Company’s operations were adversely impacted by the loss of Avani O2’s business coupled with Avani 02’s non payment of trade payables and amounts due under the joint venture agreement. A significant amount of time was devoted by management during fiscal 2005 towards attempting to negotiate and remedy the outstanding payables with Avani O2 without success. This management effort detracted from the Company’s ability to develop other international sales channels during the 2005 period. As a result of its business dealings with the Malaysian based Avani O2, the Company believes that Malaysia represents a strategic market for its oxygenated water product. Accordingly, during the end of fiscal 2005, the Company determined to wind down its operations in Canada, and re-locate of its operations in Malaysia. As previously disclosed, on March 1, 2006, the Company entered into an agreement to sell its Canadian real estate.

As stated above, on March 1, 2006, the Company entered into an agreement with an independent third party to purchase the Company’s real estate located in Coquitlam, British Columbia. The real estate consists of approximately 14,000 square feet and is comprised of seven separate buildings. The purchase price is $1,226,000.00 CDN ($1,078,390USD), of which $100,000 CDN ($86,300USD) has been paid as a non-refundable deposit. On March 15, 2006, the conditions precedent to the transaction were complied with to the satisfaction of the purchaser. The balance of the purchase price is due and payable at closing. The closing date is May 31, 2006. The Company’s real estate which is being sold has served as the Company’s principal business office and has housed the Company’s manufacturing operations.

If the Company is successful in selling its real estate, the Company intends to transport its proprietary oxygen enrichment equipment to Malaysia during the second or third quarter of 2006, and will attempt to re-establish its manufacturing operations. As of the date of this filing, the Company has not completed a plan of operations for the ensuing 12 month period, which would include a cost analysis of the funds required to re-establish its business in Malaysia. Following the sale of its real estate, and after paying off outstanding liabilities, it is likely that the Company will be required to raise additional funds in order to re-commence operations in Malaysia. The Company expects to complete this plan during the first or second quarter of 2006, and will include the specifics of the plan in the applicable Form 10-QSB. At this time, the Company has not entered into any binding arrangements regarding its intended Malaysian re-location. Product sales during the first quarter of 2006 have been limited. Moreover, the Company does not expect any meaningful sales from its Canadian facility in the future.

In addition to relocating its operations to Malaysia, the Company intends to aggressively explore other business opportunities for purposes of effecting a business acquisition or combination. At

this time, the Company has no plan, proposal, agreement, understanding or arrangement to acquire or merge with any specific business or company. In implementing a structure for a particular business acquisition, the Company may become a party to a merger, consolidation, reorganization, joint venture, franchise or licensing agreement with another corporation or entity. It also may purchase stock or assets of an existing business. If a transaction is consumated, it is possible that the present management and shareholders of the Company will not be in control. . If a transaction is consumated, it also is possible that the Company may be required to sell or spin-off its water business. Substantial dilution may result to existing shareholders upon consumation of such a business combination.

Regulation of Bottled Water Industry.

The Company's bottled water business is subject to various laws and regulations implemented by the Canadian government and local regulators, which require the Company, to obtain licenses for its business and equipment, to be subject to annual inspections, to comply with certain quality standards regarding the Company's bottling plant and equipment, and to continuously control the quality of water sold by the Company. In addition, certain other governments and states within the United States require the Company to obtain certification of its bottled water. The Company believes that it is currently in compliance with these laws and regulations and has passed all regulatory inspections necessary for it to sell its product in its current markets. In addition, the Company will seek approval from other governmental and state agencies in the event its geographical market expands. The Company believes that the cost of compliance with applicable governmental laws and regulations is not material to its business.

Bottled Water Market.

The growth of the world’s bottled water market has increased to 55 billion liters or 14.6 billion US gallons from 1997 to 2002 which total reached to 144 billion liters of bottled water in 2002. Zenith International projected that the continuous growth of the global bottled water consumption from 2002 to 2007 will jump to 200 billion liters. The sizable contribution is made by the developing countries but the intensive growth of consumption is from the developed world, especially North America.

In 2002, the average consumption per capita is around 23 liters whereas it was only a little over 15 liters per person in 1997. Particularly in Western Europe and North America, the annual bottled water consumption rates per person are four and three times respectively to the global average.

Germany, Italy and France are the larger population markets with a long established tradition of bottled water consumption. In spite of the mature market, the consumption keeps on growing. The average annual consumption per western European has increased from 20 liters in 1997 to more than 100 liters in 2002.

The bottled water consumption rate per North American per year is just behind the Western Europeans. The average annual consumption per North American was 15 liters in 1997 and

jumped to 75 liters in the course of 5 years to 2002. In spite of long strong home and office

delivery market in the United States and Canada, the growth of convenience offerings sharply boosted up the volume sales from around 15 billion liters or 4 billion US gallons to nearly 24 billion liters or 6.3 billion US gallons in year 2002. According to the Survey for the International Bottled Water Association in 2000, it concluded that bottled water (1.7 eight-ounce servings) is the third most consumed beverage based on average daily consumption, just behind filtered/non-filtered water (3.6 servings per day) and coffee (1.8 servings per day). Volumes in the 420 million citizen zone (including Mexico) stand at over 37 billion liters, giving an average of 89 liters per person in 2002.

Affluence rather than climate is the primary factor to determine the consumption of bottled water especially in the developing world. Asian consumption increases from 4.4 liters per person per year in 1997 to 10 liters per capita per year in 2002 whereas Africans only consume 3 liters per person per year. South American countries especially in Mexico and Brazil and oil-rich Middle Eastern countries are high bottled water consumers.

The growth of 55 billion liters bottled water consumption is contributed by more than 30% from Asia Pacific, 15%-16% from each of North America, South America and Western Europe, 11% from Africa and the Middle East and 7.5% from Eastern Europe. (Source: Bottled Water Reporter October/November 2003)

The oxygenated water market has been established in North America for a number of years. Although it remains principally niche product which targets a limited consumer base, it is still growing in double digits in the region in which it was first pioneered. [Source: Zenith Strategic Review Report on Oxygenated Water – February 2003]

Oxygenated water has not seen an explosion of consumption from its early adoption years. The Company believes that potential continues to exist for strong market growth fueled by health conscious consumers desiring premium beverages which are perceived to provide a clear functional benefit. Sports and vitamin based drinks are increasing in popularity on the back of the booming sports and health supplement industry. The calorie free nature of oxygenated water places it on a strong footing against sports drinks in particular.

The Company believes its product appeals to consumers of premium bottled water products and believes that its purity as well as its oxygen enrichment offers a distinct alternative to other premium bottled waters.

Product and Product Features.

In the past, the Company has manufactured and sells its purified, oxygen enriched water in 500 ml and 1.5 liter PET bottles and 2.5 and 5 gallon bottles under the trade name "Avani Water".

Avani Water contains less than 2 parts per million (ppm) of total dissolved solids (tds). The tds level of Avani water contrasts with other more recognizable products such as Evian water at 309

ppm of tds and Perrier water at 505 ppm of tds. Many regional spring waters fall between 45 and 600 ppm of tds. Total dissolved solids include metals such as iron, copper, and lead, and organic substances such as herbicides and pesticides. The limited tds content of Avani Water is achieved through a comprehensive filtration process used by the Company. The Company believes that this filtration process together with other aspects of its bottling process (reverse osmosis, carbon filtration and oxygen enrichment) enables the Company to deliver a smoother, more polished water when compared to most other bottled waters.

The Company's unique oxygenation process yields a water containing 26.4 mg/L (or 26.4 ppm) of dissolved oxygen which is approximately three times higher than the oxygen content level in Evian brand water or ordinary tap water. Internal tests performed by the Company indicate that 24 hours after opening a sealed bottle of Avani Water, the oxygen content is reduced to approximately 24 ppm. Ordinary water and most bottled water (unopened) contain less than 9 ppm of oxygen.

During fiscal years ending December 31, 2005 and December 31, 2004, the Company had no research and development costs.

Manufacturing Process.

The Company purchases its water from the local municipality which is piped to a holding tank located on premises. From the holding tank, the water flows through the bottling process at constant pressure. The water initially passes through a 10 micron filter to remove the larger solids and then passes through a series of finer media filters to remove solids greater than 2 microns in size including inorganic metals such as iron, copper and lead. The water then passes through ozonation and carbon filtration processes. Ozonation is the strongest disinfectant and oxidizing agent available for water treatment and is a standard disinfectant for bottled water processing. Activated carbon filtration removes organic compounds such as pesticides and herbicides and associated tastes and odors. The water next passes through a seven membrane reverse osmosis process which removes particles greater than 0.001 micron. The water is demagnetized to remove remaining metals and is exposed to ultraviolet light for aseptic purposes. The water is then placed in a storage tank where high volumes of oxygen (O2) is injected into the purified water under pressure creating an oxygen enriched water product. Following the oxygen enrichment process, the water is piped to the "clean room." The "clean room" is a completely enclosed room with an over-balanced ventilation system which feeds filtered, sterile air to the room. There, the water product is automatically bottled in pre-rinsed bottles, capped and labeled. The bottles are directed to a case packer which automatically loads the bottles into shipping cases for distribution.

For quality assurance purposes, the Company tests its product every two hours at various points in the bottling process, including its finished products.

The Company purchased the plant equipment in Canada in 1996. The bottling equipment which includes a conveyor system together with an automatic rinsing, filling, capping, labeling and

casing system, allows production of approximately 100 to 130 bottles per minute of the 500 ml bottles, 30 to 40 bottles per minute for the 1.5 liter bottles and 300 bottles per hour of the five gallon bottle. The Company is able to produce either the 500 ml or 1.5 liter bottles simultaneously with the production of the 5 gallon bottles. The conversion time to one of the PET sizes from the other requires approximately one hour. As of December 31, 2005, the plant is operating at 30% capacity using one 40 hour shift. An additional 40 hour shift can be added to increase production capacity.

The overall working condition of the Company’s plant and equipment in Canada and Malaysia is good to excellent. All of the bottling equipment will operate reliably at the maximum capacity rated by each respective manufacturer. The Company’s trucks and forklifts are all in good working condition.

The Company is a member in good standing of NSF International and the International Bottled Water Association.

Sales and Distribution.

The Company’s products have been sold in the greater Vancouver metropolitan area and internationally, from time to time, mainly in the United States, Malaysia, and Japan. During 2004, substantially all of the Company’s international sales were made through Avani O2 in Malaysia, and to a lesser extent through independent distributors located in Japan and Singapore. During 2005, no product sales were made to Avani O2. Substantially all of the Company sales during 2005, albeit limited, were to the United States and Canada.

During 2004 and part of fiscal 2005, the Company provided delivery of 2.5 and 5 gallon bottles in the Vancouver metropolitan area to business and residential customers, and sells 500 ml and 1.5 liter PET bottles directly to retail outlets in the Vancouver area. During 2004, revenues from its 2.5 and 5 gallon bottles accounted for $203,192 or approximately 25% of total water sales. During 2005, revenues from this segment accounted for $123,124 or approximately 40% of total water sales. As previously disclosed, on July 15, 2005, the Company sold to an unaffiliated third party its local business of delivering 2.5 and 5 gallon bottles and renting water coolers.

As of the date of this report, the Company has not formulated a sales development plan for 2006. The sales development plan will be incorporated in the Company’s plan of operations which, as described above, is expected to be completed during the first or second quarter of 2006 and will be incorporated in the applicable Form 10-QSB.

During January 2001, Avani contracted with Mr. Chin Yen Ong, as a consultant in Malaysia, to market and promote its products to the Asian market. In exchange, the Company agreed to pay Mr. Ong the sum of $10,000 CDN per month and to re-imburse all reasonable and customary business expenses not to exceed $1,000 per month. On July 15, 2002, as previously reported by the Company, an agreement was entered into with Mr. Ong pursuant to which the outstanding amount of $124,800 owed to Mr. Ong was cancelled in exchange for issuing 4,160,000 shares of

common stock of Avani and stock purchase warrants to acquire 12,480,000 shares of common stock of Avani. Mr. Ong was a controlling shareholder of Avani O2 until July 1, 2005 when he divested himself of his entire equity position in Avani O2. As of December 31, 2005, Mr. Ong is a controlling stockholder of the Company. Mr. Ong is the nephew of the Company’s President. The agreement with Mr. Ong was terminated on January 1, 2005. As of December 31, 2005, the total outstanding consulting fee payable to Mr. Ong is $275,150 ($320,000 CDN).

Backlog.

The Company had no backlog for the year ended December 31 2005. There is no seasonal impact on the Company's worldwide sales.

Facilities.

Avani maintains its production facilities at its corporate headquarters located at 328-17 Fawcett Road, Coquitlam, British Columbia (Canada) V3K 6V2. The total facilities of the Company in Canada comprise 14,000 square feet, of which 11,200 square feet is dedicated to production and storage, and the remainder dedicated to its administrative offices.

Competition.

The bottled water industry is extremely competitive and populated by a significant number of large regional, national, and international companies. Well established names in the industry, include Evian and Naya, as well as a significant number of regional products. Many of these companies maintain significantly greater resources (including financial, technical and personnel) in all aspects of business than those available to the Company. In addition, their products have achieved enormous consumer acceptance and loyalty. The principal competitive factors in the bottled water industry are price, taste, packaging, name recognition and water source. However, the Company believes that its smooth taste and its unique oxygen enrichment will enable it to sufficiently compete against other non-oxygenated products in the market.

Product Liability.

The Company is engaged in a business which could expose it to possible claims for personal injury resulting from contamination of its water. While the Company believes that through its regular product testing it carefully inspects the quality of its water, it nonetheless may be subject to exposure due to customer or distributor misuse or storage. The Company maintains product liability insurance against certain types of claims in amounts which it believes to be adequate. The Company also maintains an umbrella insurance policy that it believes to be adequate to cover claims made above the limits of its product liability insurance. Although no claims have been made against the Company or its distributors to date and the Company believes its current level of insurance to be adequate for its present business operations, there can be no assurances

that such claims will not arise in the future or that the Company's policies will be sufficient to pay for such claims.

Proprietary Rights.

The Company has not sought patent protection for its proprietary oxygen enrichment process, rather, it relies, to the extent it can, upon trade secrets to protect its proprietary process.

Environmental Laws.

The Company is subject to various foreign, federal, state and local environmental protection and health and safety laws and regulations in connection with its manufacturing facilities located in Coquitlam, British Columbia. Accordingly, we incur and will continue to incur some costs to comply with these laws and regulations. Based on available information, the Company believes it is not responsible or liable for any environmental contamination and the Company currently does not anticipate that the costs of complying with environmental laws and regulations will be significant. However, the Company cannot guarantee that it will not incur material costs or liabilities in the future, due to the discovery of new facts or conditions, releases of hazardous materials, or a change in environmental laws and regulations.

Employees.

As of December 31, 2005, Avani has 7 employees in total, of which 5 are full time including the Company’s President. The Company has no collective bargaining agreements with its employees and believes its relations with its employees are good.

Item 2. Description of Property.

Avani maintains its main production facilities and its corporate headquarters at #328-17 Fawcett Road, Coquitlam, British Columbia (Canada) V3K 6V2. The total facilities of the Company comprise 14,000 square feet, of which 11,200 square feet is dedicated to the production and storage facilities and the remainder is dedicated to its administrative offices.

As discussed elsewhere herein, Avani, together with its wholly owned subsidiary, Avani Oxygen Water Corporation, entered into the Asset Sale Agreement with Avani O2, pursuant to which Avani agreed to sell to Avani O2 its subsidiary’s certain assets, which includes its real estate. On December 13, 2004, Avani notified Avani O2 that it terminated the Asset Sale Agreement and both parties have entered into discussions to resolve the matter.

On March 1, 2006, the Company entered into an agreement with an independent third party to purchase the Company’s real estate located in Coquitlam, British Columbia. The real estate consists of approximately 14,000 square feet and is comprised of seven separate buildings.

The purchase price is $1,226,000.00 CDN ($1,078,390USD), of which $100,000 CDN ($86,300USD) has been paid as a non-refundable deposit. On March 15, 2006, the conditions precedent to the transaction were complied with to the satisfaction of the purchaser. The balance of the purchase price is due and payable at closing. The closing date is May 31, 2006.

Item 3. Legal Proceedings.

None

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

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

The table below sets forth the high and low bid prices of the Common stock of the Company as reported by NASDAQ. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. The Company's common stock is listed on the NASDAQ OTC Bulletin Board under the symbol "AVIT.” There is an absence of an established trading market for the Company's common stock, as the market is limited, sporadic, and highly volatile. The absence of an active market may have an effect upon the high and low price as reported.

2004

Low Bid

High Bid

1^st Quarter

0.05

0.75

2^nd Quarter

0.21

0.75

3^rd Quarter

0.11

0.34

4^th Quarter

0.07

0.20

2005

Low Bid

High Bid

1^st Quarter

0.05

0.07

2^nd Quarter

0.05

0.08

3^rd Quarter

0.05

4^th Quarter

0.05

0.06

2006

Low Bid

High Bid

1^st Quarter

0.05

0.06

As of April 1, 2006, the Company had 729 shareholders of record of our common stock. Although there are no restrictions on the Company’s ability to declare or pay dividends, the Company has not declared or paid any dividends since our inception and do not anticipate paying dividends in the future.

The Company’s Equity Compensation Plan Information as of December 31, 2005 is set forth below.

Equity Compensation Plan Information
Plan category	Number of securities 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 securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	0	0	0
Equity compensation plans not approved by security holders (1)	1,000,000	$0.05	1,000,000
Total	1,000,000	$0.05	1,000,000

(1). On June 10, 2003, stock options with rights to acquire a total of 1,300,000 shares of common stock of the Company were granted to three individuals who are employees or consultants of the Company. Of the total amount, 300,000 were cancelled during 2005. The total amount vested on the grant date. The options enable the holder to acquire the common stock of the Company at a price of $0.05 per share during the option term. The options expire on the earlier of; three years from the grant date, the date the employee or consultant’s relationship with Avani is terminated for “cause,” 30 days after the date the employee or consultant’s relationship with Avani is terminated for reasons other than “cause,” immediately upon receipt of written notice from Avani terminating any unvested Options and unexercised Options, or the death or disability of the party. (See “Item 12 Certain Relationships and Related Transactions”).

The Company had no recent sales of unregistered securities not previously reported. In addition, during fiscal 2005, the Company made no purchases of equity securities meeting the requirements of Item 7.03 of Regulation S-B.

Item 6. Management's Discussion and Analysis.

As discussed elsewhere herein, the Company has had significant business relationships with Avani O2 Water Sdn. Bhd. (“Avani O2”), a Malaysian company. In addition, Avani O2 was formerly controlled by a significant shareholder of the Company.

As described in the Notes of the Company’s consolidated audited financial statements included herein, the Company was the primary beneficiary of Avani O2, a variable interest entity (“VIE”)

as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46R for the fiscal period ended December 31, 2004. Accordingly, the Company consolidated Avani O2 in the results for the 2004 period. All material inter-company balances and inter-company transactions have been eliminated. The financial statements as of December 31, 2005 include the accounts of the Company and its subsidiaries only.

During 2005, due to the Company’s termination of the joint venture and asset sale agreements between the parties and the divestiture of the his ownership in Avani O2 by the Company’s largest shareholder, the Company no longer considers Avani O2 to be a VIE of the Company. Consequently, the results of operations and the financial position of the consolidated accounts of the Company for fiscal 2005 includes the Company and only its two wholly owned subsidiaries; Avani Oxygen Water Corporation, and Avani International Marketing Corporation.

The following discusses the results of operations and the financial position of the consolidated accounts of the Company, and its two wholly owned subsidiaries for the period ended December 31, 2005. As discussed above, Avani O2 was considered to be a VIE for the 2004 period and its operations have been consolidated into the operations of the Company commencing in the first quarter of 2004 in accordance with US GAAP. The cumulative effect of the accounting change has been recorded in the Statement of Operations and Comprehensive Loss for the period ended December 31, 2004. Accordingly, decrease in expenses between the year end periods of December 31, 2005 and 2004 are principally due to the consolidation of Avani O2 in the 2004 period. Segmented information by geographic area is included in Note 13 of the consolidated audited financial statements. Readers should consider the effect of such change in accounting policy and the limitations on balance sheet resources when reviewing the discussion below.

The 2004 results from operations were not restated to remove the results of Avani O2. Therefore, due to the fact that the results of 2004 includes the operations of Avani O2, the year to year comparisons set forth below will not be representative of the actual changes in the Company’s operations for such periods.

Results of Operations.

Fiscal year end 2005 compared with Fiscal year end 2004.

Revenues for fiscal year ended December 31, 2005 were $307,194 representing a decrease of $2,180,480 or 87.7% from revenues of $2,487,674 for the comparable period in 2004. The Company’s revenues in 2005 consisted of $295,668 in water and supply sales (a decrease of $2,026,831 or 87.3% from $2,322,499 for the prior period), and $11,526 in cooler rentals and equipment sales (a decrease of $154,189 or 93 from $165,175 for the prior period). During 2005, all of its total water sales were national sales contrasted with 2,012,333 or 87% of total water sales which were international sales in 2003. The significant decrease in revenues reflects the deterioration and ultimately the termination of the business relationship with Avani O2, as well as the de-consolidation of Avani O2 as a VIE, all of which occurred during the 2005 period.

Cost of revenue for the 2005 period totaled $349,948 or 114% of total revenue contrasted with

$1,667,125 or 67% of total revenue for the 2004 period. Cost of revenue in 2005 consisted of $194,396 in direct materials (bottled water, supplies, coolers and related equipment), labor, production overhead, and delivery costs (a decrease of $1,254,569 or 86.6% from $1,448,965 for the prior period) and $155,552 in depreciation (a decrease of $62,608 or 28.7% from $218,160 for the prior period). The decrease in cost of revenue as a percentage of sales for the 2005 period reflects the impact of fixed costs on significantly reduced revenues. Gross profit for the 2005 period was ($42,754) for the 2005 period contrasted with $820,549 for the prior 2004 period for the reasons discussed above.

Operating expenses which include marketing expenses and general and administrative expenses for the 2005 period totaled $587,729 representing a decrease of $408,613 or 41% from $926,071 for the prior period. Marketing expenses totaled $64,033 for the 2005 period, representing a decrease of $51,293 or 44.5% from $115,326 for the prior period. The decrease in marketing expenses reflects the result of the Company’s decision to reduce overall international marketing efforts. General and administrative expenses totaled $580,860 for the 2005 period, representing a decrease of $229,885 or 28.3% from $810,745 for the 2004 period. General and administrative costs in 2004 includes salaries to officers and employees and other office expenses of Avani O2, which amounts are not reflected in the 2005 amounts. No research and development costs were incurred in 2005 or 2004. During 2005, the Company has a gain on the sale of assets in the amount of $109,024 from the sale of its water delivery business in Vancouver. In 2004, the Company had a loss on the sale of assets in the amount of $90,805 due to the sale of certain machinery. The Company experienced a foreign exchange gain of $51,860 in 2005 compared with $0 in 2004.

Interest expense on outstanding loans totaled $6,942 for the 2004 period, representing a decrease of $339 or 4.9% from $6,942 for the prior period. Loss from the discontinued operations in 2005 which consists of a write off of outstanding payables due from Avani O2 and equipment held by Avani O2 was $710,591. Miscellaneous income which represents unclaimed customer security deposits of $51,573 for the 2005 period representing a decrease of $2,857 from $54,611 for the prior year.

Non-controlling interest of ($598,796), which represents the net profit from Avani O2’s operations and is deducted from the consolidated results to determine the net loss (prior to change in accounting policy) of $856,832 for the 2004 period. No such adjustment was made in 2005 as the results of operations of the Company were not consolidated with Avani O2. Cumulative effect of change in accounting policy of ($91,664) for 2004 reflects the non-controlling interest of Avani O2 as at January 1, 2003, the adoption of FIN 46R.

Net loss before extra-ordinary income was $1,295,923 for the 2005 fiscal period compared with $948,496 for the 2004 period for the reasons discussed above.

In 2005, the Company recorded an extra-ordinary gain of $1,361,995 relating to the payments received from Avani O2 under the Asset Sale Agreement which were forfeited by Avani O2 under the terms of the agreement. Net gain for the 2005 period was $66,072 compared with a net loss of ($948,496) for the 2004 period. Foreign currency adjustment in 2005 was $12,272

contrasted with $62,615 in 2004. Comprehensive gain loss for the 2005 period was $78,344 or $0.01 per share for the 2005 period contrasted with ($885,881) or ($0.07) per share.

Liquidity and Capital Resources.

Since its inception, the Company has financed its operations principally through the private placement of its common stock. In 2002, the Company raised a total of $75,750 from the private placement of its common stock and warrants. In 2002, the Company also satisfied an outstanding payable in the amount of $124,800 in favor of Mr. Chin Yen Ong in exchange for the issuance of its common stock and warrants which resulted in Mr. Ong obtaining a controlling interest in the Company. In August 2003, the Company completed two separate transactions pursuant to which the Company sold 2,500,000 (a total of 5,000,000) shares of common stock of the Company at a price per share equal to $0.06 and received a consideration of $150,000 (a total of $300,000). In connection with the share issuance, the Company agreed to pay a finder's fee to a third party equal to 10% of the gross proceeds, totaling $30,000 in cash and 1,500,000 share purchase warrants.

Working capital as of December 31, 2005 was ($689,792) compared with working capital as of December 31, 2004 of $702,917. The decrease in working capital for 2005 reflects the de-consolidation of the accounts of Avani O2 from the prior period.

Total assets as of December 31, 2005 were $1,230,134 an increase of $1,296,681 from total assets of $2,526,815 as of December 31, 2004.

Property, plant and equipment, net of accumulated depreciation, totaled $916,246 on December 31, 2005. Property, plant and equipment, net of accumulated depreciation, totaled $1,357,893 on December 31, 2004. The decrease is due to depreciation and the de-consolidation of Avani O2.

The Company continues to experience significant losses from operations. The Company is uncertain as to when it will achieve profitable operations. As discussed herein, the Company has entered into an agreement to sell its real estate located in Canada and intend to re-locate is water manufacturing business to Malaysia. The Company intends to use the proceeds from the sale of its real estate to fund re-location efforts, and to fund in initial operating capital. At this time, the Company has not completed it plan of operations, however, it is likely that the Company will need additional capital to re-commence operations in Malaysia. However, it can not predict the exact amount of such funds.

If the Company is required to raise additional funds, it likely will attempt to do so pursuant to the private placement of debt or equity. The private placement of its capital stock may result in significant dilution to shareholders (See disclosure relating to cautionary statements below). At this time, the Company has no commitments for any such financing, and no assurances can be given that the Company will be successful in these endeavors. If the Company is unsuccessful in raising required funds, it will have a material adverse impact on the Company and its ability to conduct its business in the future. Accordingly, the Company’s financial statements contain note

disclosures describing the circumstances that lead to doubt over the ability of the Company to continue as a going concern. In their report on the consolidated financial statements for the year ended December 31, 2005, the Company’s independent registered accountants included an explanatory paragraph regarding the Company’s ability to continue as going concern.

Off-Balance Sheet Arrangement

As the Company has adopted FIN 46R effective January 1, 2004, there are no off-balance sheet arrangement at the end of the 2005 fiscal year.

Critical Accounting Policies.

Revenue Recognition. Revenue on sales of bottled water, coolers and equipment is recognized when the products are delivered and title transfers to customers. Sales terms generally do not permit a right of return. Revenue from leasing of water coolers and filters is accounted for as operating leases and, accordingly, rental income is reported over the terms of the leases.

Deposits received for bottles and coolers are accrued as liabilities until refunded upon return of bottles and coolers. Freight charges billed to customers are included in Revenue while associated freight costs are included in Cost of Revenue.

As described in Note 4, the Company was entitled to receive from Avani O2 (see “Change in Accounting Policy” of the financial statements) a 2% royalty on all revenue and 30% of the before tax profits (Net Profits Interest) (replaced by a rental fee as amended in 2004) generated by the bottling line located in Malaysia. The Company will recognized royalty income from this bottling line, if any, when collection is reasonably assured. As part of the settlement of the loan payables from two lenders (Note 7), the Company assigned certain of its rights to the Net Profits Interest or rental fee referred to above to these lenders. The Company will recognize the revenue from the Net Profits Interest or rental fee and reduce the amount of obligation payable related to the assignment of such interest, if any, when the lenders receive their assigned Net Profits Interest or rental fee payments. For the years ended December 31, 2004, these transactions were eliminated upon consolidation.

Stock-based Compensation. The Company applies SFAS No. 123, “Accounting for Stock-Based Compensation for Non-Employees” and has elected to continue to measure compensation cost for employees under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Generally, under APB 25, compensation cost is recognized for stock options granted to employees at prices below the market price of the underlying common stock on the date of grant.

SFAS No. 123, requires the Company to provide pro-forma information regarding net income as if compensation cost for the Company's stock options granted to employees had been determined in accordance with the fair value based method. The value of stock options granted to consultants is recognized in these consolidated financial statements as compensation expense using the Black-Scholes option pricing model. Such compensation is amortized over the contract

services period or, if none exists, from the date of grant until the options vest. Compensation associated with unvested options is remeasured on each balance sheet date using the Black Scholes option pricing model.

SFAS 148 “Accounting for Stock-Based Compensation—Transition and Disclosure“ amends the disclosure requirements of SFAS 123 so that entities will have to make more prominent disclosures regarding the pro forma effects of using the fair value method of accounting for stock-based compensation, Accordingly, the pro-forma information as described in SFAS 123 are disclosed in the Summary of Significant Accounting Policies and Note 9 of the financial statements.

Valuation and Disposition of Long-lived Assets. The Company evaluates the future recoverability of its property, plant and equipment and trademarks and licenses in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 144 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the estimated undiscounted future cash flows attributable to such assets. It requires that those long-lived assets to be disposed of by sale are to be measured at the lower of carrying amount or fair value less cost of sale whether reported in continuing operations or in discontinued operations. No impairment was required to be recognized during the periods presented in these consolidated financial statements

SFAS No. 144 also requires that long-lived assets to be disposed of by sale continue to be classified as assets held-and-used until such time that all of the criteria for classifying assets as held-for-sale are met. Accordingly, those long-lived assets that are included in the sale agreement with Avani O2 are continued to be classified as Property, Plant and Equipment on the consolidated balance sheet.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (1) the equity investors do not have a controlling financial interest; or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for public entities that are small business issuers, as defined ("SBIs"), are as follows: (a) For interests in special-purpose entities: periods ended after December 15, 2003; (b) For all VIEs created before January 31, 2003: periods ending after December 15, 2004; and (c) For all VIEs created after January 31, 2003, FIN 46 is applicable immediately. The December 2003 amendment of FIN No. 46 also includes transition provisions that govern how an SBI which previously adopted the pronouncement (as it was originally issued) must account for consolidated VIEs.

Avani O2 was incorporated in July 1999 in Malaysia mainly to explore the opportunities of developing and marketing bottled water in South East Asia. In 2000, Avani O2 entered into a joint-venture agreement with The Company for the world-wide rights and licenses, except in Canada, to access and use for all purposes the Company’s technology of producing oxygen enriched bottled water. Avani O2 is considered a VIE of The Company because, pursuant to the joint-venture agreement, the Company is entitled to, among other things, receive a 2% royalty on all revenue from all licensed products and 30% of the before tax profits generated by the bottling line contributed by the Company to Avani O2 (replaced by a rental fee as amended in 2004) and to appoint two of the three directors on the Board of Directors of Avani O2. As a result, it was determined that the equity investors of Avani O2 did not have a controlling financial interest in Avani O2 and the Company is the primary beneficiary of Avani O2, the VIE. According to the above-noted requirements, the Company consolidated Avani O2 for the fiscal 2004 period. On July 1, 2005, the Company terminated the joint venture with Avani O2. Effective July 1, 2005, as a result of the Company terminating the joint venture agreement with Avani O2, changes in Avani O2’s equity holding and other matters, management of the Company has determined that the Company no longer meets the criteria of being a primary beneficiary (as described under FIN No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB51”) of Avani O2 and as such, is no longer required to consolidate the financial information of Avani O2.

New Accounting Pronouncements.

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123(R) would require the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. For public entities that file as a small business issuer, SFAS No. 123(R) is effective for the first interim or annual reporting period beginning after December 15, 2005.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs: an Amendment of ARB 43, Chapter 4” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires that these items be recognized as a current period charge regardless of whether they meet the criterion specified in ARB 43. In addition, this statement requires the allocation of fixed production overheads to the facilities. SFAS No. 151 is effective for financial statements for fiscal years beginning after June 15, 2005.

In December 2004, the FASB issued SFAS No. 153 to amend Opinion 29 by eliminating the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange is defined to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.

The Company is assessing the effect that the implementation of these new standards will have on the consolidated financial statements.

Disclosure Regarding Forward Looking and Cautionary Statements.

Forward Looking Statements. Certain of the statements contained in this Annual Report on Form 10-KSB include "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical facts included in this Form 10-KSB regarding the Company's financial position, business strategy, and plans and objectives of management for future operations and capital expenditures, and other matters, are forward looking statements. These forward-looking statements are based upon management's expectations of future events. Although the Company believes the expectations reflected in such forward looking statements are reasonable, there can be no assurances that such expectations will prove to be correct. Additional statements concerning important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed below in the Cautionary Statements section and elsewhere in this Form 10-KSB. All written and oral forward looking statements attributable to the Company or persons acting on behalf of the Company subsequent to the date of this Form 10-KSB are expressly qualified in their entirety by the Cautionary Statements.

Cautionary Statements. Certain risks and uncertainties are inherent in the Company's business. In addition to other information contained in this Form 10-KSB, the following Cautionary Statements should be considered when evaluating the forward looking statements contained in this Form 10-KSB:

1. UNCERTAIN FUTURE OF COMPANY’S BUSINESS. As mentioned herein, following the sale of its Canadian real estate, the Company has determined to re-locate its business to Malaysia. While the Company believes that significant demand exists in Malaysia for its oxygenated water, since its inception, the Company, except for a brief period in which it sold products through Avani O2, has been unable to establish any meaningful sales of its water product. Accordingly, the Company cannot predict with certainty the future of its business.

2. . NEED FOR ADDITIONAL CAPITAL/SIGNIFICANT DILUTION. The Company has not completed its plan of operations for the next 12 months. It is likely, however, that the Company will need additional capital in order to re-establish and then maintain operations. No assurances can be given that the Company will be successful in raising the capital necessary for both near term and future operations. In addition, if the Company is successful in raising additional funds, it is likely that any such additional capital will be in the form of the sale and issuance of the Company’s common stock. The sale and issuance of common stock may substantially increase the number of shares of common stock outstanding and cause significant dilution to shareholders. If the Company is unsuccessful in raising additional capital, it likely will preclude the Company’s ability to re-commence and maintain operations in Malaysia.

3 SEEKING OTHER BUSINESS OPPORTUNITIES. As a result of the termination of its business relationship with Avani O2, the Company is seeking to acquire other business opportunities by merger, share exchange or other combination. However, at this time, the Company has no plan, proposal, agreement, understanding or arrangement to acquire or merge with any specific business or company, and Company has not identified any specific business or company for investigation and evaluation. In the event the Company does acquire a business opportunity, a change of control of the Company may result. The change of control may occur through the issuance of common stock to the owners of the acquired company which may exceed greater than fifty percent of the Company’s total issued and outstanding capital stock. Generally, the amount of stock issued in such a transaction results in significant dilution to existing shareholders. In addition, the officers and directors of the acquired company may replace part or all of the existing officers and directors. The Company cannot predict when or if an acquisition will occur, or if it does occur, whether it will result in profitable operations.

4. LIMITED DISTRIBUTION CHANNELS. As of December 31, 2005, the Company has limited distribution channels in its markets. Following the relocation of its operations in Malaysia, it will be required to seek a new distribution base for its product. Although the Company continues to seek distributors to advance sales, to date it has been unsuccessful in establishing any meaningful distributor arrangements.

5. COMPETITION. The bottled water industry is extremely competitive and populated by a significant number of large regional, national, and international companies. Many of these companies maintain significantly greater resources (including financial, technical and personnel) in all aspects of business than those available to the Company. In addition, many of its competitors’ products have achieved enormous consumer acceptance and loyalty. The principal competitive factors in the bottled water industry are price, taste, packaging, name recognition and water source. Although the Company believes that its smooth taste and its unique oxygen enrichment offers a competitive distinction in the bottled water market, to date the Company has been unable to effectively compete in this market.

6. PENNY STOCK REGULATION. The Company's common stock is deemed a "penny stock" under federal securities laws. The Securities and Exchange Commission has adopted regulations that define a "penny stock" generally to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These regulations impose additional sales practice requirements on any broker/dealer who sells such securities to other than established investors and accredited investors. For transactions covered by this rule, the broker/dealer must make certain suitability determinations and must receive the purchaser's written consent prior to purchase. Additionally, any transaction may require the delivery prior to sale of a disclosure schedule prescribed by the Commission. Disclosure also is required to be made of commissions payable to the broker/dealer and the registered representative, as well as current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account of the customers and information on the limited market in penny stocks. These requirements generally are considered restrictive to the purchase of such stocks, and may limit the market liquidity for such securities.

7. VOLATILE PRICES AND LIMITED VOLUME FOR THE COMPANY’S COMMON STOCK. Historically, there has been a limited trading market for the Company’s common stock. The price of the common stock has been extremely volatile. Due to the low price of the common stock, many brokerage firms may refrain or be prohibited from trading in the Company’s common stock. This could have an adverse effect on sustaining any market for the Company’s common stock. Consequently, shareholders may not be able to sell their shares at a desirable time, if at all.

Item 7. Financial Statements.

The Financial Statements that constitute Item 7 of this Annual Report on Form 10-KSB are included in Item 13 below.

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

On February 28, 2006, BDO Dunwoody LLP (BDO Dunwoody) resigned as the Company’s independent auditor. Since its engagement on December 18, 2000 to its resignation on February 28, 2006, BDO Dunwoody had acted as the Registrant’s independent registered public accounting firm. The reports of independent registered public accounting firm of BDO Dunwoody on the consolidated financial statements of the Registrant and its subsidiaries for the years ended December 31, 2004 and December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles, except for the explanatory paragraph regarding the substantial doubt on the Company’s ability to continue as a going concern relating to the reports for the years presented. The resignation by BDO Dunwoody was accepted by Registrant’s board of directors.

During the years ended December 31, 2004 and December 31, 2003 and subsequent period through to February 28, 2006, there were no disagreement with BDO Dunwoody on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of BDO Dunwoody, would have caused it to make reference to the subject matter of the disagreement in connection with its report; nor has BDO Dunwoody ever presented a written report, or otherwise communicated in writing to the Registrant or its board of directors the existence of any “reportable event or default” as defined in (iv) of Regulation S-B Item 304 (a)(1).

BDO Dunwoody has provided the Registrant with a letter addressed to the Securities and Exchange Commission as required by Item 304(a)(3) of Regulation S-B, so that Registrant can file such letter with the Commission. The letter is attached as an exhibit hereto

On March 6, 2006, the Company appointed, as its new auditor, Jeffrey Tsang & Co., Certified Public Accountants, whose address is Unit B, 15/F, Englong Commercial Building, 184 Nathan Road, Kowloon, Hong Kong. The effective date of engagement agreed to by the parties is March 6, 2006.

The Company did not consult with the new auditor on the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company’s financial statements.

Item 8A. Controls and Procedures.

Under the supervision and with the participation of management, including the Company’s President and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operations of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, 2005 for the Form 10-KSB. Based on this evaluation, the Company’s President and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission ("SEC") reports is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms relating to the Company’s reporting obligations, and was made known to them by others within the Company, particularly during the period when this report was being prepared. In addition, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company’s fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting.

PART III

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

The directors and executive officers of the Company, their ages, and the positions they hold are set forth below. The directors of the Company hold office until the next annual meeting of stockholders of the Company and until their successors in office are elected and qualified. All officers serve at the discretion of the Board of Directors.

Director/

Officer

Name

Age

Since

Position

Robert Wang

1999

President and Director

Dennis Robinson

1999

Secretary, Treasurer and

Director

Jeffrey Lightfoot

1999

Director

---------------------------------------------------------------------------------------------------------------------

Robert Wang – Mr. Wang has been President and Director of the Company since August 1999. From 1992 to May 2002, Mr. Wang was president and director of Multiplex Technologies Inc., a Canadian public company involved in real estate development.

Dennis Robinson – Mr. Robinson has been a Director of the Company since May 1999, and Secretary and Treasurer of the Company since August 1999. From 1991 to the present, Mr. Robinson has maintained a public accounting practice in North Vancouver, British Columbia.

Jeffrey Lightfoot – Mr. Lightfoot has been a Director of the Company since May 1999. Mr. Lightfoot is a licensed attorney in Canada, and since 1994, has been a partner in the law firm of Maitland and Company, Vancouver, British Columbia. Mr. Lightfoot is a director of two companies publicly traded on the TSX Venture Exchange in Canada.

The Company’s directors have been elected to serve until the next annual meeting of stockholders and until their successor(s) have been elected and qualified, or until death, resignation or removal.

Meetings and Committees of the Board of Directors

During the fiscal year ended December 31, 2005, the Board of Directors held no regular meetings, however, it took 8 actions by unanimous written consent. The Board of Directors has not established an Audit Committee and the functions of which are performed by the Board. Mr. Dennis Robinson is the financial expert of the Board. The Audit Committee recommends engagement of the Company's independent auditors, is primarily responsible for approving the services performed by the independent auditors and for reviewing and evaluating our accounting principles and its system of internal accounting controls and has general responsibility in connection with related matters.

Code of Ethics

- The Company expects to adopt a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions in 2005. For purposes of this Item, the term code of ethics means written standards that are reasonably designed to deter wrongdoing and to promote:

- honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

- full, fair, accurate, timely, and understandable disclosure in reports and documents that the issuer files with, or submits to, the Commission and in other public communications made by the issuer;

- compliance with applicable governmental laws, rules and regulations;

- the prompt internal reporting of violations of the code to the board of directors or another appropriate person or persons; and

- accountability for adherence to the code.

Item 10. Executive Compensation.

The compensation for all directors and officers individually for services rendered to the Company for the fiscal years ended December 31, 2005, 2004 and 2003, respectively, are set

forth in the following table:

SUMMARY COMPENSATION

Annual Compensation

Long Term Compensation

Awards

Payouts

Name and

Principal

Salary

Bonus Other

Restr. Options

Position

Year

($)

($) ($)

Stock

SARS

LTIP

Other

Robert Wang(1) 2005 72,000 -0- 43,330

-0-

President and

2004 72,000 -0- 39,965

-0-

Director

2003 72,000

-0- 53,507

-0-

Dennis Robinson 2005 -0-

-0- -0-

-0-

Secretary,

2004 -0-

-0- -0-

-0-

Treasurer and

2003 -0-

-0- -0-

225,000 -0-

-0-

Director

Jeffery Lightfoot 2005 -0-

-0- -0-

-0-

Director

2004 -0-

-0- -0-

-0-

2003 -0-

-0- -0-

225,000 -0-

-0-

------------------------------------------------------------------------------------------------------------------------

(1). Under his management agreement with the Company, Mr. Wang is entitled to a salary of $72,000 commencing with fiscal year 2004, and is entitled to a daily overseas expense allowance of $175 CDN. The allowance relates to food and lodging when the officer is in Malaysia on Company business. Mr. Wang also is re-imbursed for expenses incurred on behalf of the Company. For fiscal 2005, Mr. Wang was entitled to receive $72,000 as salary, and $43,330 as an overseas living allowance. As of the date of this report, both amounts remain unpaid and have been accrued by the Company. For the same period, Mr. Wang also received $26,654 as re-imbursement for transportation expenses incurred, and is entitled to re-imbursement of marketing expenses incurred on behalf of the Company estimated to be $12,000 for the period. For fiscal 2004, Mr. Wang was entitled to receive $72,000 as salary, and $39,965 as an overseas living allowance. As of the date of this report, both amounts remain unpaid and have been accrued by the Company. For the same period, Mr. Wang also received $22,433 as re-imbursement for transportation expenses incurred, and is entitled to re-imbursement of marketing expenses

incurred on behalf of the Company estimated to be $18,000 for the period. For fiscal 2003, Mr. Wang was entitled to receive $72,000 as salary, and $53,507 as an overseas living allowance. As of the date of this report, the stated salary amount has been paid and $46,464 in overseas living allowance remains unpaid and have been accrued by the Company. The overseas living allowance of $53,507 was paid in 2004. For the same period, Mr. Wang also received $14,614 as re-imbursement for transportation expenses incurred, and is entitled to re-imbursement of $7,567 in marketing expenses incurred on behalf of the Company.

Employment Agreements, Compensation to Directors, and Stock Option Plans.

During 2003, the Company did not have written employment agreements with its officers. On January 4, 2004, the Company entered into a management agreement with Robert Wang, its President. The term of the agreement extends for a period of five years; however, the agreement may be terminated by either party with three months written notice, among other reasons. Mr. Wang is entitled to receive an annual salary of $72,000, subject to re-negotiation by the parties after one year. He will receive a daily overseas expense allowance of $175 CDN. Mr. Wang also is re-imbursed for expenses incurred in connection with Company business. The allowance relates to food and lodging when the officer is in Malaysia on Company business. In addition, during 2003, the Company agreed to pay Mr. Wang $99,971 as a living allowance for the period from January 2001 to October 2003. Of this total amount, $53,507 was paid in 2004 for the 2003 period as indicated in the table above and $46,464 remains outstanding and unpaid as stated above. For the 2004 period, the Company estimates that Mr. Wang will be entitled to receive approximately $40,000 as a living allowance. This amount has not been invoiced to the Company by Mr. Wang. In addition, the officer is entitled to re-imbursement of normal and usual business expenses. During 2004, the Mr. Wang received $51,573 in expense re-imbursements for actual expenses incurred by Mr. Wang, of which $7,567 represents payment of an outstanding amount for 2003. During 2003, Mr. Wang received $14,614 as a re-imbursement of expenses, and an additional $7,567 was accrued for future payment.

No compensation was paid to directors of the Company during 2005, 2004 or 2003. Directors, however, are reimbursed for expenses incurred by them in connection with the Company's business.

The Company does not have any other form of compensation payable to its officers or directors, including any stock option plans, stock appreciation rights, or long term incentive plan awards for the periods indicated in the above table. The Company has no compensatory plan or arrangement that results or will result from the resignation, retirement, or any other termination of an executive officer’s employment or from a change-in-control or a change in an executive officer's responsibilities following a change-in-control.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table will identify, as of April 1, 2006, the number and percentage of outstanding shares of common stock of the Company owned by (i) each person known to the Company who owns more than five percent of the outstanding common stock, (ii) each officer and director, and (iii) and officers and directors of the Company as a group. Except as otherwise indicated, the address of each party is the address of the Company. The following is based on 14,582,571 shares of common stock outstanding as of April 1, 2006, except that shares of common stock underlying options or warrants exercisable within 60 days of the date hereof are deemed to be outstanding for purposes of calculating the beneficial ownership of securities of the holder of such options or warrants.

Title

Name and Address

Amount and nature

Percent

of Class

of Beneficial Owner

Beneficial Ownership

of Class

Common

Robert Wang

-0-

Stock

President

Common

Dennis Robinson

-0-

Stock

Secretary, Treasurer

And Director

Common

Jeffrey Lightfoot

-0-

Stock

Director

Common

Chin Yen Ong

17,722,509(1)

63.7%

Stock

106 Taman Sri Selayang

68100 Batu Caves, Selangor

Malaysia

Common

Hsien-Ho Lee

3,800,000(2)

21.8%

Stock

3 Alley 16

Lane 107, Ho-Ping E Rd.

Sec 2, Taipei

Taiwan, R.O.C.

Common

Mao-Lin Hsiao

6,310,068(3)

32.7%

Stock

6F, 7, Lane 96,

Chung Shan N. Road,

Sec.2 Taipei

Taiwan, R.O.C.

Common

Voon Meng Vee

2,500,000

17.1%

Stock

35, Tingkat 01k Jalan

Besar, 18300 Gua Musang,

Malaysia

Common

Sow Yen Yip

2,500,000

17.1%

Stock

No.15 Jalan SS3/98

47300 Petaling Jaya,

Selangor Darul Ehsan,

Malaysia

Common

Tee Ah Siew

2,120,000(4)

12.3%

Stock

No.6 Jalan 7,Kaw 15

Taman Seng Chai

41300 Kelang

Selangor Darul Ehsan

Malaysia

Common

David Pok Beng Kwong

1,000,000(5)

6.6%

Stock

No.1 Jalan SS 3/46

Petaling Jaya

47300 Selangor Darul Ehsan

Malaysia

Common

Officers and

-0-

Stock

Directors, as a group (3 persons)

-----------------------------------------------------------------------------------------------------------

(1). The amount represents 4,485,003 shares of common stock of the Company and stock purchase warrants to acquire 13,237,506 shares of common stock. Of the total warrants, (i) 12,480,000 are exercisable at $0.05 per share on or before July 15, 2006, and at $0.07 per share on or before July 15, 2007, and (ii) 757,506 are exercisable at $0.05 per share on or before May 13, 2006, and $0.07 per share on or before May 13, 2007 (see “Certain Relationships and Related Transactions”).

(2). The amount represents 950,000 shares of common stock and stock purchase warrants to acquire 2,850,000 shares of common stock of the Company. The stock purchase warrants are exercisable at $0.05 per share on or before May 13, 2006, and $0.07 per share on or before May 13, 2007.

(3). The amount represents 1,575,017 shares of common stock and stock purchase warrants to acquire 4,725,051 shares of common stock. The stock purchase warrants are exercisable $0.05 per share on or before May 13, 2006, and $0.07 per share on or before May 13, 2007.

(4). The amount represents 570,000 shares of common stock held individually and stock warrants to acquire 1,500,000 shares of common stock exercisable at $0.06 per share and expire five years from the date of funding from the investments of Voon Meng Vee and Sow Yuen Yip. (See “Certain Relationship and Related Transactions”).

(5). The amount represents 500,000 shares of common stock and common stock warrants to purchase a total of 500,000 shares of common stock as follows; at $0.05 per share if on or before September 26, 2003, at $0.06 per share if on or before September 26, 2005; and at $0.07 per share if on or before September 26, 2006.

Item 12. Certain Relationships and Related Transactions.

On June 10, 2003, stock options with rights to acquire a total of 1,300,000 shares of common stock of The Company were granted to three individuals who are employees or consultants of the Company. The total amount vested on the grant date. Of the total amount 300,000 expired during 2005. The options enable the holder to acquire the common stock of the Company at a price of $0.05 per share during the option term. The options expire on the earlier of; three years from the grant date, the date the employee or consultant’s relationship with the Company is terminated for “cause”, 30 days after the date the employee or consultant’s relationship with the Company is terminated for reasons other than “cause,” immediately upon receipt of written notice from the Company terminating any unvested Options and unexercised Options, or the death or disability of the party. As of the date of this report, no options were exercised.

As disclosed herein, the Company has entered into two significant agreements with Avani O2

(See “Item 1 Description of Business – Prior Agreements with Avani O2” for a detailed discussion of these agreements). On October 25, 2002, the Company entered into a Sale and Purchase Agreement with Avani O2, pursuant to which, the Company agreed to sell to Avani O2 all of the assets of its subsidiary consisting of its plant, equipment, and real estate to Avani O2 for a total consideration of $1,650,000 Canadian Dollars (CDN) (or $1,272,657 USD at year end exchange rates). In February 2000, the Company entered into an agreement with Avani O2, pursuant to which Avani O2 received, among other rights, the right and license to construct manufacturing facilities, and to produce and sell the Company’s proprietary water product worldwide, subject to certain conditions of the agreement. The rights granted Avani O2 are exclusive worldwide except for Canada and worldwide sales from the Company’s Vancouver operations. Mr. Chin Yen Ong, a significant shareholder of the Company, is a director and a 30% shareholder of Avani O2. Mr Ong also is the nephew of the Company’s President.

On May 13, 2002, the Company completed private placements with Mao-Lin Hsiao, and Hsien-Ho Lee pursuant to which such parties purchased 1,575,017 and 950,000 shares of common stock of the Company, respectively, at a price per share equal to $0.03. The total consideration received by the Company was $75,751. In addition, the Company issued to Mao Lin Hsiao and Hsien Ho Lee stock purchase warrants to acquire 4,725,051 and 2,850,000 shares of common stock of the Company, respectively. The stock purchase warrants are exercisable at $0.03 per share on or before May 13, 2004, $0.05 per share on or before May 13, 2006, and $0.07 per share on or before May 13, 2007. In connection with the transactions, the Company paid Chin Yen Ong a finder’s fee equal to 10% of the stock and stock purchase warrants received by the investors as described above. Mr. Ong received 252,502 shares of common stock and stock purchase warrants to acquire 757,506 shares of common stock of the Company. The stock purchase warrants are exercisable on the same terms and conditions as those of the investors.

During January 2001, the Company contracted with Mr. Ong, as a consultant in Malaysia, to market and promote the Company’s products to the Asian market. In exchange, the Company has contracted to pay the consultant the sum of $10,000 CDN per month and to re-imburse all reasonable and customary business expenses not to exceed $1,000 per month. On July 15, 2002, as reported by the Company, an agreement was entered into with Mr. Ong pursuant to which the outstanding amount of $124,800 owed Mr. Ong was cancelled in exchange for 4,160,000 shares of common stock of the Company and stock purchase warrants to acquire 12,480,000 shares of common stock of the Company. As of December 31, 2005, Mr. Ong is a controlling stockholder of the Company, and formerly was a controlling shareholder of Avani O2. Mr. Ong is the nephew of the Company’s President. The agreement with Mr. Ong was terminated on January 1, 2005. As of December 31, 2005, the total outstanding consulting fee payable to Mr. Ong is $275,150 ($320,000 CDN).

PART IV

Item 13. Exhibits.

EXHIBIT INDEX

3.(i) Articles of Incorporation, as amended of the Company. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

Articles of Incorporation, as amended of Avani Marketing Corp. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

Certificate of Incorporation and Name Change and Articles of Avani Water Corporation. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

Articles of Marina Bottling Company Ltd. (Incorporated by reference to the Company's Form 10-KSB for the period ended December 31, 1997).

Articles of Incorporation of Avani Manufacturing (China) Inc. (Incorporated by reference to the Company's Form 10-KSB for the period ended December 31, 1997).

Certificate of Amendment to Articles of Incorporation of the Company dated April 3, 2001 (Incorporated by reference to the Company's Form 10-KSB filed on April 11, 2001).

Certificate Of Change Of Common Stock Of Avani International Group, Inc. dated July 27, 2001 (Incorporated by reference to the Company's Form 8-K filed on July 31, 2001).

3.(ii) By-Laws of the Company. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

By-Laws of Avani Marketing Corp. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

By-Laws of Avani Manufacturing (China) Inc. (Incorporated by reference to the Company's Form 10-KSB for the period ended December 31, 1997).

10(i) Mortgage in favor of International Commercial Bank

of Cathay (Canada) dated May 2, 1996. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(ii) Mortgage in favor of Riversedge Holding Corp. dated

May 2, 1996. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(iii) Mortgage in favor of International Commercial Bank

of Cathay (Canada) dated July 26, 1996. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(iv) Mortgage in favor of Riversedge Holding Corp. dated

July 26, 1996. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(v) Mortgage in favor of International Commercial Bank

of Cathay (Canada) dated March 25, 1997. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(vi) Mortgage in favor of Riversedge Holding Corp. dated

March 25, 1997. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(vii) Agreement dated December 15, 1995 between the Company

and Georgia Pacific Company. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(viii) Agreement dated December 18, 1995 between the Company

and Georgia Pacific Company. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(ix) Agreement dated December 26, 1996 between the Company

and Georgia Pacific Company. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(x) Distribution Agreement dated December 14, 1996 between the Company and Yueh Long Enterprise Co., LTD. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(xi) Distribution Agreement dated June 13, 1997 between the

Company and Beon Top Enterprises Ltd. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(xii) Agreement dated April 29, 1997 by and between the Company and Georgia Pacific Company. (Incorporated by reference to the Company's Form 10-SB Registration Statement filed on November 4, 1997).

10(xiii) Joint Venture Agreement dated May 5, 1999 by and between the Avani International Group, Inc. and Multimega Technologies SDN. BHD. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xiv) Share Subscription Agreement dated and effective May 12, 19999 by and between Avani International Group, Inc. and Yip, Kam Chong. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xv) Warrant Agreement dated and effective May 12, 19999 by and between Avani International Group, Inc. and Yip, Kam Chong. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xvi) Share Subscription Agreement dated May 12, 1999 by and between Avani International Group, Inc. and Ngai Sou Chang. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xvii) Warrant Agreement dated May 12, 1999 by and between Avani International Group, Inc. and Ngai Sou Chang. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xviii) Finder's Fee Agreement dated June 12, 1999 by and between Avani International Group, Inc. and Chin Yen Ong. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xix) Warrant Agreement dated June 12, 1999 by and between Avani International Group, Inc. and Chin Yen Ong. (Incorporated by reference to the Company's Form 10-QSB for the period ended June 30, 1999 filed on August 23, 1999).

10(xx) Joint Venture Agreement dated February 18, 2000 by and between the Company and Avani O2 Water Sdn. Bdn (Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on April 3, 2000).

10(xxi) Agreement dated January 4, 2000 by and between Avani International Marketing Corp. and Avani Water Corporation Sdn. Bdn. (Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on April 3, 2000).

10(xxii) Financial Consulting Agreement dated March 23, 2000 by and between the Company and SJH Corporate Services, Inc. (Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on April 3, 2000).

10(xxiii) Investor Relations Service Agreement dated March 23, 2000 by and between the Company and SJH Corporate Services, Inc. (Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on April 3, 2000).

10(xxiv) Agreement dated January 4, 2000 by and between Avani Water Corporation and Prime Source International Consultants. (Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on April 3, 2000).

10(xxv) Avani International Group, Inc. 2000 Stock Option Plan (Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on April 11, 2001).

10(xxvi) Loan Agreement dated June 13, 2001 by and between David Pok Beng Kwong and Avani International Group, Inc. (Incorporated by reference to the Company's Form 10-QSB filed on August 13, 2001).

10(xxvii) Promissory Note dated June 13, 2001 by Avani International Group, Inc in favor of David Pok Beng Kwong. Incorporated by reference to the Company's Form 10-QSB filed on August 13, 2001).

10(xxvii) Loan Agreement, as revised, dated June 13, 2001 by and between David Pok Beng Kwong and Avani International Group, Inc.

(Incorporated by reference to the Company's Form 8-K filed on October 11, 2001).

10(xxviii) Investment Agreement dated September 26, 2001 by and between David Pok Beng Kwong and Avani International Group, Inc.

(Incorporated by reference to the Company's Form 8-K filed on October 11, 2001).

10(xxix) Finder’s Fee Agreement dated September 26, 2001 by and between Avani International Group, Inc and Tee Ah Siew. (Incorporated by reference to the Company's Form 8-K filed on October 25, 2001).

10(xxx) Amendment To Agreement Dated February 18, 2000, Made Between Avani O2 Water Sdn. Bhd. (Called Aow) And Avani International Group Inc. (Called Aig) (Incorporated by reference to the Company's Form 10-QSB filed on November 11, 2001).

10(xxxi) Amendment To Agreement Dated February 18, 2000, made between Avani O2 Water Sdn. Bhd. (Called Aow) And Avani International Group Inc. (Called Aig) (Incorporated by reference to the Company's Form 10-KSB for fiscal year ended December 31, 2001).

10(xxxii) Consulting Agreement dated January 2, 2001 by and between Avani Oxygen Water Corporation, of suite 328, 17 Fawcett Road, Coquitlam, British Columbia V3K 6V2 Canada (the “Company”) and Chin Yen Ong, No. 106, Jalan 1, Taman Sri Selayang, 68100 Batu Caves, Selangor Darul Ehsan, Malaysia (the “Consultant”). (Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended December 31, 2001).

10(xxxiii) Share Subscription Agreement and Warrant Agreement both dated May 13, 2002 by and between Hsiao, Mao-Lin and Avani International Group, Inc. (Incorporated by reference to the Company's Form 8-K filed on June 3, 2002).

10(xxxiv) Share Subscription Agreement and Warrant Agreement both dated May 13, 2002 by and between Lee, Hsien-Ho and Avani International Group, Inc. (Incorporated by reference to the Company's Form 8-K filed on June 3, 2002).

10(xxxv) Finder’s Fee Agreement and Warrant Agreement both dated May 13, 2002 by and between Chin Yen Ong and Avani International Group, Inc. (Incorporated by reference to the

Company's Form 8-K filed on August 2, 2002).

10(xxxvi) Amendment to Consultant Agreement dated June 14, 2002 by and between Chin Yen Ong and Avani Oxygen Water Corporation and Avani International Group, Inc. (Incorporated by reference to the Company's Form 8-K filed on August 2, 2002).

10(xxxvii) Sale and Purchase Agreement by and between Avani International group, Inc. and Avani Oxygen Water Corporation and Avani O2 Water Sdn. Bhd. dated October 4, 2002. (Incorporated by reference to the Company's Form 8-K filed on November 5, 2002).

10(xxxviii) Amendment to Joint Venture Agreement Made Between Avani O2 Water Sdn. Bhd. (Called Aow) And Avani International Group Inc. (Called Aig) entered January 23, 2003 and effective as of January 1, 2002. (filed herewith).

10(xxxix) Amendment To Sale & Purchase Agreement Dated October 4, 2002, Made Between Avani International Group Inc. And Avani Oxygen Water Corporation (Called “Vendor”) And Avani O2 Water Sdn. Bhd. (Called “Purchaser”) effective as of February 20,.2003. (filed herewith).

17.1 Resignation letter of Ngai Sou Angeline Chang Incorporated by reference to the Company's Form 8-K filed on May 28, 2002).

17.2 Resignation letter of Wai Meng Yeap Incorporated by reference to the Company's Form 8-K filed on May 28, 2002).

21 (i) Subsidiaries of Registrant.

31 Certification under Section 302 of the Sarbanes-Oxley Act.

32 Certification under Section 906 of the Sarbanes-Oxley Act.

Item 14. Principal Accountant Fees and Services.

BDO Dunwoody LLP has served as the Company's Principal Accountant since 2001. Their pre-approved fees billed to the Company are set forth below:

Fiscal year ending Fiscal year ending

December 31, 2005 December 31, 2004

--------------------- --------------------

Audit Fees $ 53,460 $62,636

Audit Related Fees NIL

NIL

Tax Fees NIL

NIL

All Other Fees $NIL

$ NIL

As of December 31, 2003, the Company's Board of Directors did not have a formal

documented pre-approval policy for the fees of the principal accountant. It is

in the process of adopting such a policy.

FINANCIAL STATEMENTS INDEX

-Report of Independent Registered Public Accounting

Firm of Jeffrey Tsang & Co. dated December 4, 2006

F-1

-Report of Independent Registered Public Accounting

Firm of E.S. Lim & Co. dated November 16, , 2006

F-1

-Consolidated Balance Sheets as of December 31, 2005

and December 31, 2004.................................F-3

-Consolidated Statements of Operations and

Comprehensive Loss for Fiscal Years Ended

December 31, 2005and December 31, 2004.................F-4

-Consolidated Statements of Changes in Stockholder's Equity

(Capital Deficit) For Years Ended December 31, 2005

and December 31, 2004..................................F-5

-Consolidated Statements of Cash Flows for

Fiscal Years Ended December 31, 2005 and

December 31, 2004......................................F-6

-Summary of Significant Accounting Polices F-7

-Notes to Consolidated Financial Statements............F-12

JEFFREY TSANG & CO.

CERTIFIED PUBLIC ACCOUNTANTS

Unit B, 15/F, Englong Commercial Building, 184 Nathan Road, Kowloon, Hong Kong SAR.

Tel: (852) 2781 1606 Fax: (852) 2783 0752 E-mail: info@hkjtc.com

____________________________________________________________________________

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

AVANI INTERNATIONAL GROUP INC.

(A NEVADA CORPORATION)

We have audited the accompanying consolidated balance sheet of Avani International Group Inc. as of December 31, 2005 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the two years ended December 31, 2005 and 2004. 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 audits. We did not audit the financial statements for the year ended December 31, 2004 of Avani O2 Water Sdn. Bhd., a variable interest entity of the Company for that year, which statements reflect total assets and total net income of 71% and Nil, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report dated November 16, 2006 has been furnished to us, and our opinion, insofar as it relates to the amounts included for Avani O2 Water Sdn. Bhd., is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avani International Group Inc. as of December 31, 2005, and the results of its operations and its cash flows for the two years ended December 31, 2005 and 2004, in conformity with United States generally accepted accounting principles.

F-1

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations. This raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ JEFFREY TSANG & CO.

CERTIFIED PUBLIC ACCOUNTANTS

Hong Kong

December 4, 2006

F-1

Company No.

489879

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

AVANI O2 WATER SDN. BHD.

(Company No. 489879-V)

(Incorporated in Malaysia)

We have audited the accompanying balance sheet of Avani O2 Water Sdn. Bhd. as at December 31, 2004 and the related statements of income, stockholders' equity, and cash flows for the year ended December 31, 2004. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements 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 financial position of Avani O2 Water Sdn. Bhd. as at December 31, 2004 and the results of its operations and its 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 the Company will continue as a going concern. After the balance sheet date, the Company has suffered losses from its operations. This raises substantial doubt about its ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ E.S. Lim & Co

E. S. LIM & CO.

Kuala Lumpur, Malaysia

November 16, 2006

F-1

Avani International Group Inc.

Consolidated Balance Sheets

(Expressed in US dollars)

December 31

2005

2004

Assets

Current

Cash and cash equivalents

168,310

501,633

Accounts receivable (net of allowance for doubtful accounts

in 2005 - $2,569; 2004 - $66,074)

5,470

1,295,478

Inventories (Note 3)

107,227

235,882

Prepaid expenses

5,750

104,612

286,757

2,137,605

Property, plant and equipment (Note 4)

916,246

1,357,893

Other assets (Note 5)

27,131

31,317

1,230,134

3,526,815

Liabilities and Stockholders’ Equity (Capital Deficit)

Liabilities

Current

Accounts payable

677,924

610,157

Accrued liabilities

133,031

646,519

Debts payable (Note 6)

131,843

83,195

Unearned revenue and deposits

33,758

94,817

976,556

1,434,688

Obligations payable (Note 7)

285,745

285,745

1,262,301

1,720,433

Non-controlling Interest (Note 2)

1,916,893

Commitments and Contingencies (Notes 10, 11 and 14)

Stockholders’ Equity (Capital Deficit)

Capital stock (Note 9)

Authorized

400,000,000 common shares, par value of $0.001

Issued and outstanding

14,582,571 (2004– 14,582,571)

14,583

14,583

Additional paid-in capital

7,693,120

7,693,120

Accumulated deficit

(7,691,019)

(7,757,091)

Accumulated other comprehensive loss

- foreign exchange translation

(48,851)

(61,123)

(32,167)

(110,511)

1,230,134

3,526,815

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.

F-2

Avani International Group Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in US Dollars)
For the years ended December 31			2005		2004
Revenue
	Bottled water and supply sales	$	295,668	$	2,322,499
	Cooler rentals and equipment sales		11,526		165,175
			307,194		2,487,674
Cost of revenue
	Cost of goods sold (excluding depreciation)		194,396		1,448,965
	Depreciation		155,552		218,160
			349,948		1,667,125
Gross profit			(42,754)		820,549
Operating expenses
	Marketing		64,033		115,326
	General and administration		580,860		810,745
	Loss on sale of assets (gain) (Note 14)		(109,024)		90,805
	Foreign exchange loss (gain)		51,860		(20,534)
			587,729		996,342
Loss from operations			(630,483)		(175,793)
Other income (expenses)
	Interest on debts payable		(6,603)		(6,942)
	Loss from discontinued operations (Note 8)		(710,591)		-
	Miscellaneous income		51,754		54,611
			(1,295,923)		(128,124)
Income tax expense			-		(129,912)
Non-controlling Interest (Note 2)			-		(598,796)
Net loss before cumulative effect
	of change in accounting policy		(1,295,923)		(856,832)
Cumulative effect of change in accounting policy (Note 2)			-		(91,664)
Net loss before extra-ordinary income			(1,295,923)		(948,496)
Extra-ordinary income (Note 15)			1,361,995		-
Net profit (loss) for the year			66,072		(948,496)
Foreign currency translation adjustment			12,272		62,615
Comprehensive gain (loss) for the year		$	78,344	$	(885,881)
Gain (Loss) per share - basic and diluted		$	0.01	$	(0.07)
Weighted average shares outstanding			14,582,571		14,555,283
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements. F-3

Avani International Group Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
(Expressed in US Dollars)

									Accumulated
					Additional				Other		Total
	Common Shares				Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares			Amount	Capital		Deficit		Loss		Equity
Balance, January 1, 2004		14,522,571	$	14,523	$	7,606,817	$	(6,808,595)	$	(123,738)	$	689,007
Issuance of common stock on exercise of options		60,000		60		2,940		-		-		3,000
Stock option compensation		-		-		83,363		-		-		83,363
Net loss for the year		-		-		-		(948,496)		-		(948,496)
Foreign exchange translation adjustment		-		-		-		-		62,615		62,615
Balance, December 31, 2004		14,582,571		14,583		7,693,120		(7,757,091)		(61,123)		(110,511)
Net loss for the period		-		-		-		66,072		-		66,072
Foreign exchange translation adjustment		-		-		-		-		12,272		12,272
Balance, December 31, 2005		14,582,571	$	14,583	$	7,693,120	$	(7,691,019)	$	(48,851)	$	(32,167)

F-4

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements

Avani International Group Inc.
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
For the years ended December 31				2005		2004
Cash provided by (used in)
Operating activities
	Net loss for the year			$	66,072	$	(948,496)
	Adjustments to reconcile net loss for the year to
	net cash used in operating activities
			Depreciation and amortization		175,769		236,770
			Loss (gain) on disposal of assets		(76,010)		90,805
			Stock option compensation		-		83,363
			Non-controlling interest		-		598,796
			Cumulative effect of change in accounting policy		-		91,664
	(Increase) decrease in assets
			Accounts receivable		276,201		43,390
			Inventories		(26,479)		36,159
			Prepaid expenses		(2,550)		2,430
	Increase (decrease) in liabilities
		Accounts payable			169,930		146,194
		Accrued liabilities			13,231		47,141
		Unearned revenue and deposits			(61,059)		(25,614)
Cash provided by consolidation of previous VIE’s account					(236,398)		-
Cash provided by (used in) discontinued operations					710,591		-
	Cash provided (used in) operating activities from continuing operations				1,009,298		402,602

Investing activities
	Acquisition of equipment				(8,884)		-
					(8,884)		-
Financing activities
	Advances to related party				-		(135,645)
	Issuance of common shares				-		3,000
	Proceeds on forfeited deposits loans and obligation payable				(1,361,995)		-
					(1,361,995)		(132,645)
Increase (decrease) in cash during the year					(361,581)		269,957
Effect of foreign exchange on cash					28,258		13,408
Cash and cash equivalents, beginning of year					501,633		218,268
Cash and cash equivalents, end of year				$	168,310	$	501,633
Supplemental Information:
	Interest paid			$	6,603	$	6,942
	Taxes paid					$	262,632
The following transactions which did not result in cash
flows have been excluded from financing activities:
	Stock option compensation (Note 9(c))			$	-	$	83,363

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.

F-5

Avani International Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
December 31, 2005 and 2004
Basis of Presentation	These consolidated financial statements are expressed in US dollars and have been prepared in conformity with United States generally accepted accounting principles. Included in the financial statements for the year ended December 31, 2005 are the accounts of the Company and its wholly-owned subsidiaries: Avani Oxygen Water Corporation and Avani International Marketing.
	All significant intercompany transactions and balances have been eliminated on consolidation. The Company’s previous business combinations were accounted for using the purchase method.
Use of Estimates	The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.
Financial Instruments	The Company's financial instruments consist of cash and cash equivalents, accounts receivable, due from related party, accounts payable, accrued liabilities, debts payable and obligations payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. With the exception of the portion of obligation payable related to the assignment of net profits, the fair value of financial instruments approximates their carrying values due to the immediate or short term maturity of these financial instruments. The carrying amount for the portion of obligations payable related to the assignment of net profits interest was not practicable to determine.
Foreign Currency Translation and Transactions	The parent company's functional currency is the United States dollar, however, the functional currency of the consolidated entity is the Canadian dollar and the Malaysian Ringgit as substantially all of the Company's operations are in Canada and Malaysia. The Company uses the United States dollar as its reporting currency for consistency with other registrants of the Securities and Exchange Commission ("SEC").

F-6

Avani International Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
December 31, 2005 and 2004
Foreign Currency Translation and Transactions - Continued	Assets and liabilities of the subsidiary denominated in a foreign currency are translated at the exchange rate in effect at the period end. The Statement of Operations is translated at the average rates of exchange prevailing during the periods. Translation adjustments arising from the use of differing exchange rates from period to period are included in the Accumulated Other Comprehensive Loss account in Stockholders' Equity (Capital Deficit).
	Transactions undertaken in currencies other than the functional currency of the entity are translated using the exchange rate in effect as of the transaction date. Any exchange gains and losses are included in Other Income (Expenses) on the Statement of Operations and Comprehensive Loss.
Revenue Recognition	Revenue on sales of bottled water, coolers and equipment is recognized when the products are delivered and title transfers to customers. Sales terms generally do not permit a right of return. Revenue from leasing of water coolers and filters is accounted for as operating leases and, accordingly, rental income is reported over the terms of the leases.
	Deposits received for bottles and coolers are accrued as liabilities until refunded upon return of bottles and coolers.
	Freight charges billed to customers are included in Revenue while associated freight costs are included in Cost of Revenue.

Cash and Cash Equivalents	The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts	The Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible and all receivables that are outstanding for more than 120 days. The criteria for allowance provision are determined based on historical experience and the Company’s assessment of the general financial conditions affecting its customer base. If the Company’s actual collections experience changes, revisions to the allowance may be required. F-7
Avani International Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
December 31, 2005 and 2004
Inventories	Inventories are stated at the lower of cost (determined by the first-in, first-out method) and market. Market is determined based on the net realizable value of finished goods and the replacement cost for supplies. Inventory is comprised of small bottles, packaging containers, supplies and water coolers for resale.
Property, Plant and Equipment	Property, plant and equipment is recorded at cost. Depreciation is recorded at half the annual rate in the year such assets are acquired and is not recorded in the year of disposition. Depreciation is provided on a straight-line basis over the estimated useful life of the assets at the following annual rates:
	Coolers - 20% Plant equipment - 10% Office furniture and equipment - 10% to 20% Building - 2.5% Vehicle - 10%
Other Assets	Trademarks and licenses are recorded at cost and are amortized on a straight-line basis over the estimated useful life of 10 years in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.
Income Taxes	The Company follows the provisions of SFAS 109, "Accounting for Income Taxes", which requires the Company to recognize tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method. Under this method, tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided for all deferred tax assets when it is more-likely-than-not that these deferred tax assets will not be realized.
Loss Per Share	Loss per share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic loss per share is calculated by dividing the net loss available to common stockholders by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity. In a loss year, potentially dilutive common shares are excluded from the loss per share calculation as the effect would be anti-dilutive. Basic and diluted loss per share are the same for the years presented.
	For the years ended December 31, 2005 and 2004, potentially dilutive common shares (relating to options and warrants outstanding at year end) totalling 26,352,557 were not included in the computation of loss per share because their effect was anti-dilutive. F-8

Avani International Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
December 31, 2005 and 2004
Comprehensive Income	The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The Company is disclosing this information on its Statements of Operations and Comprehensive Loss. Comprehensive income (loss) is comprised of net income (loss) and all changes (loss) to stockholders' equity except those resulting from investments by owners and distributions to owners.
Stock-based Compensation	The Company applies SFAS No. 123, “Accounting for Stock-Based Compensation for Non-Employees” and has elected to continue to measure compensation cost for employees under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
	SFAS No. 123, requires the Company to provide pro-forma information regarding net income as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method. The value of stock options granted to consultants is recognized in these consolidated financial statements as compensation expense using the Black-Scholes option pricing model. Such compensation is amortized over the contract services period or, if none exists, from the date of grant until the options vest. Compensation associated with unvested options is remeasured on each balance sheet date using the Black Scholes option pricing model.
Advertising	The Company follows the provisions of Statement of Position 93-7 in accounting for costs of advertising. Advertising costs are charged to expense as incurred.
Valuation and Disposition of Long-lived Assets	The Company evaluates the future recoverability of its property, plant and equipment and trademarks and licenses in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 144 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the estimated undiscounted future cash flows attributable to such assets. It requires that those long-lived assets to be disposed of by sale are to be measured at the lower of carrying amount or fair value less cost of sale whether reported in continuing operations or in discontinued operations. No impairment was required to be recognized during the periods presented in these consolidated financial statements.

F-9

Avani International Group Inc.
Summary of Significant Accounting Policies
(Expressed in US Dollars)
December 31, 2005 and 2004
Stock Based Compensation – Continued	SFAS 148 “Accounting for Stock-Based Compensation—Transition and Disclosure“ amends the disclosure requirements of SFAS 123 so that entities will have to make more prominent disclosures regarding the pro forma effects of using the fair value method of accounting for stock-based compensation. The Company applies Accounting Principles Board (“APB”) Opinion 25 and related interpretations in accounting for stock options granted to employees. Generally, under APB No. 25 compensation expense is recognized for the difference between the market price of the underlying stock and the exercise price of the stock options. Accordingly, no compensation has been recognized in connection with options granted to employees as the exercise price of these options is greater than the market price of the underlying stock. Had compensation cost been determined based upon the fair value of the stock options at the grant date consistent with the fair value method prescribed in Statement of Financial Accounting Standard (“SFAS”) No. 123, (based on a dividend yield of Nil; risk-free interest rate of 0.57%; expected volatility of 289%; and expedted life of 2 years) the Company’s net loss and loss per share would have been increased as follows:
	Years Ended December 31 1 2004 Net loss, as reported $66,072 $(948,496) Deduct: Stock-based employee compensation expense determined under fair-value based method for all awards not included in net loss - (10,927) Pro-forma net loss $66,072 $(959,432) Loss per share: Basic and diluted – as reported $0.01 $(0.07) Basic and diluted – pro-forma $0.01 $(0.07)

F-11

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
1.	Nature of Business and Ability to Continue as a Going Concern
	Avani International Group Inc. (the “Company”), a Nevada corporation, incorporated on November 29, 1995, has constructed a bottling facility in Coquitlam, British Columbia and has been engaged in the business of developing, manufacturing and distributing an oxygen enriched, purified bottled water under the trade name “Avani Water” for domestic and export sales.
	The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred losses to date of $7,691,019 which includes an operating profit for the current year of $66,072. The continuation of the Company is dependent upon the continuing financial support of creditors and stockholders, refinancing debts payable, obtaining additional long-term financing, as well as achieving and maintaining a profitable level of operations. The Company plans to raise additional equity and debt capital as necessary to finance the operating and capital requirements of the Company. Amounts raised will be used to provide financing for the marketing and promotion of the Company’s export business and for other working capital purposes. While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate sufficient funds for operations.
	These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might arise from this uncertainty.
2.	Non-controlling interest
	The prior year comparative information has not been restated to reflect a consolidation of Avani O2. The cumulative effect of the change in accounting policy of $91,664, as a result of the adoption of SIN 46R, was recorded in the Statement of Operations and Comprehensive Loss at January 1, 2004 and included in the non-controlling interest on the balance sheet. Subsequent to the elimination of intercompany balances and transactions, Avani O2 had net assets of $1,226,433 as at December 31, 2004 and net income of $598,796 for the year then ended. These amounts were recorded as non-controlling interests in these December 31, 2004 year ended financial statements. As the Company has no equity interest in Avani O2, the maximum exposure of loss by the Company in the VIE is the accounts receivable from Avani O2 totalling $605,701 as at December 31, 2004.Effective July 1, 2005, Avani O2 is no longer determined as a VIE of the Company. The Company is therefore no longer required to consolidate the accounts of Avani O2. Losses of the Company in Avani O2 is recorded as a charge to discontinued operations.
3.	Inventories
				2005		2004
		Supplies	$	102,050	$	232,334
		Finished goods		5,177		3,548
			$	107,227	$	235,882
		F-12

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
4.	Property, Plant and Equipment
				2005		2004
		Canada
		Land	$	188,885	$	182,757
		Building		1,017,340		992,761
		Coolers		-		82,263
		Plant equipment		651,260		926,812
		Office furniture and equipment		61,874		51,609
		Vehicle		-		20,485
				1,919,359		2,256,687
		Malaysia
		Plant equipment		-		496,091
		Office equipment and fixtures		-		21,290
		Vehicles		-		11,118
		Plant and machinery		-		76,235
				-		2,861,421
		Less: Accumulated depreciation		(1,003,113)		(1,503,528)
			$	916,246	$	1,430,329

	During the year ended December 31, 2002, the Company entered into an agreement with Avani O2 ("the Licensee"), whereby the Company granted to the Licensee the first right of refusal of the exclusive worldwide (except Canada) rights and licenses to the Company's oxygen enrichment technology. The Company is also allowing the Licensee the use of approximately $208,481 net of depreciation (2004 - $237,314), of bottling and processing equipment, located in Malaysia, required to produce the product. In exchange, the Company is entitled to receive a 2% royalty on all revenue from all licensed products and 30% of the before-tax profits generated by the contributed bottling line (which was replaced by a rental fee as amended in 2004). These transactions were eliminated upon consideration. During 2002, the Company assigned certain of its rights to the Net Profits Interest to certain lenders in satisfaction of outstanding loans (Note 7).
	In October 2002, the Company entered into an agreement with Avani O2 whereby the Company agreed to sell its Canadian building and related land in Canada and production equipment in Canada and Malaysia to Avani O2 with a carrying amount of approximately $1,065,000 for proceeds of CDN$1,650,000 (US$1,418,745 at the December 31, 2005 year end exchange rates) plus interest charges at 8% per annum and applicable taxes. The proceeds will be received over two years in twenty-four monthly installments of CDN$70,620 (US$58,752) and a final payment of CDN$220,686 (US$183,600) due October 1, 2004. The gain on disposal of the properties is estimated to be $320,000 which will be deferred until the completion of the sale. Total installment of US$1,360,275 (CDN $1,582,000) was received by the Company by the year ended December 31, 2004. As Avani O2 failed to make the final payment of CDN$220,686 (US$183,600) even after an extension was provided, the management of the Company determined to terminated the agreement (Note 15).

F-13

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
5.	Other Assets
	The trademark and license is carried on the consolidated balance sheet at net book value of $27,131 (2004 - $31,317) which is calculated based on the original cost of the asset at $54,064 net of accumulated amortization of $32,639. Amortization expense of $5,536 was charged to the Statement of Operations and Comprehensive Loss in 2005 (2004 – $4,847) and annual amortization of approximately $5,500 is estimated to be expensed in each of the next five years.
6.	Debts Payable
				2005		2004
		Loan payable on demand, unsecured and bearing simple
		interest at 8%, calculated annually.	$	131,843	$	83,195

7.	Obligations Payable
				2005		2004
		Assignment of net profits interest	$	285,745	$	285,745
			$	285,745	$	285,745

	During 2002, the Company agreed with a number of lenders to fully settle the loan payables totaling $475,771. Pursuant to the agreements, the Company assigned a fully reserved account receivable in the amount of $200,944 to certain lenders in complete satisfaction of $190,026 of the loan payable. In addition to the assignment of the account receivable, the Company also assigned its before tax net profits interest in production equipment located in Malaysia (the "Net Profits Interest”) to two of the lenders Pursuant to an amendment to the agreement, the assignment of Net Profits Interest to these lenders will revert back to the Company when the lenders have received from such interest, an amount equal to $285,745, the principal amount of the cancelled loans. The Company has classified amounts related to these assignments of Net Profits Interests as obligations payable and will record reductions in this account as Net Profits Interests are received by the lenders. The Net Profits Interest was replaced by a rental fee payable by Avani O2 to the Company in 2004.
8.	Discontinued Operations
	For the year ended December 31, 2005, the detailed charges to the discontinued operations are as bellows: Write-of accounts receivable from Avani O2: $502,110 Loss on equipment held in Malaysia $208,481
	Total loss: $710,591 F-14

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
9.	Capital Stock
	Transactions not disclosed elsewhere in these consolidated financial statements are summarized as follows:
	a)	In August 2003, the Company completed a private placement of 5,000,000 shares of common stock at $0.06 per share for gross proceeds of $300,000. In connection with the share issuance, the Company agreed to pay a finder's fee to a third party equal to 10% of the gross proceeds, totaling $30,000 in cash and 1,500,000 share purchase warrants. These warrants are fully exercisable at any time within 5 years at an exercise price of $0.06 per share, expiring on September 2, 2008. The warrants were valued at $59,900 based on the Black-Scholes option pricing model, using the following assumptions: dividend yield Nil%; risk-free interest rate 2.12%; expected volatility 289%; expected life 5 years.
	b)	As at December 31, 2005, the Company had 22,862,557 (2004 – 22,862,557) fully exercisable share purchase warrants outstanding. Of this amount, 1,500,000 warrants were granted in connection with the share issuance (Note (a) above), and 550,000 warrants that were granted September 26, 2001 are exercisable at any time within 5 years at an exercise price of $0.05 on or before September 26, 2003, $0.06 on or before September 26, 2005, and $0.07 on or before September 26, 2006. The remaining 20,812,557 warrants were granted on May 13, 2002 and July 15, 2002. These warrants are exercisable at any time within 5 years at a price of $0.03 in the first two years, $0.05 in the third and fourth year and $0.07 in the last year.
		A summary of share purchase warrant transactions for the years presented is as follows:
						Weighted
						Average
						Exercise
					Number	Price
		Outstanding at January 1, 2002			1,347,500	$1.80
				Granted	20,812,557	$0.03
				Expired	(797,500)	$3.00

		Outstanding at December 31, 2002			21,362,557	$0.03
				Granted (a) and (b)	1,500,000	$0.07
		Outstanding at December 31, 2004 and 2005			22,862,557	$0.03
			All of the share purchase warrants were exercisable on the grant date and remain outstanding as at December 31, 2005.

F-15

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
9.	Capital Stock - Continued
	c)	During the year ended December 31, 2003, the Company granted 1,100,000 stock options to certain consultants as compensation for consulting services. Each option entitles the holder to purchase one share of the Company’s common stock at $0.05 per share during the first year and $0.30 per share in the second year. Of these options, 30% vested immediately with the remaining 70% to be vested on the one year anniversary of the date of grant. The Company also granted 500,000 fully vested options to a consultant, which entitles the holder to purchase one share of the Company's common stock at $0.05 per share for a three-year period. On November 18, 2002, the Company granted 300,000 stock options to a consultant as compensation for consulting services. Each option entitles the holder to purchase one share of the Company’s common stock at $0.05 per share during the first year and $0.30 per share in the second year. Of these options, 30% vested immediately with the remaining 70% to be vested one year after the date of grant.
		The Company follows SFAS No.123, "Accounting for Stock-Based Compensation," which requires compensation cost associated with stock options granted to other than employees to be valued based on the fair value of the stock options, where such fair value was estimated using the Black-Scholes option pricing model. Unvested stock options are remeasured on each balance sheet date for the purpose of determining stock option compensation. The weighted average grant date fair value of the options granted during 2003 ($0.04 per option) was estimated using the following weighted average assumptions and remeasured in 2004:
				2005	2004
			Dividend yield	Nil	Nil
			Risk-free interest rate	-	1.92%
			Expected volatility	-	200%
			Expected lives	-	2 years
		Compensation expense was amortized over the vesting period and expenses totaling $Nil for the year ended December 31, 2005 and $83,363 for the year ended December 31, 2004, were included in general and administration expenses.
		On June 10, 2003, the Company granted 1,950,000 stock options to Company employees and directors. Of this amount, 1,150,000 stock options have an exercise period of two years. Each option entitles the holder to purchase one share of the Company’s common stock at $0.05 per share during the first year and $0.30 per share in the second year. Only 30% of the options granted during the period are exercisable immediately with the remaining 70% to be vested on the one year anniversary of the date of grant. Another 800,000 fully vested stock options have an exercisable period of 3 years and an exercise price of $0.05 per share. F-16

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
9.	Capital Stock - Continued
		A summary of stock option transactions for the years presented is as follows:
								Weighted
								Average
								Exercise
						Number		Price
		Outstanding at January 1, 2002				300,000		$ 0.30
				Granted – employees		1,950,000		0.05
				Granted – non-employees		1,600,000		0.05
		Outstanding at December 31, 2003				3,850,000		0.07
		Expired				(300,000)		0.30
		Exercised				(60,000)		0.05
		Outstanding at December 31, 2004				3,490,000		$ 0.21
		Expired Cancelled Exercisable at December 31, 2005				3,490,000 (2,190,000) (300,000) 1,000,000		$ 0.21 0.30 0.05 0.05
		Exercisable at December 31, 2004				3,490,000		$ 0.21
		Stock options outstanding at December 31, 2005 are summarized as follows:
			Number		Exercise Price		Expiry Date

			1,000,000		$0.05		June 9, 2006

		As there were no stock-based compensation awarded to employees as at December 31, 2005, the pro-forma information as reported in the Summary of Significant Accounting Policy relates only to amortization of compensation expenses for employee stock options granted in 2003.

F-17

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
10.	Income Taxes
	The tax effect of the temporary differences that give rise to the Company's deferred tax assets and liabilities are as follows:
				2005				2004
	Net operating and capital losses	$		1,801,000		$		1,863,000
	Property, plant and equipment			172,000				199,000
	Valuation allowance			(1,973,000)				(2,062,000)
	Deferred tax assets (liability)	$		-		$		-

	The tax benefit of net operating and capital losses carried forward and the associated valuation allowance were increased by approximately $Nil (2004 - $258,000), representing the tax effect of losses which expired in the year
					2005				2004
	Provision (benefit) at the federal US statutory rate of 34%		$		21,000		$		(44,000)
	Foreign income taxes at other than the federal US statutory rate				24,000				(50,000)
	Effect of reduction in foreign income tax rates				18,000				93,000
	Effect of foreign exchange on valuation allowance				(45,000)				(115,000)
	Tax effect of reduction in losses carry forward from sale of
	subsidiary				-
	Tax effect of loss on settlement of payables				-				-
	Tax effect of gain on settlement of debt				-				-
	Utilization of net operating loss				-
	Non-deductible expenses				53,000				13,912
	Increase (decrease) in valuation allowance				55,000				232,000
			$		-		$		129,912
	The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and this causes a change in management's judgement about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current income.
	At December 31, 2005, the Company had net operating loss carryforwards of approximately $1,536,000 for U.S. income tax purposes, which if not used will expire during the years 2011 through 2024. At December 31, 2005, the Company had net operating loss carryforwards of approximately $4,011,000 for Canadian income tax purposes, which if not used will expire during the years 2005 through 2011 and allowable capital losses of approximately $Nil (2004 - $Nil) which are available to offset against future capital gains. F-18

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
11.	Lease Obligations
	For the years ended December 31, 2005 and 2004 total rental expenses under leases amounted to $7,018 and $5,991, respectively. At December 31, 2005, the Company was obligated under various noncancelable operating lease arrangements for office equipment and vehicle for a total of $7,311 for 2006 and $6,186 for 2007.
	These transactions were recorded at the exchange value representing amounts agreed upon by the related parties.
12.	Related Party Transactions
	Related party transactions not disclosed elsewhere in these consolidated financial statements include:
	During the year ended December 31, 2005, the President of the Company was reimbursed $26,654 (2004 - $22,433) for transportation expenses and $Nil (2004 - $29,140) for marketing expenses incurred on behalf of the Company in 2005. The Company accrued $12,000 of marketing expenses (2004 - $18,000), salary compensation of $72,000 (2004 - $72,000) and $43,330 (2004 - $39,965) of overseas living allowance for the year ended December 31, 2005, all of which are payable to the President of the Company.

F-19

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004
13.	Segmented Information
	The information for 2004 represents the consolidated revenue and property, plant and equipment of the Company and its subsidiaries and Avani O2. In 2005, geographic reporting information is as follows:
			2005		2004
	Revenue
	Bottled water and supply sales
	Canada and other countries	$	295,668	$	310,266
	Malaysia (via Avani O2)		-		2,012,233
			295,668		2,322,499
	Cooler rentals and equipment sales in
	Canada		11,526		18,546
	Malaysia		-		146,629
		$	307,194	$	2,487,674

	Property, plant and equipment
	Canada	$	916,246	$	1,063,125
	Malaysia		-		294,768
		$	916,246	$	1,357,893


14.	Gains on sale of assets
	On July 15, 2005, the Company sold its rights, title and interest to all the asset of the Company’s 2-1/2 and 5 gallon water business in British Columbia, Canada which included certain of the equipment, business records including customer lists, brochures, and samples for a total of approximate $32,642 (CDN$40,000) and the purchaser’s assumption of certain current liabilities. Including the liabilities of the Company of $59,769 such as bottle deposits, cooler deposit and unearned revenues, which were assumed by the purchaser, the total gain on the sale is $109,024.

F-20

Avani International Group Inc.
Notes to the Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2005 and 2004

15.	Extra-ordinary income
	As Avani O2 failed to make the final payment of CDN$220,686 (US$183,600) even after an extension was provided, the management of the Company determined to terminate the agreement. As a result, the installment of $1,360,275 was forfeited and recorded as an extra-ordinary income for the year ended December 31, 2005.
16.	Major Supplier
	During the year ended December 31, 2005 and 2004, the Company purchased approximately 62% and 45% of its materials from one supplier. At the December 31, 2005 and 2004, there were $Nil amounts due to that supplier in account payable.
17.	Subsequent Event
	On March 1, 2006, the Company entered into an agreement with an independent thire party to purchase the Company’s real estate located in Coquitlam, British Columbia. The purchase price is $1,226,000 CDN ($1,078,390 USD), of which 100,000 CDN($86,300 USD) has been paid as a non-refundable deposit. On March 15, 2006, the conditions precedent to the transaction were complied with to the satisfaction of the purchaser. The balance of the purchase price is due and payable at closing. The closing date is May 31, 2006. The Company’s real estate which is being sold has served as the Company’s principal business office and has house the Company’s manufacturing operations.

F-21

SIGNATURES

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

Avani International Group, Inc.

/s/Robert Wang

April 2, 2007

Robert Wang Date

Principal Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/Robert Wang April 2, 2007

Robert Wang Date

Director

/s/Dennis Robinson April 2, 2007

Dennis Robinson Date

Director

/s/Jeffrey Lightfoot April 2, 2007

Jeffrey Lightfoot Date

Director